Greenspan Warned Of Housing Bubble... In His PhD Dissertation
Submitted by Robert Murphy via the Ludwig von Mises Institute of Canada,
Sometimes you run across bits of trivia that are too funny to be made up. It is common knowledge that Ben Bernanke’s academic work, before becoming Fed chair, involved studies of the banking crises during the Great Depression. This is somewhat ironic, since many of us blame Bernanke’s policies for perpetuating the financial crisis and contributing to the second Great Depression (through which the world is still suffering).
However, what is not as well known - and which only recently came to my attention–is that Alan Greenspan had an ironic element to his own scholarship. Now many readers might assume that I’m referring to Greenspan’s 1966 essay–written when he was an acolyte of Ayn Rand–in which he sang the praises of the gold standard. Obviously, that early work would later prove awkward for Greenspan, as he held the reins of the fiat money engine known as the Federal Reserve.
But that’s not what I’m talking about. Rather, I’m referring to Greenspan’s NYU doctoral dissertation, which he took great pains to bury. Apparently, a reporter for Barron’s was the only person to unearth a copy. Here are excerpts from the April 28, 2008 Barron’s article by Jim McTague, entitled, “Looking at Greenspan’s Long-Lost Thesis”:
The dissertation, written in 1977 when Greenspan received his coveted degree from New York University, had been tucked away on a professor’s sagging bookshelf for 31 years.
…There are only two known copies: the Maestro’s own and the one we viewed. As far as we can tell, Barron’s is the only news organization ever to have seen the thesis since a third and now missing copy was removed from the public shelves of NYU’s Bobst library at Greenspan’s request in 1987, the year that Ronald Reagan appointed him chairman of the Federal Reserve Board. Glancing at the document, we momentarily felt like Indiana Jones at the dramatic moment in which he discovers the Lost Ark of the Covenant.
…We were tickled to find that the work’s introduction includes a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble. Writes Greenspan: “There is no perpetual motion machine which generates an ever-rising path for the prices of homes.”
Greenspan, however, didn’t foresee a housing mania spilling into the general economy, toppling banks and brokerage houses and paralyzing key portions of the credit system. The worst he could anticipate was that a sharp “break in prices of existing homes would pull down the prices of new homes to the level of construction costs or below, inducing a sharp contraction in building.” Back then, there were no home-equity lines of credit, derivatives or subprime mortgages. Mortgages were largely concentrated at savings and loans. Credit was harder to come by, too, because conventional mortgage rates were about 8.5% and headed significantly higher. Still, the thesis shows that the former Fed boss was focused on housing very early in his career. Thus, it casts doubt on his recent assertions about being surprised by the Mesozoic-era-size impact of this decade’s housing mania.
Thus it seems that Alan Greenspan, when his professional ambition wasn’t involved, could understand perfectly well (a) the virtues of a commodity money and (b) the dangers of a housing bubble. If the Austrians are right in laying the blame for the housing bubble on Greenspan’s loose monetary policy following the dot-com crash, then Greenspan can’t plead ignorance: He knew what he was doing.
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