Greenspan’s Legacy

I am traveling today, but filling in today with a special guest post is Jack McHugh:
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Stocks took some positive news on the credit front and rallied Thursday, though efforts to run away to the upside were thwarted in the afternoon (see below).

The Bank of England, while not cutting rates or providing the type of "emergency liquidity" on offer at the Fed or ECB, nonetheless did ease some restrictions on its member banks this morning. LIBOR fell a bit, swap spreads came in, and financial stocks everywhere jumped.

Boosting the financials even further was word from Countrywide that it had secured even more funding.  The 14% rise in CFC’s stock price set the tone for what started out as a moonshot to the upside for most equities.

But enough of an undertow developed in technology stocks that some profit-taking set it before the bell.  The major averages finished with gains ranging from 0.3% (Russell 2000) to 1% (Dow). Treasury prices broadly retreated, which was unsurprising given the action in stocks and given that credit spreads narrowed. The dollar enjoyed a nice rebound, as it advanced against every major currency except the Canadian dollar. Commodities were mixed to down, and most major sectors saw some components rally while others declined (e.g. gasoline was up nicely, natural gas was down hard). The CRB index shed 0.25% by day’s end.

Alan Greenspan seemed larger than life during his tenure; some (like Congress) even worshiped him. But the impending release of his book (The Age of Turbulence) is causing him (or his publisher) to cast his long shadow just as Chairman Bernanke girds for his most important FOMC meeting yet. An interview with the Maestro will be aired this weekend on 60 Minutes, but excerpts found their way to media outlets this morning (see below). While giving Chairman Bernanke some moral support, Mr. Greenspan acknowledged that he misunderstood the housing bubble, the lax lending practices that supported it, and its potential negative effects on the rest of the U.S. economy.

Speaking of the poor mortgage underwriting practices that he lifted not one finger to fix, Greenspan said the following:

"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,” Greenspan said in the 60 Minutes interview. "I really didn’t get it until very late in 2005 and 2006,” as he was about to leave office…"It was nothing to look into particularly because we knew there was a number of such practices going on, but it’s very difficult for banking regulators to deal with that,” Greenspan said in the interview, CBS said. 
-Bloomberg, Greenspan Says He Failed to Foresee Subprime Rout

I’m sorry, Mr. Greenspan, but bank lending practices are EXACTLY what the Fed can and should regulate. Under Mr. Bernanke, for example, mortgage lending regulations have recently been tightened. It’s probably not entirely fair for me to castigate the former Chairman until I view the entire interview, but these snippets seem like revisionist history at best and the height of disingenuity at worst.

That he is trying to hog the headlines just as his successor is trying to deal with a mess of his creation will certainly not burnish the Maestro’s legacy. Paul Volcker used to just say "no comment" when asked about monetary policy after he left office. I wish Mr. Greenspan would have the class to follow his lead. His legacy was tarnished in my eyes long ago, but perhaps recent events will cause others to see that he was anything but omniscient.

It’s high time investors realized that central bankers are not gods; they are fallible, just like you and me.

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Good stuff, Jack.

Note: Greenspan’s book — The Age of Turbulence — gets released Monday . . .   

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Sources:
Global Stocks, Dollar Rise, Bond Risk Falls on Improved Credit Outlook
Michael Patterson
Bloomberg, Sept. 13 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=a1XeiV3oscOA&

Greenspan Says He Failed to Foresee Subprime Rout
Craig Torres 
Bloomberg, Sept. 13 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOmrdFzHpajc&

Bernanke Spurns Greenspan’s Quick Fix, Seeking Data
Craig Torres 
Bloomberg, Sept. 13 2007
http://www.bloomberg.com/apps/news?pid=20602014&sid=aWSBqmhwbCFw&

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What's been said:

Discussions found on the web:
  1. tt commented on Sep 14

    Northern Rock being bailed out by BoE just 2 days after Mervyn King said they would let the markets work out their own problems …… hypocrite

  2. Pool Shark commented on Sep 14

    Retail sales (less autos) actually fell in August. Ouch!

    Gold back up over $709.00 this morning.

    Going to be an ugly open for the market…

  3. D. commented on Sep 14

    It’s tough to stay quiet when you feel guilty!

  4. Owner Earnings commented on Sep 14

    Greenspan is an em-barr-ass-ment to anyone that actually in the financial industry that actually knows what they are doing.

  5. Neal commented on Sep 14

    Just like thre troops in Iraq, the American consumer has been deployed on the front lines too long.

    They responded mightily when asked by GWB to go out and shop, but now, with no end of their deployment in sight, are asking what is the long-range plan? Will we win? Is it a war we can win? Is it our war to fight? Was it worth it?

  6. Stuart commented on Sep 14

    Retail sales poor. Employment worsening. Housing deteriorating AND housing inventory still increasing…unbloody real. Somebody get the message out to STOP building the damn things. CFC needed more emergency money and a big European shop got bailed out this a.m. Q4 is going to be “fugly” IMO.
    But hey, it’s contained. 50 bps better be the cut, else head to the bunkers.

  7. Antunes commented on Sep 14

    Those who defended and enjoyed the ride with Mr. Greenspan when he cut rates to 1% and let them there for too long to sustain the economy and the stock market are now going to realize that there is no magic wand to correct unbalances: the new/credit ecomomy is not sustainable in the long term and is realy going to fall apart, we just don’t know when…

  8. Rick commented on Sep 14

    I understand what Greenspan did and did not do and I understand your frustration with him but from where I stand looking at the markets there must be an awful lot of men and women that play fast and loose in their professional careers. If you’re saying that Greenspan should’ve regulated so the crooks couldn’t do this to our economy – I think that’s pretty naive. Call me cynical but I’ve studied the markets since 1982 and one thing’s for sure – there is alot of fast and loose stuff going on in every business in this country – who’s gonna regulate that?

    I apologize for the tone of this post because this is my favorite blog and I’m frustrated with this mess too. A mess that will ultimately give us a recession and the Fed bailing out Wall Street to save Main Street.

  9. michael schumacher commented on Sep 14

    reread stuart’s post as the dow goes green…

    fucking priceless

    Ciao

    MS

  10. C Heale commented on Sep 14

    I’ve long thought Greenspan had simply moved the bubble from the internet boom to housing and I’m not an economist or involved in finance. The fact he continues to make excuses and is unable to admit he was wrong makes him more of a jerk in my eyes. I have more confidence (but still very little) in Bernake but he has a more difficult job than Greenspan ever had, particulary with the moron that is currently president of the U.S.A. In my opinion there is nothing that can be done to avoid or even postpone a severe recession, and this is partly down to the the actions Greenspan took. I doubt that History will be kind to Greenspan.

  11. Mike M commented on Sep 14

    The fact is that the Fed (and fractional reserve banking)is a fraud, plain and simple. Banks take a man’s property and lend it to others, all the while telling him his funds are safe and secure.

    The Fed systematically robs people of real wealth; the gradual cost reduction of real goods and services over time, (yes deflation). Abolish the Fed, and return to a gold standard.

  12. techy2468 commented on Sep 14

    auto sales was up….reason heavy discounting…i too bought a honda accord…because it was selling 3k below invoice.

    but now what….since most in the market for a auto have bought it….whats going to save the retails in the next few months.

    i dont know aboout the stock market….since they are disconnected from reality….

    but its getting ugly in the economy….and we will get a rate cut…but we will still head into a recession….how bad i am not sure..

    so unless all the data about housing, mortgage, consumer debt was wrong….we have a recession maybe q4 07 or q1 08.

    unless everyone is given a low rate mortgage immediately…and low rate loan to clear credit card….so that we can start spending ASAP…of course a promise of higher salaries will be appreciated.

  13. Stuart commented on Sep 14

    MS,
    “reread stuart’s post as the dow goes green…

    fucking priceless

    Ciao

    MS”

    same thought here. Black is white, up is down. Go figure…

    FX market = George
    Equity market = Lenny.

    George is about to re-read the bunnies to Lenny.

  14. Sheeple Investment Co. commented on Sep 14

    Greenspan=Jesus. Lauded when he rode into Jerusalem (with his rate cuts), and now nailed to the cross. The same people that loved him, say they hate him now. Well, at least some of those same people. I never liked him.

    Despite how tough Volcker was as a FedHead, he and his legacy seem to be well regarded on Wall Street for setting things straight. True? Thus, I am wondering why every time Bernanke signals something other than a cut people rip him a new a-hole.

    At Sheeple Investments, we are buying into this dip HEAVILY so the hedge funds can pull the rug out from us later this month when they sell to raise cash. We encourage all sheeple to do the same.

  15. Johnny V. commented on Sep 14

    Alan Greenspan is a real-life Percy Thomas (aka the Cotton-king) from “Reminscinces of a Stock Operator”. He charms you into believing everything he says but in the end you go bankrupt. Watch out Bill Gross, PIMCO is currently falling under his spell…..

  16. Joe Klein’s conscience commented on Sep 14

    Re: Greenspan

    What do you expect from a guy who was once a disciple of Ayn Rand. Wasn’t her point that you look out for yourself and to hell with everyone else?

  17. Bonghiteric commented on Sep 14

    Just got my new batch of t-shirts from the silkscreeners:

    Its a pretty good likeness of Greenspan’s predecessor with the initials WWVD

  18. VJ commented on Sep 14

    We would have fared better with Feldstein’s little computer in place of the Fed compared to Greenie the political hack:

    * In February of ’94, Greenie claimed the economy was overheating, which he claimed would without a doubt lead to renewed inflation, therefore he needed to dramatically raise interest rates. The Fed raised the Fed Funds Rate repeatedly over the next 15 months. Unfortunately for the Fed Chairman, the economy continued to expand quite robustly, yet simultaneously, inflation continued to decline.

    * In March of ’97, Greenie announced that with the unemployment rate having fallen below 5.5%, out-of-control inflation must surely be returning. The Fed raised the Fed Funds Rate repeatedly over the next 18 months. Unfortunately for the Fed Chairman, the Unemployment Rate continued to decline to decades lows, yet there was no return of runaway inflation.

    * Add in Greenie’s warning in December of ’96, that the stock market (with the DJIA at 6,437), was suffering from “irrational exuberance” and was highly over-bought, and you have just a preview of his litany of blunders.
    .

  19. Alex commented on Sep 14

    Very disingenuous indeed. A vital role of any central bank is to look for systemic risk, and try to head it off before it becomes excessive. Of course the Fed has limited power over the mortgage market in supervision, but not completely zero, the HOEPA regulations were not enforced, and congress has criticized the Fed for that. But even so, how could Greenspan possibly be that in the dark up to 2006!? Everyone knew this mortgage market was out of control as far back as 2003-2004 at LEAST. He just did not want to upset his friends, and went along with the finance industry. Period. A very sad ending to his career.

  20. Davis Hall commented on Sep 14

    Greenspan’s new book tour looks like Britney Spears’s comeback tour.

  21. MarkTX commented on Sep 14

    “Greenspan’s new book tour looks like Britney Spears’s comeback tour.”

    So has Greenspan been lip-syncing this whole time? and/or will he melt down and forget

    HOW TO LIP-SYNC

    on his book tour?

  22. John commented on Sep 14

    VJ,

    Your statements about Mr. Greenspan could be a bit harsh.

    * “In February of ’94, Greenie claimed the economy was overheating … would … lead to renewed inflation … The Fed raised the Fed Funds Rate repeatedly over the next 15 months … the economy continued to expand quite robustly, yet simultaneously, inflation continued to decline.”

    I recall him explaining the Fed needed to take their foot off the accelerator coming out of the 1990 recession in order to prevent renewed inflation and not necessarily that the economy was overheating. Is it possible that “the economy continued to expand quite robustly, yet simultaneously, inflation continued to decline” precisely because the Fed did raise rates from loose to neutral? Hasn’t Mr. Greenspan been vilified recently for the current situation because the Fed left rates too low for too long coming out of the 2001 recession? Damned if he does and damned if he doesn’t?

    * “March of ’97, Greenie announced that … out-of-control inflation must surely be returning. The Fed raised the Fed Funds Rate repeatedly over the next 18 months … there was no return of runaway inflation.”

    Is it possible the Fed’s pre-emptive policy worked to make sure “there was no return of runaway inflation”?

    * “Add in Greenie’s warning in December of ’96, that the stock market (with the DJIA at 6,437), was suffering from “irrational exuberance” and was highly over-bought …”

    In that speech, Mr. Greenspan asked a question along the lines of “How do we know” if the stock market was experiencing irrational exuberance. It was not a statement of fact. It was a legitimate question at the time considering six years of a stock bull market that returned 16% on average with the last two years returning a dramatic 66%.

    I don’t and didn’t worship the man. Greenspan made mistakes. But he did some things right, perhaps even each of the three episodes upon which you commented. Hindsight is wonderful. But it’s important to be fair in criticism of Greenspan where it’s deserved and not just for the sake of criticizing him.

  23. VJ commented on Sep 14

    John,

    I recall him explaining the Fed needed to take their foot off the accelerator coming out of the 1990 recession in order to prevent renewed inflation and not necessarily that the economy was overheating.

    He stated in February of 1994 that interest rates needed to rise because the economy was overheating. I’m paraphrasing, of course, but he said it.

    Is it possible that ‘the economy continued to expand quite robustly, yet simultaneously, inflation continued to decline’ precisely because the Fed did raise rates from loose to neutral?

    A) If you can explain how raising the Fed Funds Rate 8 times over a 15 month period helps to increase GDP or how it would continue to lower inflation that was already declining, I’m open to see it.

    B) Just curious, how is the Fed raising the Fed Funds Rate 8 times over 15 months considered changing from “loose to neutral” ?

    Hasn’t Mr. Greenspan been vilified recently for the current situation because the Fed left rates too low for too long coming out of the 2001 recession? Damned if he does and damned if he doesn’t?

    Hardly.

    Interest rates weren’t at 40 year lows back then, and the real issue was Greenie’s bad judgment.

    Is it possible the Fed’s pre-emptive policy worked to make sure ‘there was no return of runaway inflation’?

    But he wasn’t “pre-emptive“. That was the point of my remark about Feldstein’s suggestion from years ago, that if the Fed was merely going to react to events, then they could be replaced by a computer. Generally, Greenie was a follower, not a leader. When he did try to anticipate, he repeatedly got it wrong.

    And again, I don’t see how raising interest rates over such a short term would have counteracted his belief that unemployment falling under 5.5% would be inflationary. He was wrong.

    In that speech, Mr. Greenspan asked a question along the lines of ‘How do we know’ if the stock market was experiencing irrational exuberance. It was not a statement of fact. It was a legitimate question at the time considering six years of a stock bull market that returned 16% on average with the last two years returning a dramatic 66%.

    But you’re well aware that Greenie never came straight out and said anything without doublespeak. The point was that he was wrong, again.

    I’m criticizing him because of his bad judgment and his long string of wrong calls.
    .

  24. toady commented on Sep 15

    Isn’t the subtitle for Greenspan’s book called: “An Enabler’s Lamet.”

    All that party over principle during the GWB years has caught up to Greenspan.

    He did fine with presidents that cared about good governance, but he should have been the one adult who should have thrown on the brakes to the reckess GWB fiscal policy instead of being another cheerleader when it was happening and an apologist once out of office.

  25. VJ commented on Sep 15

    Rah Row.

    The RightWingers are not going to like this:

    Greenspan Is Critical Of Bush in Memoir

    Greenspan, who had an eight-year alliance with Clinton and Democratic Treasury secretaries in the 1990s, praises Clinton’s mind and his tough anti-deficit policies, calling the former president’s 1993 economic plan “an act of political courage.”

    But he expresses deep disappointment with Bush. “My biggest frustration remained the president’s unwillingness to wield his veto against out-of-control spending,” Greenspan writes.

    However, he calls Clinton a “risk taker” who had shown a “preference for dealing in facts…”

    WAPO

    Sure, “out-of-control spending” by the Bushies and the Congressional Republicans was certainly a problem, but as the Congressional Budget Office as documented, far, FAR, more of the MASSIVE federal budget deficits are as a direct result of the four rounds of tax cuts for the Rich & Corporate, which Greenspan ENDORSED !
    .

  26. Larry Nusbaum commented on Sep 15

    By lowering rates to emergency levels and then keeping them there, he helped a lot of real estate investors and hurt a lot of savers. It’s a shame that more people didn’t lock-in the low rates with more secure 30 year fixed and/or 7-1 and 10 year I/O ARMs.
    Underwriters mis-led borrowers by telling them they could afford loan programs that they really couldn’t. That’s a shame, while the regulators snoozed (as usual).

  27. SPECTRE of Deflation commented on Sep 15

    Kurt Richeb├Ącher, God rest his soul, was so right:

    “All this emphasis on statistics and calculations… ,” he went on, rapping his silver-handled cane on the table for emphasis, “without a proper theory, it is all nonsense. And your economists seem to have no theory at all… they just think they can manipulate the system in order to get whatever outcome they want. They think economic growth comes from consumer spending and that they can control consumer spending by adjusting lending rates. It is unbelievable that anyone takes this seriously. It is capital formation that really matters. A rich society is one with a great stock of capital… one that builds capital and puts it to work to create more capital. A rich society is not one where people consume. Just the opposite. It is not what is consumed that creates wealth; it is what is NOT consumed. Yet, all the Anglo-Saxons focus on motivating consumers to consume. And now they are consuming more than they make. I tell you, in 70 years of studying economics, I have never seen such nonsense.”

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