The decision to keep interest rates low in 2001 and the burst of the housing bubble
Concordia University Chicago
In 2008, The United States faced one of the most debilitating crises in the history of the economy of the country. The major cause for such crisis was the uncontrolled number of sub-prime mortgages that were driven by historically low interest rates that flooded the market. Eventually, a large majority of these unsecured mortgages started to default due to the inability of borrowers to pay, which resulted in foreclosures, the plummeting of property values and an overall banking and credit crunch (Holt, 2009, p.121-128). In this context, the former Chairman of the Federal Reserve Alan Greenspan was criticized as one of the culprit for the crisis, in light of his decision to keep the nominal interest rate at low levels for an overly extended period of time. The aim of this case study is to demonstrate that the economic failure known as the burst of the housing bubble was not the result of unethical leadership behavior by the former chairman Alan Greenspan, but rather the result of unforeseen and unpredictable market dynamics that are intrinsic to the capitalistic economy. In doing so I will address the social, political and economic conditions that preceded the crisis and the principals and personal convictions that led the Chairman to the decision to keep interests rates low. Finally, the study will also integrate leadership theories that will help clarifying Greenspan decision making process. Specifically, I will discuss situational leadership theories, the “motive” that was behind Greenspan choice and the most prominent aspects of his character as a leader, to include honesty and integrity (Pierce, Newstrom, 6th ed., p.73-78).
Alan Greenspan was born in 1926 in New York City. Soon after he was born, his parents divorced and Alan was raised by his mother Rose in the Washington Heights neighborhood of New York. His father Herbert moved to Brooklyn and eventually remarried. During his young age, Alan Greenspan studied clarinet at Juilliard School, a conservatory in New York City, and made a living for a while as a musician. Eventually, he earned his B.A, M.A. and P.H.D. in economics from New York University (Greenspan, 2007, p.19-37). In 1953, Greenspan became co-founder of the Townsend-Greenspan investment adviser firm with William Wallace Townsend. The scope of the firm was to “translate economic analysis into a form business leaders could apply in making decision” (Greenspan, 2007, p.45-46). During President Johnson administration, while working at Townsend-Greenspan, the former Chairman developed a greater interest for fiscal policy, in response to the poor economic status of that time, and contributed to newspapers and economic journals with articles that would often critic the Johnson administration. His involvement with public politics started in 1967, when he joined the presidential campaign of Nixon. On August 8th 1974, Greenspan was appointed as Chairman of the Council of Economic Advisors, that same day Nixon announced his resignation. Greenspan ended up serving the Ford presidency in that role until Carter gain the presidency. During the Carter presidency Greenspan went on to work for the private sector, joining the board of JPMorgan. He became involved again with politics during the presidential campaign of Reagan, and worked in various roles in his administration until 1987 when he was appointed by Reagan as chairman of the Federal Reserve. Greenspan remained in that position until he retired in 2006 at the age of 79 (Greenspan, 2007, p.57-99).
Challenges, Decision and Action Taken
2001 was the year that changed the world in many ways. During this year a series of critical social, political and economic events shook the United States of America and the world as a whole. The United States were already