Barron’s Finds Greenspan’s Long-lost Ph.D. Thesis

Barrons.com

We were tickled to find that the work’s introduction includes a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble. Writes Greenspan: “There is no perpetual motion machine which generates an ever-rising path for the prices of homes.”

Greenspan, however, didn’t foresee a housing mania spilling into the general economy, toppling banks and brokerage houses and paralyzing key portions of the credit system. The worst he could anticipate was that a sharp “break in prices of existing homes would pull down the prices of new homes to the level of construction costs or below, inducing a sharp contraction in building.” Back then, there were no home-equity lines of credit, derivatives or subprime mortgages. Mortgages were largely concentrated at savings and loans. Credit was harder to come by, too, because conventional mortgage rates were about 8.5% and headed significantly higher. Still, the thesis shows that the former Fed boss was focused on housing very early in his career. Thus, it casts doubt on his recent assertions about being surprised by the Mesozoic-era-size impact of this decade’s housing mania.