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A Consensus is Developing: Blame Greenspan

I love when an idea simultaneously blooms all over at once.

If we saw the same meme suddenly pop up all over the mainstream, that would be one thing. My assumption would be that it was today's takling points, and I would be a lot more sleptical.

But when 4 pretty independent thinkers all reach similar conclusion, I pay close attention.

First up, Jeff Matthews wrote this on Tuesday:

“Every time he opens his mouth, the market tanks.”

That’s what I kept hearing during yesterday’s market sell-off.

“He” is, of course, Ben Bernanke, the poor guy who had to follow in Alan Greenspan’s hallowed footsteps as Chairman of the Federal Reserve.

Under Bernanke, the Fed has raised interest rates precisely twice. Under Greenspan, the Fed raised rates fourteen times. But, under the twisted laws of Human Nature, Bernanke is Guilty as Charged. His crime: spoiling the party.

Now, Greenspan raised rates fourteen times because he had previously dropped them to virtually zero, triggering the greatest home-building speculation boom in the history of the country. Al figured—and with his reputation in Washington, who was going to argue?—the Fed could gently deflate the Greenspan Housing Bubble in a way that everybody would win.

But Bubble aftermaths are never pretty.

Just look at the last one. It occurred only five years ago, when Greenspan himself tried likewise to gently deflate the greatest new-era business speculation boom in the history of the country—the Greenspan Internet Bubble—and triggered a recession.

So, who’s the villain here? A guy who tells the world inflation is running a little high and maybe rates aren’t necessarily going down any time soon?

Or his predecessor, whose twenty years in control led directly to $70+ oil, $300+ copper and $600+ gold?

Next up is Doug Kass' musings (Wednesday)

Don't Blame Bernanke:  Investors' inertia (and highly leveraged invested positions in overvalued market, which served to reduce risk premiums to preposterously low levels) is one of the situations that should be blamed for the recent market slide and increased volatility. At the slightest hint that the Fed might have to go further, their portfolios were decimated in short order. Stated simply, they got greedy and lacked foresight. Don't blame Bernanke.

Greenspan Is the Real Culprit  But the real culprit -- never discussed on CNBC, Bloomberg or elsewhere -- is former Fed Chairman Alan Greenspan who not only raised interest rates on 14 separate occasions (before Bernanke's paltry two increases) but who previously took interest rates to artificial and generational lows (the fed funds rate bottomed at 1%). That strategy's economic impact was to usher in another bubble (in real estate), which served to stoke consumer spending through the extraction of capital out of the housing stock. In turn, commodities followed housing ever higher. By the time the new Chairman took over in early 2006, today's problems were already percolating. Blaming Bernanke for Greenspan's mess would be like blaming Ed Breen, who followed convicted crook Dennis "Denny the K" Kozlowski as CEO of Tyco (TYC). Don't blame Bernanke.

Post Late 90s Policy Decisions Created Today's Market Position The unusual nature of policy decisions post the late 1990s bubble served to put the markets in the position they are today -- a position inherited by policy makers. As a result of the aforementioned monetary loosening, for the first time in modern economic history, consumer debt (installment and mortgage) increased in the recession of 2001-02. A series of 14 incremental and gradual tightenings, intended to wean our economy off of easy money, sowed the seeds of the inflation we see today. Don't blame Bernanke.

Acknowledge Other Causes for Market's Decline So, blame the market's decline on avaricious and poorly positioned hedge funds, on former Chairman Alan Greenspan bubble-inducing monetary policy, or on the natural cyclical nature of markets, or "Blame it on the Bossa Nova." But don't fixate and blame Ben Bernanke.

Then last night, Slate's Dan Gross was even more specific, saying, The Ghost of Greenspan is haunting the Fed:

But Bernanke's rhetorical vacillation isn't the Fed's sole contribution to the recent volatility. It's his new methods. Last week, Bernanke told a Senate committee that economic data released in the coming weeks would help determine whether the Fed would raise rates at its next meeting at the end of June. "Our thinking on this will be very data-dependent." Now, the Fed has always been "data dependent." But the implication of Bernanke's comments was that the Fed would essentially make decisions on the fly, based on the latest headlines. So, every time a new piece of information comes in, like last week's lame jobs figure, investors have to guess at how that might impact the Fed's decision. The fact that economic data are frequently contradictory contributes to investors' confusion.

In theory, this type of transparency and disclosure was precisely what the market wanted from the new Federal Reserve chairman. For years, investors have complained that Greenspan's Fed was too opaque, too hard to read. But now it turns out that trying to interpret public data is even trickier than interpreting the oracular Greenspan.

The Bernanke-era volatility can also be blamed on the stature gap. Under Greenspan, the Fed generally spoke with a single voice, Greenspan's, and didn't engage in any public debate. Sure, the other Fed governors and heads of the Fed's regional banks were well-respected economists. And, yes, their testimony and comments were dutifully reported by the financial wire services and picked over for clues as to what the Fed might do next. But they were like so many planets to Greenspan's sun. Today, as would have been the case regardless of Greenspan's replacement, Bernanke lacks Greenspan's weight. And as a result, the comments of people who were perceived as peripheral players in the past now have a greater capacity to move the markets.

Lastly, Marketwatch's David Callaway puts this all into context:

"But what the market is missing among all this tough talk is that transparency from our financial leaders is a good thing. Sure he spooked the markets about inflation. But should they really have been that spooked?

In its traditionally coded way, the Fed has been banging the drum for more than a year about inflation. But with no visible signs of it -- other than soaring energy prices -- investors didn't believe the central bank. Now they do. It took plain talk to accomplish that.

What the market is also missing is that just as plain talk can scare investors, it can also excite them. The day will come when Bernanke will blurt out something positive for investors, like "I think that should do it." Then it's off to the races.

The problem with the financial markets is a lack of transparency. That's why an entire industry has grown around central bank watching. Trying to decipher what these bankers are saying is a global financial pastime. Economists and financial journalists spend their lives studying snippets of sentences for underlying intent. Now we have Bernanke to spell it out for us and we're upset?

For the markets, this is tough medicine. But they had a great run in the first quarter and in April, and we're overdue for some sort of setback.

UPDATE: JUNE 12, 2006 6:57AM

Bloomberg joins in:  Bernanke Can Thank Greenspan for His Troubles   

"If you consider that a "neutral'' federal funds rate is probably around 4.5 percent, and that the rate was below that all of last year, one must conclude that the Fed had its foot on the gas right up to Greenspan's departure. We are in this difficult spot because the Fed was far too easy when growth was hot last year, leaving all of the tough work for Bernanke.

Whenever there is a tightening cycle, markets are always puzzled and dismayed by the question, "When will the tightening end?'' If Greenspan were at the Fed right now, market volatility would be the same, because the Fed's uncertainty about when to stop would be the same.

He isn't at the Fed now, and somebody else is, a person who is supremely able to deal with the difficult task of managing monetary policy. But Bernanke's job would be a lot easier now if the Fed had simply increased the federal funds rate enough last year so they could have halted the increases in Greenspan's last meeting in January"

Sources:
Shooting the Messenger
Jeff Matthews is Not Making This Up,
Tuesday, June 06, 2006
jeffmatthewsisnotmakingthisup.blogspot.com/2006/06/shooting-messenger.html

The Blame Game
Doug Kass
The Edge, Street Insight 6/7/2006 7:31 AM EDT
http://www.thestreet.com/i/dps/te/20060607/theedge1.html   

The Ghost of Greenspan
It's haunting the Fed.
Daniel Gross
Slate, Wednesday, June 7, 2006, at 6:39 PM ET
http://www.slate.com/id/2143225/

Loose lips Bernanke just what market needs
Commentary: Tough talk brings transparency
David Callaway
MarketWatch, 12:01 AM ET Jun 8, 2006
http://tinyurl.com/klfnf

Thursday, June 08, 2006 | 10:58 AM | Permalink | Comments (32) | TrackBack (0)
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Comments

The Dow drops 800 points (< 8%) from its all-time high and people want to blame the Fed??

You'd think a "minor" correction was in order anyway.

The first big hurricane in the Gulf is going to freak out the market anyway.

Posted by: Andy | Jun 8, 2006 11:31:07 AM

Barry,

Your view about inflation and economy is consistent. I do notice however that your view about fed has changed a little. In March, you seems to think Fed was the biggest risk for economy by overtightening, judging by what you said on Kudlow & company. It also seems that you think Fed should not go too far. Now, you practically want Fed to risk overtightening. Is the observation correct? If yes, can you elaborate what have changed your view?

Posted by: yc32 | Jun 8, 2006 11:41:11 AM

Can't help but recall Jim Rodgers on CNBC a couple years back: "Greenspan is an idiot"

Posted by: Bob A | Jun 8, 2006 11:41:22 AM

A REPEAT PERFORMANCE 3 days in a row.
Fed Head opens his mouth and mrkt drops 100pts.
I'm thinking this might be just a little ridiculous today.
Finally done dropping?

Posted by: tjofpa | Jun 8, 2006 11:44:39 AM

Congrats, Barry - you are #1 on Google for "whackage"!

Posted by: mrf | Jun 8, 2006 11:50:15 AM

Wheeeeeee!!! It's like a freefall ride at the Six Flags park. SPX went through that 1245 like butter.

And the summe forest fire season is here to boot...we're socked in with smoke. And it sucks. Time for a scotch...oh wait, it's only 7:45am. Make that a bloody mary.

Posted by: Alaskan Pete | Jun 8, 2006 11:50:32 AM

If I never said it before, let me say it now, Thank You Barry!

Posted by: DaveF | Jun 8, 2006 11:51:45 AM

The fan is spinnin and the poop is flyin

Posted by: Bob A | Jun 8, 2006 11:54:02 AM

yc32 --

I've been pretty consistent as to the Fed -- they tend to overtighten -- and I explained last week why that is -- its the better of the 2 choices.

But I change my views -- and my positions -- all the time. Reality changes, and you must adapt to specific events.

I liked Japan for the longest time, but as I said in the Forbes interview, we are now short Japan. I liked Taiwan, but its chart decayed and we got stopped out -- I see no reason to jump back in yet.

If you can freeze all the data and curreent events over time, I would be almost perfectly consistent -- but shit happens, and I cannot ignore it.

Posted by: Barry Ritholtz | Jun 8, 2006 11:55:46 AM

This is all very intriguing. I see the pundits on CNBC say they were calling for a 10% correction so this isn't to be unexpected. Oh really? Care to look at some of the international markets down 30-50%. Some of the same ones you told your clients to invest in? Just a normal correction?

Bernanke surely has a bag-o-crud to deal with. Let's hope it doesn't get as bad as it possibly could. Americans see their 401K and homes going down in value and they are likely to create a self fulfilling prophecy by no longer spending.

The financial community loves to blame the Fed. I have too. But really, who is at fault? Bubbles and imbalances were here before Greenspan and Bernanke. And, they were here well before there was any concept of the Fed.

So, was it Greenspan/Bernanke that made fund managers drive industrial commodities through the roof which threatened economic growth? Was it G/B that told those people in China, Australia, France, England, Spain and Canada to jam home prices through the roof in a bout of speculation? Was it the Fed that made Americans buy all of that garbage from China instead of buying from American companies that employed their neighbors at higher wages? Was it the Fed who made American companies outsource their own workers putting their own long term wealth in jeopardy? Or was it the Fed that made them buy stocks in 1999 and 2000 only to see them crumble?

I do envy the Japanese because they know who butters their bread. They understand their continued success is dependent on supporting their own employers. And even Europeans do to an extent. But Americans? We love to screw ourselves by buying something that is made by another country at 1/10 the wages. Even if it means we lose our own livelihood.

So, whose fault was it? Really? Look in the mirror. It's called the human condition. It's why we will never, ever, ever have Pax Globalia. We always f*ck it up ourselves in our greedy, self destructive tendencies.

Posted by: B | Jun 8, 2006 11:57:52 AM

Hey, we are all agreed that Greenspan's era has been a resounding success for those who benefit from nugatory or negative real interest rates, huge injections of liquidity and ever rising asset prices.

Unfortunately all good things come to an end, and the bill sooner or later arrives. :-)

If there is a defense one can make of what the Economist used to call Greenspan's ''ultra loose'' monetary policy, it is that it has enabled deficit/bond financing of the past 5 years of a couple of wars at the lowest possible cost to the Treasury and to rich people who would otherwise have had to pay a lot more war taxes.

In effect it has been the Arab oil producers, China, Japan and Taiwan that have paid so far for the cost of the war by buying large amounts of extraordinarily expensive USA war bonds...

Quite an extraordinary achievement and feat of salesmanship.

Posted by: Blissex | Jun 8, 2006 11:58:40 AM

Being Fed Chair

A fellow had just been appointed Fed Chair. The outgoing Chair met with him privately and presented him with three numbered envelopes.

"Open these if you run up against a problem you don't think you can solve," he said.

Well, things went along pretty smoothly, but six months later, the economy took a downturn and he was really catching a lot of heat. About at his wit's end, he remembered the envelopes. He went to his drawer and took out the first envelope. The message read, "Blame your predecessor."

The new Chair called a press conference and tactfully laid the blame at the feet of the previous administration. Satisfied with his comments, the press and Wall Street responded positively, the economy began to pick up and the problem was soon behind him.

About a year later, the nation was again experiencing a slight dip in economic activity, combined with serious product problems. Having learned from his previous experience, the new Fed Chair quickly opened the second envelope. The message read, "Blame international events."

This he did, and the economy quickly rebounded. After several consecutive profitable quarters, the nation once again fell on difficult times. The Fed Chair went to his office, closed the door and opened the third envelope. The message said, "Prepare three envelopes."

Posted by: Robert Cote | Jun 8, 2006 12:13:38 PM

Greenspan may not have been telling people to buy houses, but as recently as last summer he was still making public speeches advising people to get ARMs so that they could afford to buy a house. He didn't say that house prices always go up, but he did encourage the reckless mortgage practices that led to the housing bubble. A more responsible Central Bank head would have been warning people about the dangers of ARMs as soon as they started becoming common. Economists (including everyone on the FOMC) should have been pointing out to people that if you can only afford a to pay some price for a house because interest rates are at record lows, you shouldn't expect to be able to sell it at that price anytime soon. Instead they sat around talking about what a great investment a house was. Now we have a housing bubble that will be the biggest test of the world economy since the great depression.

We will survive this test. But the world will change, and it will change in unpredictable ways.

Posted by: jkw | Jun 8, 2006 12:18:31 PM

DJIA exactly where it was 12 months ago , $/Euro also , 30-year was 4.65% now 5.10%....... these problems are overseas , and while we get some fallout we'll weather this a lot better than they .... Nikkei 17,500 vs. 11000 year ago , etc.

Posted by: jbl | Jun 8, 2006 12:39:58 PM

You are stretching it to blame anyone's behavior on the Fed jkw. I do agree Greenspan's comments were misplaced but he's part of the problem too. He's just another one of us, not some god. Prone to the same mistakes and foibles.

I guess all of those people in every country across the world were buying real estate based on Greenspan's comments.

Posted by: B | Jun 8, 2006 12:59:21 PM

All this Greenspan criticism is off the mark - he'll go down in history as the greatest central banker of all time.

Posted by: Tim | Jun 8, 2006 1:00:07 PM

Easy money is/ has (been) borrowed in Japan , not here . The hedgies don't need debt in the US , they borrow in Japanese markets and have used it to lever their commodity , emerging market , and high beta plays ... now it's unraveling ... just ask Ospriea Fund ( former Tiger alum ) , -19% thru May ... easy money has been global , not just US

Posted by: jbl | Jun 8, 2006 1:17:27 PM

Greenspan's chances of going down in history as the best fed chair of all time are just slightly better than Bush's chances of going down as the best president...

Posted by: drey | Jun 8, 2006 1:24:54 PM

So, what are you saying?

Every spring and every fall, the market drops. It always recovers and goes up from there, until the next scheduled declinel. They appear to last about a month, leaving another week on this one. The declines always follow a slightly different pattern with respect to capacity to frighten, but they all end.

Why is this one different? Are you saing that it will fall to zero and is long overdue in getting there? Are skyhooks the only force holding up the market? Will the bears be eaten by the dinosaurs? Will China fall off the Earth and take all emerging markets with it? Will the US return to a closed economic system, once again?

Stay tuned. Is this the end of time, or just a repeating pattern?

Posted by: joe economics | Jun 8, 2006 2:22:28 PM

Maybe Greenspan is playing bad cop to make it easier for Bernanke to play good cop and allow him to separate himself from his predecessor.

Posted by: Lord | Jun 8, 2006 3:13:11 PM

On a slightly different note. I wonder if the markets in general have not over emphasized the importance of what the fed does. Granted, there is clearly some short term moves after any kind of "fed speak".

Long term they have played a role in the credit boom but only a small part. Now that the credit boom is coming to an end, I see everyone looking to the Fed to increase liquidity under some hope that this will boost the markets.

I don't see it. Given current debt levels (which do have to be repaid, someday) , the improper pricing of assets to account for risk and various geopolitical events that are completely out of our control it seems clear that the Fed is not in charge of much of anything.

A recession is coming. The Fed won't be able to stop it. The fed won't be able to control it. The only possible action the fed could have is that if they really screw up, they could make it deeper and longer.

Posted by: ralph | Jun 8, 2006 4:14:56 PM

On a slightly different note. I wonder if the markets in general have not over emphasized the importance of what the fed does...A recession is coming. The Fed won't be able to stop it. The fed won't be able to control it. The only possible action the fed could have is that if they really screw up, they could make it deeper and longer. [ralph]

I agree.

Every spring and every fall, the market drops. It always recovers and goes up from there, until the next scheduled decline. They appear to last about a month, leaving another week on this one. The declines always follow a slightly different pattern with respect to capacity to frighten, but they all end. Why is this one different? [joe economics]

Every civilization rises, has its moment in the sun, and falls, to be replaced by another as the richest and most powerful.

This decline may be different from others you remember, in that we may be in a long bear market (secular bear). Note that we still haven't recovered from the 2000/2001 decline, with the Nasdaq value being less than 1/2 of what it was back then. So not all declines are trivial matters that correct themselves in a short time...

Posted by: Detroit Dan | Jun 8, 2006 5:08:29 PM

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Posted by: 视频聊天 | Jun 8, 2006 11:08:02 PM

Greenspan, the respected central banker, revealed his true identity as Greenspan, the Republican SHILL, when he sat before the Senate and said that the second round of tax cuts were fine for the economy and the deficit. And during a WAR for God's sake! Now the country is on the brink of bankruptcy and ol' Al is collecting 6-figure fees on speaking tours. SHEESH!

Posted by: BettinaZ | Jun 10, 2006 1:56:23 PM

Greenie vs. Bennie? Well, Greenie raised 14 to Bennie's 2, but Bennie raised the last two, and there is a perception that he's going to overshoot (if he hasn't already). So to compare 14 to 2 and say "Greenie's the culprit" seems silly. The culprit for blowing and bursting the equity bubble by belatedly raising rates instead of proactively raising margin requirements 6 years ago, sure. The culprit for blowing the housing bubble with Easy Money, to bail out his first mistake, absolutely. But 14 vs. 2? Nope. Don't see it.

Now a comment on the current state of the markets. *Puts on Carson's old swami hat*

This decline is not the beginning of Fleck's oft-predicted "next time down." But, that BBE is just over the horizon.

My crystal ball, by no means infallible, says that we're going to have a good summer, hold up well into the fall and through the election, and then do just fine through the end of the year, based on "hopes that St. Nicholaus soon would be there." Come the first of the year, collective breath will be held, and the worry will serve to keep the upward progress going into the beginning of spring. By this point, commodities should be down and not have rallied back in any meaningful way, the equities markets should be looking fabulous, and everyone will breathe a collective sigh of relief.

Then will come the pullback that starts it all, and even moreso than this latest decline, there will be no worry about it, as the bullish calmly move to cash and congradulate themselves on their patience, while they wait on the bottom to form.

And wait...

...and wait...

...and wait...

Posted by: John | Jun 11, 2006 11:23:04 AM