A Consensus is Developing: Blame Greenspan

Thursday, June 08, 2006 | 10:58 AM

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"

Shooting the Messenger
Jeff Matthews is Not Making This Up,
Tuesday, June 06, 2006

The Blame Game
Doug Kass
The Edge, Street Insight 6/7/2006 7:31 AM EDT

The Ghost of Greenspan
It's haunting the Fed.
Daniel Gross
Slate, Wednesday, June 7, 2006, at 6:39 PM ET

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

Thursday, June 08, 2006 | 10:58 AM | Permalink | Comments (32) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference A Consensus is Developing: Blame Greenspan:


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

The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™