The Man Who Knew: The Life and Times of Alan Greenspan — Ten: THE FIRST HOUSING CONUNDRUM

1. 1. Kathryn Eickhoff observed that homeowners were taking out second mortgages to fund consumption, turbocharging the economy.
2. 2. Greenspan developed a method to estimate home-equity extraction by comparing expected mortgage debt changes with actual changes.
3. 3. By mid-1977, virtually the entire increase in home values was being monetized through mortgage extraction, boosting consumer purchasing power by nearly 5%.
4. 4. Greenspan warned that rising home prices could take on a speculative hue, and the assumption of ever-rising prices was not valid.
5. 5. Greenspan's PhD thesis emphasized that financial markets and asset prices are key drivers of the economy, a view that set him apart from monetarists and Keynesians.
6. 6. Greenspan identified feedback loops between asset prices and spending that can make unsustainable trends appear sustainable until the bubble bursts.
7. 7. Greenspan gave a qualified endorsement of Proposition 13, calling tax cuts necessary to prevent government from increasing its share of economic activity.
8. 8. Greenspan testified in favor of the Kemp-Roth tax cut, arguing that it would be followed by spending cuts rather than being self-financing.
9. 9. Greenspan explained that the creation of Fannie Mae and Freddie Mac in the 1970s massively expanded mortgage credit, delinking the housing market from interest rates.
10. 10. Greenspan warned in 1978 that the Fed was too weak-willed to counter the inflation caused by the mortgage explosion, and a recession was almost surely coming.
11. 11. Greenspan broke with conservative monetary orthodoxy by arguing that returning to the gold standard was unnecessary if fiscal and inflation problems were resolved.
12. 12. Greenspan's forecasting approach was eclectic and data-driven, relying on discreet insights like scrap steel prices rather than grand theoretical models.