Saturday, 14 March 2009

Gordon Brown and Greenspan still don't get it

I read that Greenspan has been trying to cover his tracks in the same way that GB has tried.

Greenspan blags

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages.

OK here we go again. Cheap money led to mortgages becoming more affordable. It does not matter how the cheap money came about, what matters is what decisions were taken to enable borrowers to borrow this cheap money.

During the housing boom, the financial regulations let the cheap money be lent to borrowers who had no provable income, no deposit, no way of repaying it. This happened in the US and it happened in the UK.

This meant that borrowers could borrow much greater multiples of their 'income' and push up the housing asset.

Now we have a situation where we have cheap money again, but the lenders are applying stricter criteria on who can borrow the money. This leads to a low level of borrowing, until house prices fall to within the income multiples or the borrower has saved the larger deposit.

To summarise

Financial regulations that ensure lenders are doing some sort of due diligence on how much is being borrowed will keep a lid on any housing asset bubble.

We do not need new tougher regulation, we just need regulation that works.

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