In the film, "Back to the Future," Marty McFly meets Doc as planned in the parking lot of Twin Pines Mall. Doc presents a DeLorean DMC-12 which he has modified into a time machine. As Marty videotapes, Doc explains the car travels to a programmed date and time upon reaching 88 miles per hour using plutonium in a nuclear reaction to generate the 1.21 gigawatts of power it requires. Demonstrating how to program the machine, Doc enters in November 5, 1955 as the target date, explaining that it was the day he conceived the idea of the flux capacitor; the device which "makes time travel possible."
In recent months, we have watched the housing and financial markets completely collapse before our eyes. While hindsight is 20-20, I'm sure there are plenty of CEO's out there wishing they could jump inside Doc's DeLorean right about now and set the clock back to 2000. From former Lehman Brothers CEO Richard Fuld to Alan Greenspan, the former Federal Reserve chairman, many of the country's top financial gurus say they didn't see the glacier coming.
Foreseeing the collapse
But how could the smartest economists and business leaders in the country not see this massive meltdown coming? During my studious search to make sense of the housing and financial debacle, I stumbled upon a 2007 Washington Post article written about Edward M. Gramlich. Gramlich, was a former Federal Reserve System governor, who died in September 2007 at the age of 68. Although he was no Nostradamus, Gramlich warned nearly seven years before his death, that a fast-growing, new breed of lender was luring many people into risky mortgages they could not afford.
Former Federal Reserve governor Edward M. Gramlich.
Gramlich served on the Fed's Board of Governors from 1997 to 2005. In June 2007, he published "Subprime Mortgages: America's Latest Boom and Bust" on a topic that he had warned about for years. Much earlier, as chairman of the Neighborhood Reinvestment Corp., he had urged lawmakers to better protect consumers against predatory lending practices by toughening the regulation of mortgage lenders and banks. He called the mortgage process "confusing, costly and far less than optimal."
Gramlich continued that campaign as a Fed governor in December 2000. He was among those who wanted to tighten regulation of high-cost home loans long before the current panic set in. A The New York Times article published December 18, 2007,reported that Gramlich had privately urged Fed Examiners to investigate mortgage lenders affiliated with national banks, but he was rebuffed by Greenspan.
Greenspan's way or the highway
Greenspan and other Fed officials repeatedly dismissed warnings about a speculative bubble in housing prices. In December 2004, the Federal Reserve Bank of New York issued a report bluntly declaring that "no bubble exists." At the time, Greenspan predicted several times - incorrectly, it turned out - that housing declines would be local but almost certainly not nationwide.
The Fed was hardly alone in not pressing to clean up the mortgage industry. When states like Georgia and North Carolina started to pass tougher laws against abusive lending practices, the Office of the Comptroller of the Currency successfully prohibited them from investigating local subsidiaries of nationally chartered banks. The Feds were counting on the housing boom to prop up the economy after the stock market collapsed in 2000 from the dot.com bust. You can say that the government had put all their eggs in one basket, and those eggs spoiled before they knew it.
Financial innovation outweighed the concerns of the millions of new homeowners that had boarded the subprime Titanic ship. I can't tell you the number of stories I hear from mortgage brokers and managers who tell me they had felt uncomfortable selling the new wave of subprime loan products that had flooded the market in 2000. Even they knew then that something wasn't right, but they were pressured to sell, "because everyone else in the industry was selling the same products."
"Sometimes, one's advice must be weighted toward economic practicality, sometimes toward humanity," Gramlich said during his Fed nomination hearing in September 1997. "A good economist should know how to balance both objectives."
Gramlich never needed Doc's DeLorean.
Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.
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