Question

What was Greenspan’s argument of why housing was not a bubble? What is wrong with his argument according to Cassidy?

Answer 1

Greenspan who was the chairman of the Fed ,argued that housing cannot be a bubble like the stock market as the houses are not liquid and cannot be traded. He also said that there was no over supply of newly constructed houses , infact the number of newly constructed houses were in line with the demand of the population. There has been claims of growing bubble like situations in local markets where prices were going beyond sustainable levels , he further argues that developing of bubbles in the local market will not affect the whole nation. Greenspan argues that the low interest rate during this period was due to the inflow of savings in Asia and elsewhere.

Cassidy argues that during those times, banks were willing to loan out five times more amount that the borrowers even required back then which has led to the housing bubble. So, due his excessive expansionary monetary policy and the low interest rates from 2002 to 2004 augmented the problem. It was Fed's laxity that allowed the demand to grow rapidly.