Greenspan takes a lot of flak for saying, in 2004, that more people should take on adjustable rate mortgages. Once again, I rise to his defense. What he said was not crazy: you pay your bank a very large premium to get them to assume the interest rate risk. Unless you think that you are better than the bank at estimating future inflation, you cannot make yourself economically better off by taking out a fixed rate mortgage--which is to say, you are about as likely to end up better off by taking out a sensible ARM as you are to end up worse off. My parents had an ARM years before it was cool, and we didn't end up in the poorhouse.

What people did with that advice was insane: they acted as if an ARM was a fixed rate mortgage, which is to say, as if there were no interest rate risk. They borrowed money right up to the limits of their ability to pay at the teaser rate. Some of them thought that rising prices would enable them to refinance before it reset (and to be fair, some of them were right); some of them appear not to have thought at all.

How much responsibility does Greenspan bear for this? With hindsight, obviously, I wouldn't say that sort of thing again. But was it obvious, prospectively, that people were going to use ARMs to leverage themselves to the hilt--and that banks were going to let them? It wasn't obvious to me at the time. And the people I heard criticising him at the time clearly didn't understand that borrowers pay a premium for fixed-rate debt, so I'm reluctant to credit their incredible analysis of matters economic. But perhaps there were brighter voices making the case, and I simply didn't encounter them.