Monday, September 17, 2007

Greenspan redefines "cleaning up"

David Seaton's News Links
To understand where Alan Greenspan is coming from, it's important to know that as a young man he was one of Ayn Rand's most favored disciples and that her magnum opus, "Atlas Shrugged" could be said to be his "bible". Outside of the parameters of human relations affirmed by all major faiths, it is a book whose philosophy Gore Vidal described as “nearly perfect in its immorality.”

To make a long story short, Greenspan's years at the Fed have not been about the economy, which is now beginning to unravel: these years have been about Greenspan, who is now about to make a lot of money writing and speaking. And if what he writes or what he says about current affairs destabilizes that economy... hard cheese (that's British for tough shit). DS

Greenspan: His Fault -
Abstract: Greenspan’s book will make headlines over the next few weeks, in part because of his surprisingly downbeat assessment of the economy and financial markets. But even though he left the Fed more than a year and a half ago, his recollections aren’t of merely historical interest. The current turmoil on Wall Street is largely a result of policy decisions he made during his final years. By keeping interest rates too low for too long, he encouraged a borrowing-fueled speculative binge, which has now given way to a credit squeeze. By failing to crack down on the mortgage industry, he allowed subprime hucksters to peddle dubious loans, which the financial industry’s math whizzes packaged for investors. Coming on top of his role in creating the internet-stock mania a decade ago, the mistakes Greenspan made—now playing out in home foreclosures and hedge fund collapses—will surely color historians’ views of his long tenure, if not his own account of it.(...) Since leaving the Fed, he has continued to make news, if not always in ways he would like. Within weeks, he started making off-the-record appearances before select audiences: hedge fund managers, investment bankers, and the like. Inevitably, some of his remarks slipped out, causing disruptions in the markets. In February, he said a recession was possible before the end of 2007—a comment that contributed to a 416-point fall in the Dow. In May, he put the chances of a recession at one in three. Two weeks later, he rattled international bourses by saying that a bubble had developed in the Chinese stock market and a “dramatic contraction” was inevitable. When Greenspan was chairman of the Fed, his public statements were famously delphic. While he is entitled to make a living—he reportedly charges $150,000 a speech and received an $8.5 million advance for the book—there is something jarring about his late-life discovery of clear, declaratory English. His predecessor, Paul Volcker, was barely heard from for years after he retired, and Greenspan’s failure to follow that example has perplexed some of his former colleagues.(...) Citing fears (which proved to be misplaced) of Japanese-style deflation spreading to the United States, he kept the federal funds rate at 1 percent until June 2004, by which point the economy had been growing steadily for more than two years. By failing to tighten monetary policy, Greenspan created an apparently limitless supply of cheap credit. After adjusting for inflation, the cost of cash was close to zero. Investment banks, hedge funds, and other financial operators were able to obtain money at minimal cost and use it to finance risky investments. To a lesser extent, so could ordinary Americans. In a feat of levitation almost without precedent, the prices of nearly all speculative assets moved in the same direction: U.S. stocks went up; foreign stocks went up; residential real estate went up; commercial real estate went up; oil went up; gold went up; sugar went up; coffee went up; Treasury bonds went up; junk bonds went up. To make money, all you had to do was suit up, buy something, and sit back and watch it grow.(...) Greenspan has come up with a new argument. “These adverse periods are very painful, but they’re inevitable if we choose to maintain a system in which people are free to take risks,” he said in August. Because of his Randian view of the world, there is no reason to doubt that Greenspan believes what he said, but it raises the question of whether he was ever a suitable choice for Fed chairman, given his understanding of the job. The reason the Fed was set up, in 1913, was to preserve financial stability—to break the historical pattern of ruinous boom-and-bust cycles. Central banks maintain stability by limiting the types of risks people can take, either by raising the cost of borrowed money or by enforcing regulations. If all else fails and panic breaks out, they inject liquidity into the system by acting as a bank of last resort, which is what the Fed and other central banks were forced to do over the summer. Given Greenspan’s inaction during his final years in office, our current crunch was pretty much inevitable. In addition to reducing interest rates to 1 percent, he rejected calls for more vigorous oversight of the mortgage industry. Instead of outlawing such dubious practices as the provision of “2-28” loans—which lure borrowers by offering them cheap rates for two years and then sock them with enormous increases in their monthly payments—the Fed issued vague “guidance” letters that most lenders ignored.(...) Greenspan did get one thing right, though: his retirement date. Were he still at the Fed, he would be responsible for cleaning up the mess he helped create. While his successor, Ben Bernanke, watches anxiously to see who the next casualty of the credit squeeze will be—a Wall Street investment bank? a big hedge fund? a private equity firm?—Greenspan will be busy signing autographs at Borders and Barnes & Noble. If you want to question him about all of this, get there early. The lines will be long.

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