Greenspan is wrong

I don't think he's completely wrong here, but he's certainly wrong on the impact of low short-term rates impacting long-term rates. First, I could point him to the FRB at San Francisco that gives a little primer on the determinants of long-term mortgage rates. Mortgage yields tend to track government yields and long-term government yields are certainly affected by what happens to short-term government yields. Granted this relationship tends to break down, like it did when Greenspan notes, but historically the long-term decline in the discount rate has some effect on the mortgage rate.

Second and more importantly, the chart above of the effective interest rate charged on ARMs vs. FRMs says it all. Note the dramatic decline in ARM rates relative to FRM rates around the time when the bubble began to expode in 2002-3. Indeed, Greenspan himself said in a 2004 speech that, "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." The research from my (unpublished) M.A. thesis showed (among other things) that ARMs account for a significant portion of new subprime loans and the rise in delinquencies. Since the spread of subprime borrowing and ARMs were also a contributor to the growth in the housing boom, Greenspan's low interest rate policies (and speeches) fueled the interest in ARMs and hence the housing boom*.

I don't deny that increased investment from overseas was a factor, but it really doesn't make sense for the housing boom to be mostly caused by the global savings glut. They might have invested in MBS, but most of the decisions were first made by people buying homes in California, Nevada, and Florida and those who sold 'em to 'em.

* not a conclusion from my thesis, but it was a team project