Wednesday, December 12, 2007

Greenspan's Mea Culpa: Too Little Too Late

Today's Wall Street Journal opinion section carries a piece by former Federal Reserve Chairman Alan Greenspan, creator of the "Greenspan Put."

For the uninitiated, this is what financial markets had come to call the Greenspan Fed's reacting to specific market sector stress, i.e. an addition of liquidity to the credit markets, or what the old-timers would call "revving up the money printing press."

Actually, this liquidity put is not peculiar to Greenspan, as Bernanke (our current Chairman) has proven over the last few months. In fact, it has become a part of the monetary landscape. Every time the markets perceive signs of stress in the financial sector, the Fed starts printing.

Strangely, enough, it only seems to work one way. The Fed has rarely moved rates up in reaction to the preliminary signs of such stress (a growing speculative bubble), for reasons that are obscured by the rhetoric of players like Greenspan.

But I digress.

It looks like Greenspan is beginning to feel pangs of guilt about his activities as Fed Chairman. Here is the pertinent paragraph from the article:

"I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices."

[Thanks to for this image.]

Congratulations, Sir, on your armchair 20/20 hindsight. We wish you had had such clear vision in 2003.

Then he quickly dries his crocodile tears with this:

"In my judgment, however, the impact on demand for homes financed with ARMs was not major."

Unfortunately, you have no way of proving this, Sir. The state of the economic science in general, and the monetary oversight science in particular, is primitive to say the least. A cursory glance at history, however, would suggest that central banks should be much more contrite.

All fiat currencies (money that is not backed by a standard like a measure of gold, silver, or something of generally accepted value) have gone the way the dollar is going, thanks to the intervention of the governments and/or entities that controlled them.

It's funny, but you yourself, Sir, used to proclaim such wisdom in the past. I'm reading your chapters of Ayn Rand's "Capitalism: The Unknown Ideal." In one, published in 1966, you state:

"Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold [or whatever they are using in its place] to higher-interest paying banks in other countries."

How true, at least back then. Today, we have no gold standard; and because we don't, we didn't get the remedial "... shortage of bank reserves in the 'easy money' country" to induce "tighter credit standards and a return to competitively higher interest rates again." Yes, these are your words, Sir.

(Well, actually you still get the shortage of bank reserves, but only after the huge wave of financial liquidity has done great damage, just as it has drowned our housing sector. The gold standard would have cut the wave short before it became a tsunami.)

What else did you say back then? "It was limited gold reserves [as contrasted to unlimited fiat central bank reserves] that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster."

You go on to describe the Federal Reserve created fiasco of the 1920s with perfect analysis. You say:

"The Fed ... nearly destroyed the economies of the world.... The excess credit which the Fed pumped into the economy spilled over into the stock market [read housing market today]--triggering a fantastic speculative boom."

I read these pages with my mouth dropped wide open, thinking, "Can this be the same Greenspan?"

Sir, you would do well to read your own scripture. When you have, come back and rewrite this Mea Culpa. Your "can't beat 'em, so I guess I'll just join 'em" days are behind you now. Please, get yourself back on the straight and narrow before you put the final touches on your own legacy.

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Blogger mike volpe said...

You took this as a mea culpa? Were we reading the same article? I took this as some sort of sophisticated and intelligent sounding mumbo jumbo designed specifically to skirt responsibility. He claimed that China, globalization, and derivatives were more responsible than his lowering of the Fed Funds Rate below one percent. Of course, that isn't true. Among the myriad of players that ought to be held responsible for what happened, Greenspan must stand front and center.

By creating so much loose money, it invariably was used irresponsibly. While he couldn't have predicted the mortgage mess per se, he should have predicted that something bad would happen. When he lowered the Fed Funds Rate to below one percent, it was simply irresponsible. Something irresponsible was spawned out of it. This was no accident and he must shoulder some of the blame for this. Here is how I analyzed the article...

As a mortgage broker, I was in a unique position to witness this crisis. Here is how I saw its roots and aftermath...

9:14 AM  
Blogger Freddie Sirmans said...

Your blog is very, very interesting. Happy holidays.

9:21 AM  

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