Greenspan's Epiphany

Alan Greenspan, the darling of irrational exuberance, has admitted he was wrong. Indeed, he now says there was a fundamental flaw in his economic model.

Not quite sure how he figured this one out. I mean, I've been expecting the big crash since the Clinton years. I remember I was playing with some financial planning software back in the 1990's, and I enterred into it the rate of return on investments currently happening. The software spouted up a warning, saying, essentially, don't be ridiculous, you're not going to earn that much on your investment. The software, of course, had been made in the late eighties, before the boom got going and people like Alan Greenspan started pretending that the old rules didn't apply, and permanent prosperity got believed in.

In 1995, I was house hunting. I figured out what we could afford for a mortgage, and went to mortgage brokers. They told me, "you know, we used to say the limit was this much," and he quoted a figure a little higher than what I could afford. "But now, they've relaxed the rules, and you can afford this much," and he quoted a figure almost half-again as much as I could afford. Well, they may have changed the rules, but they didn't change laws of physics, which state that you can't make something (in this case money) out of nothing (in this case my paycheck).

Now we have a huge financial crisis, caused, in large part, by people believing the banks when they said, "actually, you can afford this humongous loan."

Roughly 2000, a friend of mine moved to California, where he found that in order to get a house, you had to be able to pay tens of thousands of dollars in cash, because houses were selling at over their assessed value, and so banks would not extend mortgages for the full selling price.

I never studied economics in college. Alan Greenspan was considered a financial genius. How is it that I knew the economy was a train-wreck waiting to happen, and Alan Greenspan didn't?

I appreciate his candor in admitting he was wrong. That's impressive. But his devotion to trickle-down economics was, to put it kindly, knuckle-headed.