Category: Alan Greenspan

Greenspan sees no bubble

The Maestro’s crystal ball is the gift that keeps giving.  With an uncanny knack for completely missing most of the major inflections points in financial markets over the past five decades, Greenspan added this gem to his resume in a FOX Business News interview yesterday:

“There are a lot of things that can go wrong, but to say that the market is bubbly and in a position where it could conceivably create a serious problem, I think is overstating it.”

Let’s put this prediction in perspective by filling in some of his resume…

“It’s very rare that you can be as unqualifiedly bullish as you can now.”  ~ Alan Greenspan, The New York Times “Economic Survey”, January 7, 1973

1973 and 1974 turned out to be the worst years for economic growth and the stock market since the Great Depression.  (as noted in Jason Zweig’s commentary in The Intelligent Investor)

On October 2, 1990, then Federal Reserve chairman Greenspan made this prediction:

“At the moment it isn’t raining.  The economy has not yet slipped into a recession.”

It was later revealed that a recession had actually begun three months earlier, in July.

In April 2000 (one month after the NASDAQ peak), Greenspan was asked if rising rates would prick the stock market bubble.  His response:

“That presupposes I know that there is a bubble…  I don’t think we can know there’s a bubble until after the fact.”

From The Age of Turbulence (2007), Greenspan recounted his thoughts on the 2003-2006 housing bubble:

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.”

The December 26, 2005 issue of BusinessWeek confirmed his complacency:

“The view of most economists, including Fed Chairman Alan Greenspan, is that a national home-price bust is highly unlikely.”

Greenspan also whistled past the subprime lending grave:

“With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. . . . This fact underscores the importance of our roles as policymakers, researchers, bankers and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”  ~ Alan Greenspan, from a speech given April 8, 2005

Housing prices peaked in Q1 2006 and by Q4 were in full retreat, yet Greenspan was unconcerned:

“Most of the negatives in housing are probably behind us.  The fourth quarter should be reasonably good, certainly better than the third quarter.”  ~ Alan Greenspan, October 26, 2006

Even as late as Q2 2008 he thought the worst was over:

U.S. financial markets, roiled by the collapse of the subprime-mortgage market, have shown a pronounced turnaround since March. The worst is over for the credit crisis, or will be soon, and there’s now a reduced possibility of a deep recession.  ~ Alan Greenspan, June 13, 2008

The S&P 500 plunged nearly 45% over the ensuing five months.

Alan Greenspan is a stark reminder that central bankers have only one productive use: as contrary indicators.

Fed officials give their imprimatur to stock market bubble

greenspan-bubble

Last Friday former Fed chairman Alan Greenspan gave support that the 4-year bull market in stocks has room to run:

And right now, by historical calculation, we are significantly undervalued.  The reason why the stock market has not been significantly higher is there are other factors compressing it lower.  But irrational exuberance is the last term I would use to characterize what’s going on at the moment.

On March 4, Fed vice-chair Janet Yellen assured investors:

At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability.

And on February 26, chairman Ben Bernanke gave stocks his stamp of approval:

I don’t see much evidence of an equity bubble.

Not to question these all-knowing masters of the universe, but there does seem to be a trifle of evidence to the contrary, that perhaps their zero interest rate policy (ZIRP) has stampeded savers into anything hinting at a yield.  Exhibit A: Over $1 trillion has poured into bond funds over the past 4 years (out of money market funds).  Exhibits B and C: Junk bond yields are at record lows and margin debt near record highs.  Exhibit D: Total credit market debt is a record $56.1 trillion (352% of GDP) compared to $49.8 trillion (also 352%) at the top of the credit bubble 5 1/2 years ago.

After the tech bubble burst, The Maestro admitted that when it came to detecting bubbles investors were on their own:

We at the Federal Reserve considered a number of issues related to asset bubbles–that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact–that is, when its bursting confirmed its existence.  (August 30, 2002)

Five years later those words proved prescient (one of the few times) as the Fed-heads missed the housing bubble and failed to recognize how it had metastasized into a full-blown credit bubble.  While still at the helm of the Fed, Greenspan weighed in on his 6-year experiment to contain the bursting tech bubble (which he failed to see coming):

Most of the negatives in housing are probably behind us.  (October 26, 2006)

Right before the subprime bubble burst, Janet Yellen was oblivious to any impending trouble:

I’m waking up less at night than I was [over the slowdown in housing].  So far, there’s been remarkably little effect on the rest of the economy.  (February 21, 2007)

After taking the reins at the Fed, Bernanke did his own Alfred E. Newman impersonation:

We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.  (May 17, 2007)

The Federal Reserve’s crystal ball does not do asset bubbles.  When its wizards begin to feel they possess such power (that is, denying the presence of a bubble), contrarians take notice.

Greenspan defends his legacy

On Tuesday, the Wall Street Journal published an abridged version of several interviews with Alan Greenspan in which he defended his actions from 2001-2005 which many believe fomented a massive credit bubble (present company included). In addition, interviewer Greg Ip ran a front page story on the critique and defense of post-millenial Greenspan. Ip framed the debate along the interventionist paradigm with this line:

The Fed’s low rates and laissez-faire regulatory oversight during his final years are widely blamed for sowing the seeds of today’s financial crisis — one that began in the U.S. housing market and is now battering banks, stock markets, borrowers and consumers around the world.

According to the prevalent interventionist mindset, we’re allowed to criticize the policies of the Fed, but never the institution or the system itself. Strange, Greenspan is supposed to be a disciple of Ayn Rand, complete with free market pedigree. Yet he was a lousy forecaster in both the private and public sector, and did stints as a government employee before taking the position as arguably the most powerful central planner in the world for 19 years. Is it not a total contradiction for anyone to use “Fed” and “laissez-faire” in the same sentence?

The Fed is like a broken candy machine and the chairman’s job is to dispense candy. By definition, a policy of lowering rates to 1% is intended to crank up the machine; sugar highs among the kiddies are the predictable result. Regulating the distribution of candy either limits the amount of candy (contrary to the stated policy) or attempts to means test the recipients (an exercise in futility). Keep in mind, the Fed chairman is a child himself, and owes his priviledged position to the other children hooked on chocolate. As Greenspan said in the Q&A:

I have always seriously questioned [bank examiners’] ability to do more than what counter-party surveillance would do. What evidence do we have that this actually works? Because I know that internal auditors of a bank have significant difficulties in spotting problems and malfeasance within a bank, and the outside auditors obviously have less than the inside auditors. The capabilities of regulators are still less. The problem is not the lack of regulation, but unrealistic expectations about what regulators are able to anticipate and prevent.

How ironic that Greenspan is concerned about moral hazard here (and rightly so), yet was guilty of creating the mother of all moral hazards by attempting to suppress every crisis, beginning with the ’87 Crash. He adopts humility when attempting to regulate the activity of lenders and borrowers, yet very little with regard to the pricing of short-term credit.

Greenspan, Bernanke and every other central banker see the world through an interventionist lens. The boom-bust cycle is never caused by their manipulations of the credit markets, but always seen as an unsavory side effect of capitalism or a “dynamic economy.” The role of central bankers is to mop up the mess and prevent its spreading. They honestly believe this was the lesson of the Great Depression and Japan during the 1990s (even though central bank induced credit expansions caused both bubbles and massive government intervention prolonged and deepened each correction.) This is why Greenspan flooded the system with cheap credit during the tech bust (an insurance policy against the possibility of a Japan-style deflation), and why Bernanke is doing the same today. As Jim Grant wrote in his latest issue, “Who better to manage crises than the institution that instigates them?”

How can the cure be more of what caused the disease in the first place? Einstein defined insanity as “doing the same thing over and over again and expecting different results.”

Greenspan sees parallels to ’87 crash

The WSJ reported on a speech given by Greenspan last night:

“The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907,” Mr. Greenspan told a group of academic economists in Washington, D.C., last night at an event organized by the Brookings Papers on Economic Activity, an academic journal.

He then went on to blame the boom/bust cycle on emotion, or what Keynesian economists refer to as “animal spirits:”

Mr. Greenspan, Fed chairman from 1987 to 2005 and now a private consultant, said business expansions are driven by euphoria and contractions by fear. While economists tend to think the same factors drive expansions and contractions, “the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria.”

Too much optimism leads to bubbles, regardless of what central bankers do to throw cold water on them:

The euphoria in human nature takes over when the economy is expanding for several years, and leads to bubbles, “and these bubbles cannot be defused until the fever breaks,” he said.

Bubbles can’t be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and “stopped the nascent stock-market boom,” but when stopped, stocks took off again. “We tried to do it again in 1997,” when the Fed raised rates a quarter of a percentage point, and “the same phenomenon occurred.”

“The human race has never found a way to confront bubbles,” he said.

So let me see if I have this straight:

  1. Artificially low interest rates provided by central bankers have nothing to do with bubbles.
  2. Responding to every crisis with artficially low rates doesn’t lead to moral hazard.
  3. I acted responsibly during my reign as Fed chairman from 1987-2005.
  4. Unfortunately, investors let emotions get the better of them from time to time during those 18 years.
  5. I should go down as the greatest Fed chairman in history.
  6. The Fed can take credit for saving capitalism from itself.
  7. Don’t forget to buy my upcoming book.

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