We are a very long way from having a broadly agreed-upon story of the crisis that quietly commenced on the afternoon of June 20, 2007. That was when two Bear Stearns real estate hedge funds began to come apart, ushering in a long period of nervous waiting for fear eventually to subside (it didn’t) or panic to break out (it did). Nevertheless, a couple of unusually interesting accounts have appeared recently, one by the New York Times reporter who was covering the Federal Reserve Board, the other by a Bush appointee who, conceivably, might have defused the crisis altogether had he been heeded.
“Why did you do it?” That’s Alan Greenspan, interrupting, on the first page of Busted: Life Inside the Great Mortgage Meltdown – shocked, appalled, perplexed and finally curt – as Times reporter Edmund L. Andrews mentions, in the course of interviewing the Fed chairman in December 2007, that he thinks he’s about to lose his own family’s home to foreclosure. “I felt like a teenager who had just told his father that he had crashed the family car.”
Greenspan had been expounding on the origins of the sub-prime crisis in various species of criminal fraud, committed by borrowers, lenders or both. It wasn’t his job to police the riff-raff, the great central banker explained. Perhaps the reporter should interview the director of consumer affairs? Or the general counsel? “Deceptive and unfair practices sound very unfair until you try to define them.”
He was stopped short, though, when Andrews volunteered, “Let me tell you about my own personal experience with these mortgages.” If anybody should have avoided catastrophe, it was the 52-year-old newsman. He’d been a Times reporter for sixteen years; since 1999, he had covered the Fed. Yet in December 2007 he was squarely behind the eight-ball. He had bought a house with one of those no-documentation mortgages; he had diminished his nominal equity by borrowing cash against the house to pay down credit card bills.
But Andrews didn’t feel as though he had committed fraud, or that he had he been defrauded in turn. He had been aided at every step by loan officers, underwriters, banks, Wall Street firms, and rating agencies – a long chain of promoters that now seemed to stretch up all the way up to the revered policymaker with whom he was sitting. Blaming the borrowers, or the faceless bureaucrats of the consumer affairs division, suddenly seemed beside the point.
It was a cathartic moment. Was his interviewer the first person Greenspan had known personally to have been caught in the mortgage meltdown? He certainly wasn’t the last. The Fed chairman ended his own discomfiture that day with a broad grin and a joke. If the reporter had been sufficiently anxious to have avoided default to this point, probably the lenders’ models had been correct after all: “I bet they’ve made money on you already.” But for Andrews, the discomfiture was just beginning.
The result is Busted, a fascinating meditation on the experience of the crisis from the point of view of those facing foreclosure. Why Andrews found himself in dire straits was easy enough to explain. His marriage had come apart, he had fallen in love with a long-ago friend in similar straits (an Argentino mother of four, no less, living in Los Angeles, whom he had first met in high school in the days when his CIA father was stationed in Buenos Aires). Together they had bought a home – for $460,000, with 10 percent down with an adjustable rate mortgage – in a good school district in suburban
There are other stories of sub-prime borrowers in the book as well, of upwardly-mobile Hispanics and African-Americans lured to disaster in developers’ tracts in suburban
There is no happy ending, at least not yet. “As I write in February 2009, I am four months past due on my mortgage and bracing for foreclosure proceedings to begin,” the book concludes. Thus while Andrews’ account of his ordeal does plenty here to whet one’s appetite for the details of foreclosure relief, which may or may not appear in tomorrow’s newspapers, the greater value of this acute personalization of a very complicated story awaits repurposing in a different medium.
Busted would make a dandy movie – one in which Andrews gets to keep his house.
At the opposite end of the spectrum is Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis, by John B. Taylor, of
Why the departure? Alan Greenspan had plenty of reasons for the considerable monetary easing that followed the 9/11 bombings. No one wanted the
easing ended the shallow recession in November, after only eight months. If the Fed had tightened instead, the accompanying political heat would have required all the president’s attention.
So instead the Fed explained that interest rates would remain low “for a considerable period of time,” and that when they eventually began to rise, it would be “at a measured pace” – which, as the chart shows, is exactly the path that interest rates ultimately took. Before long, a new reason for the easy money was discerned. There was a “global savings glut,” originating mainly in
The problem with such a “counterfactual” exercise is that
But even though
That meeting took place barely three months before reporter Andrews contributed his own more personal critique, confessing his embarrassment to the Fed chairman. It was just about the time that market participants all around the world were waking up to the gravity of the situation, and dramatically revising their estimates of Greenspan’s reputation. It will be years before a consensus evolves about the