How Failures from the Maestro, Alan Greenspan, Lead to the Mortgage Crisis


Fed Chairman Alan GreenspanAccording to the man who has been touted as the greatest central banker we’ve ever had, Alan Greenspan revealed yesterday that he dropped the ball during the birth of the Sub-Prime Mess. According to Greenspan in a 60 Minutes interview, “While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late . . . I really didn’t get it until very late in 2005 and 2006.”

This deeply troubles me. I can’t fathom how I and others had an understanding that what was going on was sure to lead to a horrific economic crisis, but Greenspan was out in the dark. I wonder if the central banker simply had too much on his plate, or if his isolation in DC led to his lack of awareness.

I return to the example I’ve given dozens of times of a young policeman in LA who was able to purchase a million dollar home using an option ARM loan. While I was skeptical of things prior to learning of this man’s story, it really did put things into perspective for me. I knew then that we were in for some real troubles ahead. It is all about the math . . . the average policeman can’t afford $4,000+ or $5,000+ a month on a note, and whenever this guy’s mortgage was set to reset, he was going to lose his home. When everyone I knew back in 2003 was talking about how how much money they were going to make in real estate, I knew something was wrong. It just looked too much like the Dot-Com bubble.

This bubble seems to have much larger implications, however . . .

Knowing that Mr. Greenspan failed to recognize the obvious (along with millions of other frenzied investors, home-owners, real estate agents, lenders, etc.) has actually begun to ruin his reputation.

That said, many economists are finally saying that he should have been calling for increased regulation of the mortgage business, and that he left rates too low for too long. It is easy to come out as a Monday morning Quarterback and go after him now, but where were they when all of this was going on? Most of them were busy sowing the spoils we helped to create.

So where are we now?

Many of the same economists are now predicting that we are headed for a recession unlike any we’ve seen since WWII. I’m thinking that they might finally be on point with their predictions.

Thanks for everything Mr. Greenspan (and all others who could have done something about this, but were too busy getting fat off of the booming housing market at the time)!

About Author

Joshua Dorkin

Joshua Dorkin (@jrdorkin, Google+) founded when he saw a need for free, trustworthy information about real estate investing online. Over the past 12 years, Josh has grown the site from self-funded hobby to full-time job and passion. Today, BiggerPockets brings together over 600,000 members, housing the world’s largest library of real estate content, iTunes’ #1 real estate podcast, and an array of analysis tools, all geared toward helping users succeed.


  1. What appears that most people missed during the sub-prime run up was the human element. The human element is that we are creatures of habit. If we practice poor financial skills prior to buying a home are we going to change those habits because we now own a home?

    Another part of the human element theory is that sometimes people see a relative or friend obtain a material asset. People do get envious and try to achieve the same material asset – keeping up with the Jones’s.

    Personally, I think most of the lenders in the sub-prime market did not consider the human element.

  2. Greenspan was very, very smart for a very, very long time. Did he really screw up? Is he now too old to be effective? I for one am not ready to write the guy off. He has a distiguished career, is an expert, a good manager of the economy, and served with humility and nobility. That is a good measure for any man.

    Cheap money is always a good thing in an economy. You can’t have too much of it. You just can’t. If you doubt that, check back here next year when the credit noose has tightened around the economy like a boa constrictor and I guarantee you will be singing a different tune. Interest rates are very much like taxes, duties, shipping costs, and energy costs in that they add friction and inefficiency to a market.

    We are very fortunate that real estate took off after the stock market tanked. The question everyone should be asking now is, what sector will take off in this next go ’round? We need another bubble. We just don’t know where it will come from. Bubbles aren’t bad. They are very efficient. How do you make money in a bubble? Easy – get in early – and get out early. I repeat: get in early and get out early and you will profit and not get hurt.

  3. I seriously doubt we are going into a serious recession in the next few years. There are some bad factors that will drag the economy (credit crisis, far too much federal debt, far too much personal debt, trade imbalance, high oil prices) still I don’t see a big recession as likely. So far the economy has been incredibly strong considering oil prices and the downturn in home construction.

    The biggest risk I see is overleverage by people and business setting them up for big failure if things don’t go right. And since so many are in that boat if some start to fail and then (say in housing) houses are foreclosed on… As those house are added to the current glut that can snowball. But businesses that haven’t be convinced by investment bankers to over-leverage are in good shape. And I think the housing crisis will not alone be enough to create a huge recession.

    Greenspan did very well overall, in my opinion, but that doesn’t mean he didn’t make some very bad mistakes too.

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  5. Outta Names999: Wow, thats an interesting perspective. I tend to agree with the “get in early and get out early and you will profit and not get hurt” you said. The only problem is the guy left holding the bag. Don’t you feel bad for him?

  6. It’s hard to say that the guy really screwed up, it’s not like understanding every intricacy of the US economy is an easy job, or one that’s even possible for that matter. Historically, Greenspan’s been right on, plus, the people in the trenches (the mortgage professionals) who say he should have known are forgetting one thing, they’re on the front line…they’re seeing exactly what’s happening every day. The Chairman of the Federal Reserve doesn’t. It’s not like the banks were reporting that they were funding loans that were going to fail. From the outside, everything seemed normal.

    The industry’s situation now was obvious to me a year ago, but that’s only because I was seeing it day in and day out. Funding bad loans isn’t something that anyone who’s involved in is going to go around telling everyone. Everyone that knew enough was either a part of it, or with a company that was a part of it.

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  9. Hold on just a minute!

    Was Volcker to blame for the junk bond crisis? Absolutely not. Wall Street investors sometimes reach to riskier investment products to enhance yield. It’s the straw and the came;s back.

    The projected deep recession was caused by two planes ramming into two buildings in lower Manhattan. Greenspan reacted as any Chairman should in a crisis; he injected liquidity into the system. Market forces reacted as expected.

  10. The real cause was greed. Lenders, mortgage brokers and some REALTORS saw the opportunity to make a lot of money and just ran with bad business practices. Should Greenspan have recognized that? It is easy to be blind when things are going well.

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