All the Devils Are Here [59]
The details of that meeting have never emerged. Gramlich died of cancer in 2007, at the age of sixty-eight. Greenspan told the Wall Street Journal that he didn’t remember much about the conversation, but it was certainly not a heated discussion. Gramlich presented his idea; Greenspan turned it aside. “He was opposed to it, so I didn’t pursue it,” Gramlich told the Journal three months before his death. He, too, proffered few details.
Yet that meeting would later become a touchstone for Greenspan’s critics. It was proof, they would say, that the Fed chairman wouldn’t take on the subprime lenders—or the larger problem of too many people getting loans they could never repay—even when asked to do so by a fellow Fed governor. And they were right. But Gramlich’s unwillingness to push Greenspan any further than the Fed chairman was willing to be pushed made it easy for Greenspan to ignore him. Shamefully, Greenspan would later publicly blame Gramlich for failing to bring the issue to the board, which, as he surely knew, Gramlich had done to save Greenspan from embarrassment.
Not long before he died, Gramlich, upset at the criticism Greenspan was starting to receive, penned a note to his old boss. “What happened was a small incident,” he wrote, “and as I think you know, if I had felt that strongly at the time, I would have made a bigger stink.” But he hadn’t made a stink. That was the point. Making a stink was simply not how Gramlich led his life, even with something that mattered to him as much as subprime lending.
Josh Rosner had also begun complaining to the Fed about subprime mortgages. By 2000, he had left his job at a mainstream Wall Street investment bank and joined a small independent research firm. Once a huge believer in the new subprime companies, he had become deeply critical of them. Companies he had invested his clients’ money in had gone out of business. He had watched the lawsuits pile up over their seamy business practices. “I unintentionally helped kill my clients,” he says today. “I was so dispirited.”
Rosner had a foreboding that went well beyond that of most subprime critics. Gramlich worried about subprime lending because it took advantage of unsophisticated buyers and often cost people their homes. But Rosner saw that the delinking of borrower and lender could have more far-reaching consequences. Well connected in Washington, he began showing up at the Fed to express his concern. Fed officials would respond by saying that it wasn’t their job to determine who should or shouldn’t get a mortgage. “I’d say, but it is the Fed’s job to ensure that the system is stable,” Rosner recalls.
There were two essential reasons for Rosner’s fears. The first was that his close reading of the data showed that most of this frenetic mortgage lending really had nothing to do with getting people into homes, since the vast majority of subprime loans were refinancings. That was true of the prime market as well. He calculated that the dollar volume of refinancings during the 1990s was $3.4 trillion, more than the entire volume of mortgage origination in the 1980s! A little-noticed Freddie Mac study noted that more than 75 percent of homeowners who refinanced in the last three months of 2000 had taken out mortgages at least 5 percent higher than the ones they retired. They were using their homes as piggy banks. “Refinancing offers the potential to increase the absolute debt burden of the average U.S. household without materially reducing other consumer debts,” Rosner wrote at the time. Surely, he thought, all this additional consumer debt was likely to end badly.
The second reason for Rosner’s fears was that he could also see from the data that fewer and fewer home buyers were putting down