Greenspan Redux: The Fireman’s Blowback
9 April 2008Alan Greenspan is having a tough time: the world has caught on to his shenanigans at the Fed, and much sooner than he would have liked. So it is that he’s taken to the hustings, protesting that he had no role in the current credit debacle or the US housing market and construction markets.
If he weren’t already guilty of malfeasance, he would now be guilty of the added charge of dissimulating – I mean, not telling the truth.
His most recent defenses, published in the FT and elsewhere, basically go like this: the whole world had a problem with housing, so why was I to blame? And, following: since the lenders and repackagers were to blame for the subprime mess, why bother me?
Clever, but no one ever said Alan was stupid.
Alan’s interest rate plunge after 2000 directly led to what I’ve termed Refi Madness, which began all this. Alan knew full well that putting US interest rates effectively below zero would pull all kinds of equity out of housing assets, even though Americans are the worst savers in the world, and even though homes are often their only and largest asset. Alan needed them spending that equity money on WalMart, and he went after it and got it.
Period. End of argument. Admit it, Alan: you screwed the people.
Add to this, that the original problem had nothing to do with subprime, which remains a subset of the US housing disaster. Most loans in default a year ago were not to subprime borrowers, but to prime borrowers over their head, having over extended themselves in speculation. Some bought three condos, some upgraded their own housing to too-expensive new homes, sure that prices would continue to go up forever.
Did the head of the Fed, watching this, think that house asset pricing would keep growing at 20% and more per year, forever? No, he didn’t.
Alan, you’re completely and personally responsible for doing something which was wrong. You may have intended well, but that’s your only defense. Don’t try for anything fancier, it just comes across as sad and pathetic, two qualities you don’t want to add to your current legacy of overreaching and misunderstanding.
I would like to thank Tim Coldwell for his smart and helpful posts on this and related banking subjects, most of which readers will find under the Ben and Hank thread below. Tim is a well-known European tech CEO who has been around long enough to recognize $42B in BS when he sees it.
I continue to think that Ben Bernanke, having been given a really tough and thankless task, is so far doing exemplary work. Keep it up, Ben! No one envies you, but we are all glad you are there.
10 Responses to “Greenspan Redux: The Fireman’s Blowback”
April 10th, 2008 at 11:18 am
More on the Fireman’s defense:
http://www.nakedcapitalism.com/2008/04/on-greenspans-fed-is-blameless-canard.html
April 12th, 2008 at 4:32 am
Latest state of play. April 11 2008
Saving banking from the bankers
This week the world’s leading banks – represented by the Institute of International Finance – concurred with a conclusion long ago reached by the rest of the world: they screwed up, the credit crisis is largely their fault, and everybody else is suffering for their errors. The admission may not be enough to prevent a dangerous backlash.
Bankers may have realised, too late, the dangers of the banker caricature many people now believe. The popular perception is of an industry populated by clever crooks who manufactured toxic derivatives of subprime loans, repackaged them to look succulent, and sold them to greedy fools.
http://www.ft.com/cms/s/0/d912a4fc-07f5-11dd-a922-0000779fd2ac.html
April 13th, 2008 at 6:20 am
1929 once more?
Economies in crisis: There is a dearth of politicians able and strong enough to learn the lessons of history and keep banking in check
Ann Pettifor
In debates about the financial crisis – on the left and right – there are five oft-repeated economic fallacies.
The first of these is that ‘economic fundamentals are sound’ and that the crisis is limited to a finance sector previously celebrated as vital to prosperity but now somehow detached from the real economy. The second is that the crisis is caused by ‘turbulence’ in the housing market. The third: that the crisis was caused by low rates of interest, in particular monetary easing since 2001. The fourth: that the UK government was guilty of profligacy during the good years. The fifth: that we should remain fearful of inflation.
These fallacies arise because our leaders have not learned from parallels in history; and because they refuse to correctly analyse the long process that has led us to the end-game that is today’s systemic crisis.
The parallel with the Great Depression is frequently drawn, while parallel events that were the cause of the disaster are ignored. After 1918 policymakers liberalised finance under the banner of the gold standard. Winston Churchill reflected on the consequences:
http://commentisfree.guardian.co.uk/ann_pettifor/2008/04/economies_in_crisis_1929_once.html
“The financial sector must to return to its role as servant, not master of the global economy.”
April 13th, 2008 at 7:55 am
Churchill’s comment post ’29 crash: “The year 1929 reached almost the end… under the promise and appearance of increasing prosperity, particularly in the United States. But in October a sudden and violent tempest swept over Wall Street……… The whole wealth so swiftly gathered in the paper values of previous years vanished. The prosperity of millions of American homes had grown up a gigantic structure of inflated credit, now suddenly proved phantom. Apart from the nation-wide speculation in shares which even the most famous banks had encouraged by easy loans, a vast system of purchase by instalment of houses, furniture, cars and numberless kinds of household conveniences and indulgences had grown up. All now fell together.”
Sounds familiar:-)
April 14th, 2008 at 2:30 am
Good FT interview with Henry Kaufman. Between the lines <>
http://www.ft.com/cms/893ac9c8-757e-11dc-b7cb-0000779fd2ac.html?_i_referralObject=711493383&fromSearch=n
April 15th, 2008 at 4:38 am
Some welcome sense below from John Dizard, FT. If only ……
FED PLAN IS SPOILT BY ITS BACKING OF HYPOCRITES
Woe unto you, scribes and Pharisees, hypocrites! for ye are like unto whited sepulchres, which indeed appear beautiful outward, but are within full of dead men’s bones, and of all uncleanness. Matthew 23:27
Think of the main US banks and dealers, along with their regulators, as the Iraqi government – though without the same unity, purpose or long-term planning. The cash positions and liquidity of both are better now. The Iraqi government is not squandering its money on food for the ration system, medicine, electric plant or water treatment.
The US banks and dealers are through the first quarter, and are backstopped by a Federal Reserve that has gone from vestal virgin to camp follower. Some of the accountants would have appended the above quote from Matthew’s gospel to their opinions on the banks’ and brokers’ quarterly earnings statement, but it did not fit the guidelines of SFAS 157, the accounting standard.
It is not fair to say the Fed does not have a plan. It does. The plan is for the banking system to recapitalise for a new on-balance sheet world by raising a minimum of $200bn in a short period of time, not longer than two quarters. That way, there is no credit crunch, according to the model. A credit crunch, in Fed chairman Ben Bernanke’s own language, is: “A significant leftward shift in the supply curve for bank loans, holding constant both the safe real interest rate and the quality of potential borrowers.” ( The Credit Crunch , Brookings Institution, 1991) That means you can have a decline in the demand for credit as part of a business cycle without a “crunch”.
http://www.ft.com/cms/s/b70d152a-0a86-11dd-b5b1-0000779fd2ac.html
April 15th, 2008 at 10:21 pm
Thank you, Tim, for these great posts. Seems like the British have a clearer view of what is going on than most American experts. Our newspapers, including things like the WSJ, are completely useless. As you’ve demonstrated here, the FT, our latest and now best paper, is the new best place among the print media to turn for any clues to what’s transpiring.
April 16th, 2008 at 8:10 am
Well Der Spiegel is offering its view too: (Le Monde is on strike
The Madness of Ben Bernanke
By Gabor Steingart in Washington
The dollar is in a tailspin, the trade deficit is growing and a recession is on the horizon. The American way of life is in serious danger. But the head of the Federal Reserve keeps on pumping easy credit into the system — a crazy policy that will worsen the crisis. ….
http://www.spiegel.de/international/business/0,1518,547317,00.html
April 16th, 2008 at 10:17 am
Credit Default Swaps and Bank Leverage
Listen to this article The Financial Times reports that that $45 trillion figure that most of us have been using for the size of the credit default swaps market is woefully dated. The International Swaps and Derivatives Association will announce today that outstanding contracts now total $62 trillion, up from $34.5 trillion a year ago.
Institutional Risk Analytics gives some useful commentary on credit derivatives and the related issue of bank gearing, focusing on JP Morgan’s counterparty issues (and a sobering bit of Bernanke gossip):
http://www.nakedcapitalism.com/2008/04/credit-default-swaps-and-bank-leverage.html
Tin hats anyone?
May 7th, 2008 at 8:35 am
Greater Liquidity Produces Instability – Yves Smith – Complex Systems Theory
Below is a provocative line of thought from an anonymous reader. It supports a gut feeling that I have been unable to prove, namely, that lowering of boundaries between markets (ranging from the large number of global macro hedge funds to the large number of retail currency speculators in Japan) is destabilizing. I’ve found the occasional supporting bit of empirical evidence (for instance, Kenneth Rogoff’s and Carmen Reinhart’s recent paper on financial crises, which found that greater financial integration was correlated with crises) but no theories. Conventional economic wisdom would tell you arbitrage is always and ever good (it supposedly improves price formation which leads to better allocation of capital), and inefficiencies are bad. However, complex systems theory provides a very different perspective:
http://www.nakedcapitalism.com/2008/05/hoisted-from-comments-greater-liquidity.html