Jeffery Sachs was heard sniggering on local radio this morning at the extent to which Greenspan admitted fault.
Greenspan has shocked the world by admitting his world-view was incorrect.
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
He confirmed yet again that housing prices must be allowed to fall:
Indeed, a necessary condition for this crisis to end is a stabilization of home prices in the U.S. They will stabilize and clarify the level of equity in U.S. homes, the ultimate collateral support for the value of much of the world’s mortgage-backed securities.
However, he still failed to critique the speculative lure that government allows in land. By permitting the economic rent inherent in land price appreciation to be privately captured, the easy profits in land speculation have attracted every man and his dog. This has been the driving force behind asset price bubbles over the last 30 – 100 years, leading to larger and larger debts. Such speculative activity has been encouraged by governments as a supposed incentive to increasing home ownership.
If the speculation was deterred with a holding charge on land then the credit histories of sub-primer’s would no doubt be under less pressure. CDO’s may not have eventuated.
The policy priorities revealed in actions such as Australia’s FHOG and the 1% cutting of interest rates will keep property prices higher. The recession will be longer and deeper because of this. Failure by neo-cons such as Greenspan to incorporate the third dimension in economics, the land rent component in the factors of production, will see a backlash towards over-regulation.
Will Australia’s future generations accept paying 50% of their income on housing? That seems to be the policy objective of leaders worldwide.