April 28, 2008 | posted by Michael Baxter in House prices, credit crunch |

Gordon often likes to quote Alan Greenspan.   If you are actually able to stay awake long enough to listen to our Gordon, you will hear him saying things like, “Alan Greenspan says,”  “Alan Greenspan agrees with this,” “Alan this,”  “Alan that” and “three bags full Alan.”

But actually, the two men did differ in their views in quite an important respect.

Earlier this decade, Gordon Brown tried to promote fixed rate mortgages, that’s really fixed rate – fixed for their entire term, or at least ten years.

These types of mortgages were much more popular in the US and continental Europe – but the Brits never really warmed to the idea.   Poor old Gordon, he had the right idea – it is just that no one was bothered.

In the US, on the other hand, Alan Greenspan encouraged the take-up of variable rate mortgages. It is interesting, he gets slated in the press for dropping interest rates so low, but maybe his biggest error was the support he gave to the shift away from fixed rate mortgages.

 But now, it is all change.

Citibank reckons 2008 will see $460bn-worth of adjustable rate mortgages reset – and it seems we will see a flight back to fixed rate mortgages.

 It has already begun.

According to Bloomberg, a record number of mortgage holders have been dumping variable rate mortgages in exchange for fixed rate mortgages.   Apparently, re-financed loans will hit an all-time record this year, and 90 per cent of the new packages will be for fixed rate mortgages. It will mark the biggest ever exodus from variable to fixed rate loans.

 It’s a shame we can’t rewind the clock back. 

In 2004 Alan Greenspan said, “Homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages” and “the traditional fixed-rate mortgage may be an expensive method of financing a home.”

These days, Mr Greenspan denies he was against fixed rate mortgages – but when you are as influential as he was – and still is – you have to watch your words closely.

When the story of this economic chapter is finally complete, it seems that Mr Greenspan’s words of 2004 might well be held up as one of the main causes of the crisis that followed.