Alan Greenspan, in particular, argues that
The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier -- in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.
U.S. mortgage rates' linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.
As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.
Explain why:
1) He is wrong as a matter of fact, in the sense of considering only a very partial set of facts and in the sense of either carrying out (or reporting) a flawed statiscal analysis of the relevant data;
2) He is wrong as a matter of theory, in the sense that his description of how the financing of mortgage lending in the US and abroad works ignores important features of those markets. More precisely: he completely ignores the role that short term borrowing and leveraged securitization played in the whole process;
3) He would be, in any case, wrong, as a matter of proper conduct of monetary policy should his arguments about what happened "outside the Fed" turn out to be correct. Said otherwise: if his analysis of what happened between 2002 and 2005 were correct it would imply, according to elementary textbook principles of monetary economics and central banking, that HE (i.e. the Fed) should have acted very differently back then!
Be concise; state your assumptions clearly.
Also, do not insult him, he's already insulting himself enough with articles like this. No need to "maramaldeggiare" ...
P.S. I am happy to receive answers in Italian (French, Spanish, ....., Chinese (Enzo will translate), etcetera ....).
P.P.S. The 30 year, conventional mortgage rate (MORTG), can be found here; all other relevant rates can easily be traced on that site.
I have a feeling I am going to flunk this homework because when I read AG's article it kind of made sense. Please don't give me a grade.
1) On the statistics, I guess we are looking at the period 2002-2005 he mentions. I recall the fed fund rates being pretty low until 2004, so if the MORTG falls until then it should not surprise anyone. (do I get partial points?)
2) This part kind of made sense to me. However if the culprit was an excess of foreing saving flooding the US, then why didn't the $ appreciate?
3) In his article he admits that "it was indeed lower interest rates that spawned the speculative euphoria".