greenspanIn an interview on MSNBC's Morning Joe, personal finance expert Suze Orman lit into Alan Greenspan.

Not for his monetary policy. Nor for his laissez-faire approach to regulation.

Instead, she took him to task on a point that few people have: His public suggestion that homeowners were better off with adjustable-rate mortgages (ARMs) than with fixed-rate loans. Say what you want about his monetary policy, but as a personal finance guru, Greenspan was a complete and utter disaster.

"No! Don't do that!"

Orman pointed to comments Greenspan made in 2004 in which he championed the appropriateness of the adjustable-rate mortgage. We found a transcript of the speech on The Federal Reserve Board website. The remarks came at the Credit Union National Association 2004 Governmental Affairs Conference. Greenspan said:
Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade.... American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

Orman commented that as she watched Greenspan's speech, she was "sitting there, going, 'No! No! Don't do that! Don't do that! Everybody's going to start getting an adjustable-rate mortgage at the exact time they shouldn't.'" And that's exactly what happened.

Forgetting Risk

It's really hard to read Greenspan's remarks and and come away with an impression other than that Greenspan provided horrendously awful financial advice to millions of homeowners -- advice that contributed to the growth of exotic mortgages like the pay-option ARM and, ultimately, the housing bubble and all the destruction that came with its collapse.

So where did Greenspan go wrong? Just like Bear Stearns, Lehman Brothers, Countrywide Financial and other financial institutions brought low by the mortgage meltdown, he left one critical variable out of the equation -- risk.

Saying that adjustable-rate mortgages can save consumers money is like saying not having health insurance and paying cash for care can save you money. In some cases, that may be true. But if something goes wrong -- rising interest rates or illness -- the downside risk is so monumental that the strategy looks an awful lot like jumping in front of a steam roller to pick up a penny.

Should've Stuck to His Day Job

The reason homeowners should prefer the fixed-rate mortgage is that it provides stability: As inflation drives up expenses, a large chunk of home-ownership costs remain fixed. With an ARM, there's no certainty.

As a central banker, people will argue for a long time about Greenspan's competence. But as a personal financial guru -- which is the role he played when he recommended adjustable-rate mortgages instead of fixed-rate options -- this much is clear: He's no Suze Orman.


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