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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 . . . 

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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 | Comments (43) | TrackBack (0)
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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