Greenspan's 'No Housing Bubble' Prediction, 5 Years Later

This week marks the fifth anniversary of then-Federal Reserve Chairman Alan Greenspan's observation that there was no housing bubble to worry about:

"Although a 'bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.... Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications."

Some froth, eh?

Home prices are nationally down 18 percent from that day in 2005 and 30 percent from their 2006 peak with total homeowner equity dropping by a stunning 50 percent. That's more than $2 trillion in homeowner equity down the toilet.

How could Greenspan have gotten it so wrong?

In recent testimony before Congress he explained it this way: "Regulators who are required to forecast have had a woeful record of chronic failure. History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be."

In short, he got it wrong because he -- and apparently everyone in his position -- isn't very good at seeing, timing or predicting economic bubbles.

This leads -- at least in my mind -- to the very logical questions:
  1. Why didn't he make that caveat in his original statement? ("Oh, by the way, keep in mind that I'm really not very good at this prediction thing.")
  2. Why did we even listen to him in the first place, if he was not good at prediction?
  3. What the hell is wrong with writing things clearly?
Greenspan testimony was alway ambiguous, with people like me trying to figure out the morning after just what they heck he meant and what did it mean for interest rates? This had to have been deliberate. Greenspan is married to Andrea Mitchell from NBC. She could have cleaned up his vague text.

At the time we all thought these obscure papal utterances were based on Greenspan having a bigger brain, but now it's clear that the guy was mainly winging it.

Bob Woodward wrote a book about Greenspan titled "Maestro." Not so ironically, it was Woodward's only non-bestseller.

We can spend all day beating up Greenspan for a huge mistake five years ago, but a more constructive approach would be for us to learn from this experience and apply those lessons to Greenspan's replacement, Ben Bernanke.

We should ask him regularly the question nobody every asked Maestro Greenspan: "Why should we believe you?"

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