Tuesday, January 31, 2006

Greenspan Retires. His Legacy.

Federal Reserve chairman Alan Greenspan retires today after a 18 year reign. Despite only two mild recessions during his tenure as Federal Chairman, Greenspan leaves as the economy faces huge negative imbalances.

  • A Massive Trade Deficit (~ 700 billion a year)
  • Housing Bubble
  • Federal Debt & Huge Deficits
  • Negative Personal Savings Rate

Faults in Greenspan's Tenure:

I. Very Low Interest Rates For Too Long & Lax Credit Standards

In recent years Greenspan dropped short term interest rates to the incredibly low rate of 1%. He kept the rate at 1% for a long time.



The above graph shows the roller coaster ride that was short term interest rates over the past 5 years. So much for laissez faire economics. The cheap money supply and easy credit in large part caused a credit bubble that contributed to:

  • The Housing Bubble
  • Negative Personal Savings Rate
  • Trade Deficit

Without the incredibly low interest rates and the lax credit standards the housing bubble would not have happened. The cheap easy credit was the gas that inflated the housing market to bubble status. Sure, there were other contributing factors, but the cheap and lax credit standards were crucial in creating the bubblicious housing market.

"There are some of us who believe he aided and abetted some asset bubbles," said Paul Kasriel, chief economist of Northern Trust Co. in Chicago

II. Support For Partisan Policies

The Fed chairman has also faced fire for stepping into areas that had nothing to do with monetary policy, offering support for Bush administration tax cuts in 2001 and private retirement accounts in the government system.

Moves like those outraged Democrats and fueled the sort of scorn that led Senate Democratic leader Harry Reid to last year label Greenspan "one of the biggest political hacks we have in Washington." (Reuters, Jan 30)

III. Unrealistic Remarks on the Economic Situation

Despite the fact that Greenspan coined the term irrational exuberance. Greenspan often is overly optimistic about the economy. For example in today's FOMC statement "Although recent economic data have been uneven, the expansion in economic activity appears solid." Appears solid? What about the trade deficit, the budget deficit, housing bubble negative personal savings rate and credit bubble? Greenspan was a Johnnie-Come-Lately to recognize 'froth' in the housing market.

Conclusion

Sure, being a Federal Reserve chairman is tough job and we have the benefit of hindsight, however this does not excuse Greenspan's mistakes. The economy is facing unprecedented negative economic imbalances that were in some part fueled by Greenspan's policies. These huge economic imbalances have been glossed over by Greenspan using Greenspeak. To be sure, these huge negative imbalances will lead to a recession this year. Of course, Greenspan will no longer be there to lead as the torch has been passed to Ben Bernanke.

14 comments:

  1. Well, preety much nothing more than a high school graduate eduacation for me, but if Greenspan has done so well in the past what makes you think that he doesn't have a handle on what has been going on in the last few years? Bernanke has the same/similar economic views, doesn't he?

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  2. Makes me laugh really- the media-print TV and business web sites are for the most part in awe of Grennspan- they still are blind to see the dark storm looming on the horizon-that are getting dangerously closer. Gold up and up again- my new gold funds are going higher- is golds rise telling us something? Google got slammed after hours today.

    Transferred money from a US Government trust (mostly mortage backed) To a money market fund.

    The prefect storm is getting closer- Greenspan dodged the bullet- Ben will be the sacrificial lamb.

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  3. God, these bubble blogs are filled with gold peddlers, socialists and people telling of the coming economic disaster.

    Honestly, I like some of these sites, this one included being a good resource, but after a while, these comments become more entertaining than the site itself. I'm starting to believe I'm wrong about a bubble after reading the conventional wisdom around these places.

    LOL, you guys really are fun. You keep putting that money in the Money Market Fund. I'm sure you'll retire a thousandaire.

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  4. Dear Anon;

    Many people can become fanatical in their beliefs, like those that think there is no ceiling to housing prices and the creative financing used to inflate the market doesn't have historical precedence(see margin buyers in the 1920's).

    On the other hand there are people like me who were edged out of the housing market by a bunch of froth at the mouth investors who bought properties up at a pace that created a false housing shortage and are a little pissed about the whole thing.

    So when you lump all the people who frequent these blogs as a bunch losers, kiss my *ss.

    I find arrogant people who seem to think the housing price run up has been healthy for our economy the ones who are the most leveraged and potentially the biggest losers in this whole thing. And from my persepective I hope they lose everything.

    Do my rantings make me a loser? I think not, just a person with an interest in watching this thing unwind in whatever way it does.

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  5. "God, these bubble blogs are filled with gold peddlers, socialists and people telling of the coming economic disaster."

    I am not a gold peddler [although its a good idea to have some gold, incase of strong inflation], not a socailist and economic disaster perhaps might be too strong of a term.


    "Honestly, I like some of these sites, this one included being a good resource, but after a while, these comments become more entertaining than the site itself."

    I agree that a small portion of the commentators on these bubble site are delusional in terms of their overly negative forecasts.



    "LOL, you guys really are fun. You keep putting that money in the Money Market Fund. I'm sure you'll retire a thousandaire."

    Actually my money is mainly in the money market. 3.80% at ING Baby.

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  6. Choice 1:
    Buy a condo with granite counter tops for 400k and lose 80k over the next 3 yrs.

    Choice 2:
    Put your money in money markets and get 4% today, and most likely higher rates in the future.

    Does picking choice 2 make someone a socialist?

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  7. This comment has been removed by a blog administrator.

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  8. guess in the 'New Order' that Bush and Greenspan have created- what matters is;

    1. Debt
    2. Asset bubbles
    3. Massive speculation
    4. Economic smoking mirrors
    5. Illusions of perpectual bull markets (stocks, housing) that go up forever.
    6. Widening gap betwen the haves and have nots

    I guess economic prudence and common sense make me a socialist.
    Yep- Also have money in a 3 month CD collecting 4.35 percent (E Trade bank)

    I guess if you do not believe in massive debt- overpaying for real estate, or do not have your money 100% tied up in stocks- then you are a 'socialist'. Back in 1931 when the depression was worsening- Herbert Hoover said that concepts such as old age pensions and unemployment insurance and social safety nets where 'European evils' that 'would never work' in America- how wrong he was then- and how wrong many are today.

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  9. Anon:
    Similar name calling can go to housing head too. And I just find housing head funny and amusing as I read their postings.

    Have you ever checked out Ben's blog: http://thehousingbubble2.blogspot.com/

    He's presenting facts...judge by yourself what's going on.

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  10. Actually credit standards are set by the comptroller of the currency, (the OCC). Their rules are "advice" and don't have the force of law, but will be held against lenders if they fall afoul of the rules.

    However, what has fueled the mortgage market isn't the availablity of credit per se, but the growth of the secondary market which had eliminated risk for originators.

    Starting in the mid 90's secondary market mortgage brokers began increasing their profits not by traditional derivative-based means, but by growing their portfolios, (call it the MCI approach to profits).

    To achieve this several big players relaxed their underwiting standards so originator's loans would qualify for being picked up on the secondary market to include new credit scoring practices where debt(s) on a credit report are weighed differently for the consumer: previously ALL debt was weighed equally. In the new system revolving debt is given less weight than say, a car payment or rent.

    In the wake of Sarbanes-Oxley secondary market brokers were forced to recalculate their profits based on changed of rules for derivatives forcing HUGE accounting scandals at the two biggest players in the market, resulting in more conservative underwriting practices.

    Ultimately for the consumer of a new mortgage this means that it will be increasingly more hard to get a mortgage simply because it's more hard for the originator to sell it on the secondary market.

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  11. "Today, the Federal Reserve’s duties fall into four general areas:

    * conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

    * supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

    * maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

    * providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system"

    Taken from Federal Reseve Website.

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  12. Yes, and there's also this regarding the Fed on there web site regarding regulatory authority:

    The Federal Reserve has responsibility for supervising and regulating the following segments of the banking industry to ensure safe and sound banking practices and compliance with banking laws:

    bank holding companies, including diversified financial holding companies
    formed under the Gramm-Leach-Bliley Act of 1999 and foreign banks with U.S. operations

    state-chartered banks that are members of the Federal Reserve System (state member banks)

    foreign branches of member banks

    Edge and agreement corporations, through which U.S. banking organizations
    may conduct international banking activities

    U.S. state-licensed branches, agencies, and representative offices of foreign banks

    nonbanking activities of foreign banks
    Although the terms bank supervision and bank regulation are often used interchangeably,
    they actually refer to distinct, but complementary, activities. Bank supervision involves the monitoring, inspecting, and examining of banking organizations to assess their condition and their compliance with relevant laws and regulations. When a banking organization within the Federal Reserve’s supervisory jurisdiction is found to be noncompliant or to have other problems, the Federal Reserve may use its supervisory authority to take formal or informal action to have the organization correct the problems.


    Please note if you are willing to dig deep enough "supervisory jurisdiction" covers access to credit and insurance.

    As opposed to this at the OCC:

    In regulating national banks, the OCC has the power to:

    Examine the banks.

    Approve or deny applications for new charters, branches, capital, or other changes in corporate or banking structure.

    Take supervisory actions against banks that do not comply with laws and regulations or that otherwise engage in unsound banking practices. The agency can remove officers and directors, negotiate agreements to change banking practices, and issue cease and desist orders as well as civil money penalties.

    Issue rules and regulations governing bank investments, lending, and other practices.


    In this regards the true test of anything is who you go to if you have a problem. In the case of mortgages and credit cards do you go to the Fed? No, as the first step in their complaint process is to determine who has jurisdiction. You go to the OCC.

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  13. Oh yeah, one more thing regarding my previous post. A search of the two organizations enforcement actions are informative...

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  14. "Greenspeak" indeed. Glad you did not say "Greenlies" or "Greenduplicity".

    Well Greenman got out just in time before winter makes all his greencover drop

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