The origins of a housing credit bubble; Monday-morning quarterbacks are finding plenty to blame for the creation of a housing credit bubble that has dramatically brust. While there's a growing laundry list of causes, there appears to be emerging consensus on some primary drivers, such as monetary ploicy and the unchecked expansion of mortgage credit by non-banks. This two-part series examines the details

Mortgage Banking, Sept, 2008 by Robert Stowe England

Greenspan also tackled the notion that banking regulators should have moved more quickly. "Regulators, to be effective, have to be forward-looking to anticipate the next financial malfunction. This has not proved to be feasible. Regulators confronting real-time uncertainty have rarely, if ever, been able to achieve the level of future clarity required to act preemptively," he wrote on ft.com's Economists' Forum. "Most regulatory activity focuses on activities that precipitated previous crises and that investors have long since largely abandoned, although new laws may prevent recurrences. New problems, to repeat, are by their nature incapable of being anticipated with any degree of confidence," he added.

Greenspan continued: "Aside from far greater efforts to ferret out fraud (a long-time concern of mine), would a material tightening of regulation improve financial performance? I doubt it. The problem is not the lack of regulation, but unrealistic expectations about what regulators are able to anticipate and prevent," he wrote on ft.com's Economists' Forum. He added: "Could tightened regulation of subprimes have contained some of the reprehensible, and presumably criminal, acts of lenders? Probably. But the broader crisis would likely have arisen even with increased micro-surveillance."

Finally, Greenspan concluded, "The core of the subprime problem lies with the misjudgments of the investment community. Subprime did not break from its localized niche status until 2005." He cited current Fed Chairman Ben Bernanke's observation that the deterioration in underwriting standards appears to have begun in late 2005, citing the delinquency data then emerging on performance of loans made after that time.

Greenspan lays out his argument on the creation of the credit bubble as follows: "Subprime securitization exploded because subprime mortgage-backed securities (MBS) were seemingly underpriced (high-yielding) at original issuance. Subprime delinquencies and foreclosures (in a rising home-price market) were modest at the time, creating the illusion of great profit opportunities. Investors of all stripes pressed securitizers for more MBS. Securitizers, in turn, pressed lenders for mortgage paper with little concern about its quality. As a consequence, underwriting standards collapsed, and mortgage originations and securitizations rose to far greater heights than would have occurred without securitization."

Given this situation, Greenspan concluded, "Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle."

Greenspan's faith in competitive free markets remains unshaken, he wrote. "I have been surprised by the fierceness of investors in retrenching from risk since August [2007]. My view of the range of dispersion of outcomes has been shaken, but not my judgment that free competitive markets are by far the unrivaled way to organize economies. We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?"