Gramlich’s Warning on the Subprime Mortgage Crisis and Its Relevance Today

For many years before his death in 2007, Edward (Ned) Gramlich was my next-door neighbor. Ned was a nationally respected economic expert who taught the subject for two decades at the University of Michigan.

As with most who spend time in Ann Arbor, Ned also was into Michigan football. So much so that a regulation UMich football helmet, a gift from the university’s athletic department, was on prominent display in the front hallway of Ned and Ruth Gramlich’s Washington home. At his funeral service, mourners even sang “Hail to the Victors, Valiant,” the school’s fight song.

Ned Gramlich’s Early Warning on Subprime Mortgages

In 1997, President Clinton appointed Ned to the Federal Reserve Board. Not long after, Ned, an expert on subprime mortgages, warned then-Chairman Alan Greenspan about the threat of the subprime mortgage boom and advised that the Fed begin closely monitoring and regulating the industry. Greenspan, who generally believed that markets should self-regulate with minimal government interference, didn’t heed the warning from Ned or from many others who were ringing alarm bells.

Just before Ned died, his book, “Subprime Mortgages, America’s Latest Boom and Bust,” was published. The book was a dead-on accurate forecast of what became the deepest U.S. economic collapse since the Great Depression.

As a result, tens of millions of people suffered economic hardship. The adverse effects—joblessness, lost retirement savings, business bankruptcies—lingered for years. The crisis wasn’t inevitable. It likely could have been averted if wiser heads had been in key decision-making roles. Like Ned Gramlich.

Lessons from History and the Role of Economic Decision-Makers

I’ve been thinking of Ned lately after reading my book club’s latest selection, “Lords of Finance, The Bankers Who Broke The World.” This is the story of how, in the financial aftermath of World War I, the men who led the Federal Reserve, the Bank of England, and their counterparts in France and Germany made a series of calamitous decisions that collapsed the world’s economy and resulted in the Great Depression.

During those years, revenge and economic orthodoxy championed by a few key decision-makers led to dire financial consequences for just about everyone on the planet and sowed the seeds for the calamity we know as World War II.

And that leads me to the point of this newsletter—what’s happening now in Washington.

Revenge, crony politics, rigid economic orthodoxy, and a large sprinkling of greed are creating a potentially toxic brew of economic policy and management.

Economic Policies and the Risks Ahead

President Trump and the Republican congressional majority seem hellbent on enacting a massive cut in taxes, justifying it with the widely discredited trickle-down fantasy that more for the wealthy eventually trickles down to the rest of us.

To pay for the tax cuts, Republican congressional leadership is sifting through proposals to cut or eliminate needed public services. (Who needs FEMA? for example.) The richest man in the world, who likely would benefit more than anyone else in the world from lower taxes, is neck-deep in the process.

Trump himself is sounding ambivalent about making program cuts. What’s a few trillion more added to the national debt? With the 2017 tax cuts and other deficit spending, Trump’s first term wound up raising the national debt by about $8 trillion.

Combine all of that with Trump’s top-level appointees, most of whose qualifications seem to begin and end with loyalty to him, knowledge and experience be damned. It’s not being partisan or needlessly alarmist to suspect this may not end well.

Most people don’t pay attention to economic policy or the people who make important economic decisions. But those decisions and those policymakers can make or break a lot of economic eggs. And lives.

Trump inherits an economy that’s the envy of the world. Record profits, historically low unemployment, an economic pipeline gushing with long-needed programs that are rebuilding infrastructure and creating incentives to grow into an AI-driven world. The model for prosperity is in place and performing.

But as the old saying goes, “Any jackass can kick a barn down. It takes a carpenter to build one.”

A pithy saying. But at the highest level of governance, it’s a unnerving prospect.

Comments? Criticism? Contact Joe Rothstein at jrothstein@rothstein.net