Dammit, Alan

There are certain concepts that can cause my brain to lock up. One of them is reading anything that Alan Greenspan has to say, particularly when it's intended to show that while he may have been involved, the events that led up to this financial crisis are most definitely not the his fault. Which is why I am having to read the article in the Wall Street Journal about that topic very, very slowly, sounding out all the big words and having to pause every so often for pictures of kittens and other soothing things.

For example:
There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages.Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

Okay, I can sort of follow that. I don't understand it, though. Helpfully, he goes on to explain:
After all, the prices of long-lived assets have always been determined by discounting the flow of income (or imputed services) by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates -- such as the fed-funds rate -- to determine the capitalization rate of real estate, whether it be an office building or a single-family residence.

It's at this point that my brain begins to lock up. The prices of long-lived assets are determined by discounting a flow of income? Really? Gee, I thought it was more along the lines of 'wonder what the market will bear?' But he goes on to say that, though it used to be that way (you know, the way that he just said nobody uses), it hasn't been for a while, because money sources now flow across borders.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier -- in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

Well, sure. But he goes on:
(T)the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

At this point, I'm starting to grasp at straws. Such as: what the hell does 'ex ante' mean? But, let me see if I get this. He's saying that when lots of people shifted from central planning to market-based activities, that caused interest rates to go down, which made many economies kick into overdrive, which sucked up the money people would otherwise have used for capital investment. At least, thats what I think he was saying.

I need to go look at kittens. But if you're interested, there's about eight more paragraphs of that, back at the WSJ. Me, I'm going to wait for the Classic Comics version.