Blog Spotlight: The Mess That Greenspan Made

Thursday, November 16, 2006 | 07:00 PM

For the next edition of our series Blogger Spotlight:  Tim Iacono and The Mess That Greenspan Made. Tim is a software engineer in his mid-forties, living in Southern California. He calls his blog is a "vain attempt to stave off a mid-life crisis, and here's hoping that it's going to work."

This is part of our ongoing short list of excellent but somewhat overlooked blogs that deserves a greater audience. Expect to see a post from a different featured blogger here every Tuesday and Thursday evening, around 7pm.


This is Tightening?

Much has been made of the "tightening" by central banks around the world, particularly the multi-year "baby-step" therapy applied to short-term interest rates here in the U.S.

This treatment was just concluded a few months ago under the watchful eye of Fed Chairman Ben Bernanke - the baby steps weren't the new Fed Chief's idea, but he is saddled with what they have produced.

Having wondered what effect these rising rates have had on the creation of both consumer debt and new money, the construction of a chart showing all three laid together is a task that has sat near the top of the To Do list around here for some time.

It can now be checked off.
Nearly all of this data is available at the Federal Reserve website. The only part for which one has to look elsewhere is the last six months of M3 Money Supply - the central bank stopped divulging this data earlier this year.

The latest M3 data is now available in reconstructed form at Now and Futures and John Williams' Shadow Government Statistics.

The trend is still up - surprise!

Household debt looks to be throttling back to a tepid sub-ten percent annualized growth rate - that might be expected after the orgy of borrowing since late 2002. Whether the recent pullback is a result of higher rates or sheer exhaustion by consumers is unknown.

Surely there are limits to what Americans can borrow and spend. Aren't there?

A Changing Relationship

Looking back a few decades at the relationship between short-term interest rates and the growth of money supply, one change jumps out at you. Up until the mid-1990s, the two were located in about the same area of the chart, often times crossing over each other.

That all stopped in the mid-1990s after the "productivity miracle", cheap energy, and other cheap imports allowed the two to become detached from each other. As shown in the chart above, there are now a good three to five percentage points, sometimes much more, between the two curves.

The most recent data puts money supply growth at near ten percent with short-term rates fixed at just over five percent.

Could that cause problems over the longer term?

More significantly though, the old relationship between higher short term rates and lower money growth seems to no longer be working. This was a consistent pattern up until the mid-1990s - when interest rates rose, money supply throttled back. When money supply growth slowed, falling short-term rates caused money supply growth to head back up (sometimes with a lengthy delay).

For the last ten years, and as shown clearly above for the new decade, higher interest rates seem to goad the money supply into growing faster until it declines for other reasons.

The Dissenter

Maybe Jeffrey Lacker at the Richmond Fed has seen a chart like the one above and walked away unimpressed with the effects of the rate hikes to date. Either that or he realizes that the Fed has to do a better job at appearing to "fight inflation", this being one of the more curious roles for a government agency - being responsible for combating something that they cause.

Mr. Lacker has been the sole dissenting vote at the last three Fed meetings, favoring a quarter-point rate hike while all other voting members opted for a pause aimed at refreshing an ailing housing market.

Like former Fed Chief Alan Greenspan, Mr. Lacker looks at some of the housing data and sees hope.

On Monday he said there were "tentative signs emerging that the housing market may be stabilizing." After looking at weekly mortgage applications and recent home sales data, he commented "We'll just have to see. It's very tentative."

What is decidedly not tentative is the booming new real estate sector of auctions. That is, selling real estate that has been turned back over to the bank and reduced in price for quick sale in former hotspots such as Colorado.

Everything Seems Different Now

With the bond market forecasting lower rates ahead and with the rise in short term rates failing to have the desired effect on credit creation and money growth, what's a central banker to do?

The old relationships no longer seem to apply.

If the intent of the last two and a half years of rate hikes has been to tighten things up here in the U.S. after the near death experience of the stock market melt-down that began in 2000, then something has gone horribly wrong.

The levers and knobs don't seem to work anymore.

This is tightening?

Thursday, November 16, 2006 | 07:00 PM | Permalink | Comments (10) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference Blog Spotlight: The Mess That Greenspan Made:


I don't know where we go from here, but it seems we have no choice but to flirt with the 70's experience. Perhaps, after Greenspan imported Japan's problems, Bernanke feels that he can short cut the depression part and inflate past it.

If I recall, Japan's equity and bond markets bloated just like the NYSE and S&P as a result of the BoJ's frantic attempt to keep the property bubble inflated with counterfeit. Instead of just one bubble bursting, real estate, Japan had three which depressed their economy for a generation.

Maybe this is what Mr Lacker fears. I know I do!

Posted by: blam | Nov 16, 2006 8:04:45 PM

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™