Denial and insanity are next door neighbors

Via FT:

We will never be able to anticipate all discontinuities in financial markets. Discontinuities are, of necessity, a surprise. Anticipated events are arbitraged away. But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own.

Mr. Greenspan left out a very important point…the one about him touting the merits of adjustable-rate mortgages at the peak of the “euphoria.”

Just because you stop throwing fuel on a fire doesn’t mean the flames are going to immediately burn out.

While Alan Greenspan speaks:

I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.

Demand in those days was driven by the expectation of rising prices–the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations

…everyone should keep in mind that Chairman Greenspan was publicly extolling the virtue of using adjustable rate mortgages even as things started looking awry.

UPDATE: Paul Kedrosky meets Mr. NotMe. Don’t worry, it was “not major.”