Just reading through the recently released FOMC documents from 2005 (these meetings from 2005 are veritable lovefests with the members cracking more jokes than analyzing the economy) and wandered across this gem from Alan Greenspan:
“I think whatever froth there is in the housing market is becoming contained at this stage, and it’s getting contained largely because mortgage rates have moved up and are beginning to have an impact. Remember, it’s not only the 30-year fixed rate but adjustable rates as well. And short-term rates have moved up quite significantly and are impacting the market. If we can contain the presumptive housing bubble, then we have a really remarkable run out there. But the real danger, in my judgment—where I think the risks lie—is in moving rates down too soon. When I say moving down, I mean that when we stop tightening, the long-term rates are going to come down. And in my view we have to be careful about how that happens and what the impact is on the economy.”
Greenspan acknowledges that there is a housing bubble and yet he believes interest rates and monetary policy are all that’s needed to help the economy avoid the inevitable collapse. Could he have possible gotten it more wrong?