The Greenspan Kaput
We can always count on Barron's Alan Abelson to lay blame precisely where it belongs: At the feet of the maestro, Sir Alan Greenspan:
"To be anxious is not, of course, to be devoid of compassion. And as we watched the great unraveling of that tangled web that financial engineering spun, we couldn't help but think of the acute discomfort being felt by that outstanding public servant Alan Greenspan, who, during his celebrated tenure as head of the Federal Reserve, more than anyone deserves credit for nurturing the ownership society. Mr. Greenspan, lest we forget, went far beyond the call to entice people, no matter what their circumstances, into buying a home by whacking the cost of credit to as near zero as you can get and still lay claim to being somewhat rational, and urging them to go for those new-fangled adjustable mortgages with deceptively low initial interest rates.
Beyond even his cleverness at blowing successive "smart bubbles," so that the newest one (for example, housing) was nicely calculated to offset the fallout from its burst predecessor (the stock market), and his adroit ability to please his political masters (his overriding passion has always been to be liked), nothing more distinguished Mr. Greenspan's long stint at the Fed than his timing in departing from that august body.
As his successor, gentle Ben Bernanke, is no doubt becoming ruefully aware, creating a mess is easy. The trick is in knowing when to slip out, leaving someone else with the job of cleaning it up. And here Mr. G has proved himself an undisputed master.
Financial mischief on such a grand scale is not a one-man job, and Mr. Greenspan, needless to say, had a lot of help from Wall Street, Washington and points north, south and west. But there's no diminishing the singular part he played.
And just as the contempt for risk that made possible the gross extravagances in housing and the financial markets was sustained by confidence that Mr. G would always bail out the participants -- the so-called Greenspan put -- so the current collapse in housing and the financial markets merits a special designation, one that similarly recognizes his critical role. How about the Greenspan Kaput?"
As previously mentioned, by the time his memoir, "The Age of Turbulence," is released on September 17th, he may not have much of a legacy left . . .
>
Source:
After the Greenspan Put…
ALAN ABELSON
Barron's August 13, 2007
UP AND DOWN WALL STREET
http://online.barrons.com/article/SB118620573381988303.html
Saturday, August 11, 2007 | 07:08 AM | Permalink
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I sent the following email to a friend two weeks ago about Greenspan.
Story has it that Archimedes, when tasked with determining the volume and density of the king’s crown came to the solution while taking a bath. With the realization that he had discovered the answer, he jumped out of the tub and went running into the street naked shouting “eureka”.
It is rumored that Alan Greenspan had his own “eureka moment” while bathing. It seems that the Maestro spent all of his time pouring over reams of computer printouts of economic statistics. He was known to do this while taking long baths. It was during a long soak that he realized that a significant boost to the economy could be achieved through stimulating the housing market. Although he didn’t run out into the street naked which in my opinion wouldn’t have been a pretty sight if you’ve ever seen Alan Greenspan, he figured this was just what the economy needed after the Dotcom stock market bubble burst and threatened the economy with a severe recession.
Alan Greenspan lowered interest rates and thus begat the mortgage equity withdrawal perpetual free money housing ATM machine. The creation of a real estate bubble to replace the burst dotcom bubble seemed to be doing the trick. Anecdotal evidence was pouring in from the likes of insurance agents in California telling about customers who had been insuring Hondas and Toyotas that were suddenly insuring Mercedes and BMWs. There was a proliferation of shows touting the easy riches to be made by flipping houses and Horatio Alger like stories of high school graduates making the big bucks selling subprime adjustable rate mortgages, buying and wrecking Enzo Ferraris, dating soap opera stars and financing movies.
It was great, while it lasted. Signs began to appear in August 2005 that announced the beginning of the end. But unlike the stock market that is efficient and liquid and where prices drop quickly, real estate prices are what economists call “sticky” and fall very slowly. Adjustments in the real estate market take years to happen. So here we are almost two years later and many are just now waking up to the fact of serious problems in the real estate market and its spreading contagion.
This came from the CEO of AutoNation:
The chief executive of the nation's largest publicly traded auto-dealership chain is disputing suggestions that the housing slowdown is contained, attempting to drum up support for interest-rate cuts that would help sagging vehicle sales.
Mike Jackson, head of AutoNation Inc., ... took issue with Federal Reserve Chairman Ben Bernanke's recent suggestions that the housing slump won't significantly crimp economic growth over time. "Absent a rate cut, which will both have a financial impact and a psychological impact, I think it's going to take a long time to work through -- a long time," Mr. Jackson said of the housing correction. "The stress in housing is significant, the stress in automotive retail is significant."
All I can say is beware of economists reading economic statistics while taking a bath because pretty soon we’ll all be taking a bath.
Posted by: Nels Nelson | Aug 11, 2007 9:25:08 AM
"Mr. Greenspan, needless to say, had a lot of help from Wall Street, Washington and points north, south and west. "
What about east as the in the far east? If it wasn't for all of the Asian countries that have been soaking up US dollar debt and the rise of low-cost production centers such as China, the situation wouldn't be quite as bad as it currently is.
Because more US imports are coming from China that has helped keep price inflation low, this was accommodative to the Fed since it allowed them to drop the Fed rate 1% in the early 2000s after the tech bubble crash.
And with Asia's own liquidity crisis 10 years ago, they have become big believers in holding greater amounts of liquid foreign reserves as a buffer against local financial crises. As a result, China, Japan et al have provided plenty of liquidity to the US over the last 10 years by soaking up massive amounts of US debt.
This in turn has screwed up the Fed's monetary playbook by keeping long-term risk-free rates low even though the Fed tried to push up the whole yield curve a few years back by increasing short-term rates. If the far-end of the yield curve would have moved up as hoped for, the housing bubble may not have gotten so big with the current bust not being so disasterous.
China in particular, having been so useful to the US 3-10 years ago, has been handed control of US monetary policy through the amount of US debt it holds ($800B) and the US's dependency that it continue to acquire so much more. In my opinion, the Fed may be somewhat irrelevant over the next few years since the US has already given too much of it's power away to other nations.
Posted by: W.Edwards | Aug 11, 2007 9:31:17 AM
I have never, ever been a fan of Alan Greenspan. By inflating the bubble (i.e. not raising rates when it was clear we were headed towards an asset bubble) and then raising rates like crazy (and quickly), he ensured the demise of 70 - 80 million baby boomer families.
I still know lots of folks who are turning 60 that were hit 30 - 50% on their retirements because they got in late to the .com party and stayed until they got run over by the train.
I put the blame on that squarely on Greenspan's shoulders.
Posted by: Jdog33 | Aug 11, 2007 9:35:48 AM
Maybe Bush gave Greenspan that medal of honor too soon?
Posted by: Chief Tomahawk | Aug 11, 2007 10:23:29 AM
As we've seen, that medal goes to incompetant cronies.
So while he may have received its early, he would have gotten it anyway . . .
Posted by: Doug | Aug 11, 2007 10:42:03 AM
Posted by: Grodge | Aug 11, 2007 10:56:38 AM
Paraphrasing, "Short on the rumors,
Buy back in on the fear-monger news."
Buy like there's blood in the street,
though the vampiroyals have no blood.
There is more equity and more liquidity
now, than sum total of human existence.
They aren't making anymore real estate,
and US immigration is the next big boom.
The contagion isn't the underlying asset.
The contagion is the con they made of it.
Posted by: Peris Troika | Aug 11, 2007 11:05:01 AM
Greenspan was in a tight spot back in 2000/01 I think; if the Fed and executive branch could have worked constructively together perhaps some combination of fiscal and monetary policy might have been concocted to work out the bubble aftermath but the Greenspan Fed had already developed the habit of giving the equity market undue weight (IMHO) and, on top of that, the other end of the conversation could only say "tax cut" then "tax cut, war;" not much to build on there.
But that's 20/20 hindsight; a lot of reputations have been ruined in putative service to the country the past seven years, why should Greenspan be any different.
Posted by: RW | Aug 11, 2007 11:10:23 AM
greenspan's biggest contribution to the 25-yr boom in leverage and speculation was his hands-off attitude to regulation and supervision of financial markets and key players, because as he never tired of repeating in his Ayn Randian wisdom "markets know better than regulators and are in any event self-correcting". like he ever let a market correct! bernanke is just as willfully ignorant of how the players are marking certain positions. because the Fed has no idea how the parties are marking their positions or how they're valuing derivatives, they will be shocked, shocked by the enormity of the problem. hence, no correction. the bucket brigade starts here.
Posted by: scorpio | Aug 11, 2007 11:11:52 AM
Has Abe Abelson been reading Peter Schift too? If a bubble lasts 25 years, is it a bubble any more?
Posted by: Socalcool | Aug 11, 2007 11:34:26 AM
I dont think that Greenspan would have thought like, hey,let me defer the mess and let the next guy clean it up. It was much simpler in the sense that the economy had a problem at hand and he had some tools to fight it with. What the long term consequences would be was best not thought about.
What I don't simply understand is what the problem is if markets fall and Cramer's friends are on the losing side. After all, as they say, prices fluctuate. Why cant we just let them f$%&*#g fluctuate??? I just so hate the choppers.
Posted by: pj | Aug 11, 2007 11:47:27 AM
pj.
its not a matter of cramer and his hedgie friend's losing money....its a question of stability of the banking and financial system.....as some one has said...we getting our next paycheck.
no matter how much we debate the take home story in every sphere is the same....its all about short term...
bush wanted the economy to boom at any cost in the short term.....greenspan let it happen by housing boom.
now they would like the economy not to go in recession.....which is possible if you deflate the dollar (reduce debt) and inflate everything leading to reduction in size of the whole debt problem.
its not going to be as easy as it was in 2000/01 because right now consumers are stretched to the max on debt factor....they dont have any disposable income to spend.
unless we inflate by 50% in the next few years....everyone makes 50% more......and we can just go on with the spending binge.
Posted by: techy | Aug 11, 2007 11:56:02 AM
bush was so afraid of not getting re-elected "like his dad" because of an economic slowdown....he told greenspan to lower interest rates to 1%....then he started a needless war...nothing gets money into an economy like a good war.that's why were in the trouble were in.
Posted by: jake | Aug 11, 2007 12:11:15 PM
Imagine if the doodooheads on CNBC stopped talking and actually read some facts once in awhile. Maybe they would stop blaming the problems on borrowers (Dylan R? Bob F?) who sadly trusted Alan Greenspan and George Bush and the 'ownership society' marketing fairytale they were lulled into. Talk about buying votes...
Posted by: Bob A | Aug 11, 2007 12:13:13 PM
"If a bubble lasts 25 years, is it a bubble any more?"
At that point I believe the correct term would be derigible - as in Hindenberg.
Posted by: Winston Munn | Aug 11, 2007 12:34:15 PM
I dont believe in a bailout. However, if there is systemic risk the Fed will have no choice. I am starting to wonder if Wall Street will create systemic risk to force the Feds hand.
Posted by: GerryL | Aug 11, 2007 12:38:38 PM
I don't believe we can pin the housing bubble on Greenspan.
Who is supposed to oversee the mortgage industry? Who enforces against fraud in mortgage approvals? Who held a gun to anyone's head and said, "You must approve this loan"? Or any fund manager's head saying "You must buy this piece of crap mortgage/CDO?"
Following long term demographics, we're going to see interest rates fall back to 3% as the Baby Boom starts the long process of retirement. The fact is there *is* going to be a lot of money chasing around too little to invest in. Interest rates will be low despite anyone's best attempts.
But the liar loans, the 100% loans, the owner-occupied mortgage being used to buy a rental. Or for people like Casey Sergin, to buy multiple rentals in multiple states. The home equity scams. The identity theft. The straw buyers. And many other fraud schemes.
We've had web bloggers able to clearly point out mortgage fraud just using title searches and the MLS system. If any of the 138 lenders that have gone bankrupt so far this year had someone on staff doing the same basic research as these bloggers before approving a loan, they could have said no as well.
The housing bubble blame lies not with Greenspan, but half with a mortgage industry that ran without even the most basic of checks against client fraud ...and half with the absence of government oversight that allowed these mortgage lenders to run free and stupid, built for destruction.
Posted by: stanleyb | Aug 11, 2007 1:09:57 PM
Dead Giveaway: Alan sitting next to H.R. Clinton at Bill's first State of the Union address- Totally inappropriate for the Fed. Chairman. As JFK had a Dr. Feelgood so has Clinton and Bush.
To get the gist of what is really going on the summation by Doug Noland at Prudent Bear, et.al will explain what is happening- if Friday's C.B. actions have left you puzzled. Haven't gotten round to A.A.' latest missive yet but A.A. is an old hound dog who follows the scent no matter what the current "wisdom" is. Begin with the role of tripleA leveraging if his stats put you off the feed.
Posted by: zell | Aug 11, 2007 1:13:38 PM
Very well put, W. Edwards.
I don't understand why Greenspan takes so much heat. He had little choice. People and businesses didn't want to spend after trillions in wealth had been wiped out from the collapse in stock prices. Our already fragile national psyche took another hit after we all watched on TV the horror of 9/11. And to top it off, some kook decides to start poisoning people by sending anthrax through the mail. As a nation, we were paralyzed from shock. Neither businesses nor individuals wanted to spend.
So Greenspan lowers rates to 1% to stimulate the economy. What else could he do? After leaving them at 1% for about a year, he raised them 17 consecutive times. A total of 425 basis points. During the tightening process, long rates hardly budged.
The Chinese/Japanese sabotaged his attempt to tighten monetary policy because they needed the U.S. consumer to keep consuming their exports.
Posted by: Groty | Aug 11, 2007 1:34:07 PM
Yeah, it is so easy to blame Al. Did 90's bull market has anything to do with him? And, let's blame 9/11 on Bill Clinton.
Posted by: yc32 | Aug 11, 2007 1:44:03 PM
techy
My point is this: If excessive risks are taken (whatever be the reasons); If people start believing that "risk" is dead and money is free, then if it finally comes to such a pass where you have a crash, gloom, doom whatever and people start taking a walk out of their windows; then let it be so.
That is the price. It is a Fair game if you play it. You cannot have Calvin moving the goalposts, again.
Posted by: pj | Aug 11, 2007 2:30:33 PM
It's not just a "housing thing" boys and girls, that just happens to be, by coincidence, the first shoe that dropped, the most obvious, if you will. We should change the conversation somewhat to redefine this enchilada for what it really is. I can only suggest the definition currently being bandied about, " CREDIT CRUNCH", is not applicable to the circumstances. It is a "SQUEEZE".
The problem is with the underlying collateral, not with the loans. I question the value of the collateral not the validity of the loans. That's why it's systemic. You can parallel the equity market with the housing market. Take a close look and the Apollo deal, Harras and Reaology. I would like that deal to "POOP ON" and then I would like to use the paper issued for the Chrysler deal, to "WIPE WITH. Please...! If this stuff isn't "subprime", I don't know what is. These are like Miami condos and the sad thing is that the much of the equity market was priced as comps.
That, my dear friends is the issue and in order to keep the metaphores consistent, I urge you to find some cover for when the "SHIT HITS THE FAN"..... ;-)
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Aug 11, 2007 2:50:38 PM
pj.
in a fair system....those banks will be supplied short term liquidity....and they will have to mark to market....all those worthless paper they have.
and all those people who bought homes they cannot afford, will have to either pay by not spending on anything else...or they default.
and all the assets which are inflated will deflate so that everyone can afford them.
but we dont live in any such world....from the last 20-25 years we are living in a endless growth high.....the price of which if paid all at once will be very painful.
hence it will be subsidised with tax payer money....because it is sending the whole system in a shock all at once.
Posted by: techy | Aug 11, 2007 2:54:09 PM
zell,
"Dead Giveaway: Alan sitting next to H.R. Clinton at Bill's first State of the Union address- Totally inappropriate for the Fed. Chairman."
As opposed to Greenie publicly hawking this administrations disastrous tax cuts for the Rich & Corporate ?
.
Posted by: VJ | Aug 11, 2007 3:12:10 PM
ECONOMISTA NON GRATA wrote: "The problem is with the underlying collateral, not with the loans. I question the value of the collateral not the validity of the loans. That's why it's systemic."
Econ, I rarely find a reason to quibble with your views, but here I believe there is more involved. The problem in my view is the effects of deflation on Ponzi finance.
The problem, as always is the case, was inflation - monetary inflation that manifested itself as asset and equity inflation.
In my view both the the loans and the collateral are equally supsect because both were based on inflated values. Now that the air is whooshing out of the balloon, both the value of the collateral and the quality of the loans are being exposed as emperors wearing no clothes.
Posted by: Winston Munn | Aug 11, 2007 3:31:06 PM
