This will be my last Easy Al post for the foreseeable future (you can see yesterday’s Greenspan Media Blitz! here)
From yesterday’s Guardian, comes this story on former Fed Chair Alan Greenspan: Greenspan: era of low inflation is over:
Britain faces the prospect of falling house prices and rising inflation within a few years, according to Alan Greenspan, the former chairman of the Federal Reserve.
In a series of interviews to promote his memoirs, the respected US economist warned that the era of low inflation was over.He predicted that the Bank of England would struggle to keep the consumer prices index within one percentage point of the government’s 2% target . . .
"That’s going to change, because markets are going to start turning round and inflationary pressures are going to start to build," warned Mr Greenspan.
I am compelled to point out the painfully obvious: We have enjoyed an ever-decreasing low interest rate environment, ever since Paul Volcker, the cigar chomping, tough guy, was Fed chairman. He had the colossal cojones to break inflation’s back through a series of unbelievably painful rate hikes.
Amazingly, the man who stood 180 degrees to Volcker, the architect of a Fed policy which saw liquidity as the answer to any crisis, who single-handedly did more to promote, provoke and manufacture inflation, is now predicting that the era of low inflation is over. Go figure.
Does anyone else see the irony of this . . . ?
>
Source:
Greenspan: era of low inflation is over
Graeme Wearden and Ashley Seager
Guardian Unlimited, Monday September 17, 2007
http://business.guardian.co.uk/economy/story/0,,2170888,00.html
According to the Federal Reserve Act of 1913, the Fed’s mandate is “to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.”
Since the 3rd one is dependent on the 1st two, the Fed’s dual mandate is employment and inflation. Those telling the Fed to cut 50 bps today are ignoring this mandate b/c inflation pressures are clearly evident (implied inflation in the 10 yr TIPS is at a one month high and the CRB index is just shy of a one yr high).
With respect to the statement, the FOMC basically wrote the 1st half on Aug 17th when they cut the discount rate and said, “financial mkt conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward.”
As my friend says, long before Greenspan was a genius, he was an idiot.
Funny,their Suns are 180 degrees opposite one another! :-)
The one thread I see running through most of Greenspan’s comments during the recent media blitz is his view that most of our problems incl. inflation are the result of GLOBAL forces, most of which the Fed was powerless to affect meaningfully. China, India and so forth are the culprits in his mind.
Whether this is true, or just his apologia for missing things like the obvious dangers (hello!) inherent in the subprime debacle, we might want to consider that he is right about the global aspect of this.
Continued global growth could really heat things up IMO. And global credit problems could similarly bring the markets down. Did you read John Mauldin’s “Here Comes a Whale” from GavKal re: Northern Rock last night? Could get ugly here.
A truly scary double edge sword — inflation and chaos in the credit markets.
Cheers!
[Voice over as the sun sets on the ocean:
“Hey, wait a minute, that is MY deck chair!”]
I am compelled to point out the painfully obvious: We have enjoyed an ever-decreasing low interest rate environment, ever since Paul Volcker, the cigar chomping, tough guy, was Fed chairman. He had the colossal cojones to break inflation’s back through a series of unbelievably painful rate hikes.
Amazingly, the man who stood 180 degrees to Volcker, the architect of a Fed policy which saw liquidity as the answer to any crisis, who single-handedly did more to promote, provoke and manufacture inflation, is now predicting that the era of low inflation is over. Go figure.
Does anyone else see the irony of this . . . ?
To say I’m disgusted by the man is an understatement. For those of us who are old enough to remember Volcker as FED Chair, irony may be too nice a word for what Easy Al has done to our economy and currency.
You want irony? Jimmy Carter appointed Volker and Reagan got credit for the economic boom. Maybe Carter, like Lincoln, will look better and better as time passes.
My kids tell me Lincoln was despised in office…
In one interview, AG even predicts double-digit interest rates in the US, albeit for a short while.
I just can’t see this happening.
My analogy is prefessional sports. A GM of a team comes in and builds a team but it does not “click” until the 2nd or 3rd year after the guy is fired. It’s called a legasy.
So Greenspams legasy is increased inflation and marklet turmoil.
Just like the corporate analogy. Managers come in and profits increase–because they stopped spending on the future. Short term focus.
It is frightening how much spun exposure he gets on infomercial cnbc, et. al.
Speaking of inflation, it looks like we’re back to heads I win tails you lose reporting again. Bloomberg is reporting plunging producer prices as an excuse for a rate cut even while core prices went up and were higher than forecast (not to mention yoy 2.2%.) So previously the Fed didn’t have to raise rates because core prices were low and now the Fed can cut rates because headline inflation is declining.
How’s this for irony. Actually its probably better described as an oxymoron. Good Corporate Governance.
“Of the nearly $270 billion in financial assets on Lehman’s balance sheet at the end of the fiscal second quarter, for example, about $22 billion, or 8%, fell into what is called Level 3. The firm said in its financial filings that values in this category “reflect management’s best estimate of what market participants would use in pricing the asset.” At Bear, about $18 billion of the firm’s $220 billion in financial assets fall into this category. At both firms, the bulk of their financial assets — $152 billion for Lehman and $163 billion for Bear fell into the mark-to-model category, or Level 2.”
So $174 billion of Lehman’s assets fall into either Level 2 (mark to model) or level 3 (mark to make believe). Their earnings are down 3 cents from last quarter. It’s plainly clear they didn’t mark down a god damn thing. Beyond incredible the balls of these guys.
Today’s TIC report was horrible. Continued Enron style accounting such as this morning’s shining example will go a loooonnngggggg way to instilling confidence in luring much needed foreign direct investment.
I saw the news from LEH………what a crock of shit…..Fed better leave the rates pat since Lehman (and I’m sure the rest of them) live in make believe land) and according to them are doing just fine.
If we get a cut you can kiss off the concept of paper money over the next several years…
Looks like LEH traders are a little skittish about it’s own prospects today….LOD on “earnings beat”…..
Ciao
MS
BTW Irony is all of us waiting for the Fed meeting and both the Fed and Treasurey are busy accepting more boat loans for money today.
Total of about $15 billion between the two…
Free market my ass……..
Even if nothing done to the Fed funds Hanky-Poo and Co. are ready to take the market up no matter what.
Ciao
MS
Stuart, is that TIC report on this page:
http://www.treas.gov/tic/
and what was so bad?
“Does anyone else see the irony of this…?”
I’m assuming the question is purely rhetorical…
Does anyone here believe that any one person (i.e. President, Fed Chair) has enough power to receive 100% credit (or blame) for the long-term conditions of financial markets?
I would venture to guess that the right (or wrong) person in a position of power at a given moment in history can greatly affect short-term conditions but the degree of power over long-term conditions appear to me as minimal…
Do macro-economic conditions such as the baby boom generation, advances in technology, global trade, emerging markets, and geo-political forces have less or more collective weight on financial markets than a President or Fed Chair? Is it possible that conditions could be worse if not for Greenspan’s policies? Of course we can look back with a degree of confidence but we are discussing PAST decisions that were made about the future. That’s easier to do than make decisions TODAY about the future…
Additionally, please tell me why it matters who is in power. After all, traders can theoretically make money in almost any political or market environment and passive investors don’t care.
Things can always be better but perhaps we should decide on what is “good enough” and move forward…
Cheers…
I think FED will cut 0.25 basis point.
Why? Because they have been giving out Repos at 5% rate in the past 1 month.
http://www.ny.frb.org/markets/omo/dmm/temp.cfm
“Does anyone else see the irony of this…?”
Not iron,… baloney.
I highly suggest pulling up a chart of a 5 year GFMS Base Metal Index (Kitco.com). You will clearly see a BREAKDOWN of an 18 month uptrend line going back to Oct ’05. Contrast this with the charts of Gold and Oil, that have been bid up to breakout levels BY SPECULATORS.
Bottom line — economy is slowing down, and inflation is under control.
BTW…the consumer wasn’t hiding at BBY was he?
Fred….so now you think economy is slowing down…
i remember that just 45 days back you said everything was fine….
maybe you want a rate cut to continue the bull market in equities……it does not matter what it may do the the economy in the long run, does it??
A slower economy is a good thing. There is a disconnect between growth expectations and needs. Part of it needs to be addressed by consumers who simply need to adjust to having less and the other part is the acceptance that while BRIC and other countries have a natural momentum of their own, in large part the US consumer drives much of that growth. A smarter consumer will be more selective about not just how much they buy but what they purchase and why? There is tremendous opportunity to shift from a predominantly consumption-based country to a stronger savings-based country. 401Ks were just the start, the next level is to personalize the savings process. Typically, this does entail some pain however.
It might be useful to differentiate between the guy speaking into the microphone and the guy sitting in the FOMC meeting making policy. Greenspan had that all-knowing persona in public. In the reality of the FOMC meeting, he had a limited range of tools and options. Riding to the rescue may not have been inevitable, but it was pretty close. He’d have been replaced if he had declined to spill oil on troubled waters.
Same with inflation. He coulda pushed inflation down more than he did, but think about the things daddy Bush said about him. Notice how he cozied right up to a Democrat, once his Republican master started bad-mouthing him? He needed political cover to keep his job and to do his job. Volcker had the advantage of public horror at the pace of inflation. Public horror faded, and Greenspan couldn’t be Volcker.
There is also the question of whether the rate policy of 5 years ago has much influence over inflation 5 years hence, as long as inflationary expectations are kept in check. If inflationary trouble lies ahead, how much could tighter policy through most of Greenspan’s term have done to prevent that?
Greenspan’s image is, I think, too big. He was not in charge of natural gas prices or health care or Social Security. He just allowed us to pretend he was. He has been associated in one way or another with every president since Kennedy. Self-promotion probably became an ever larger part of his behavior. Luck did a lot for him, and he has admitted that. We should probably recognize that admission.
If Greenspan gets some of the blame for the housing bust – and any financial and economic troubles growing for the housing bust – that is well deserved. He is ducking blame for the fiscal mess he helped foster, and should get crap for that.
If there is a shift in inflation fundamentals, why is he to blame? He wasn’t in charge of China, or US demographics, or mineral reserves or global energy demand or ethanol policy. Monetary policy can be adjusted quickly to meet future inflation fundamentals. That is somebody else’s job. Let’s keep the focus on that somebody.
according to LEH they are just fine……..
We are less than 5% from an ALL TIME HIGH and these brokers are clamoring for cheaper money……
What utter and total bullshit
And LEH’s CFO is so talking out of his ass…..how about showing us WHERE you stuffed that $27 billion in “leveraged loan committments” that you “feel very good about”.
Obviously you did’nt feel very good about breaking down what levels you have all those commitments sitting at.
How much of your profit came from the black box???? that is a rhetorical question…
Money Quote:
“Loan writedowns finished unless spread widens”
translation: if we do not get a rate cut then we will be losing more of YOUR money
Ciao MS
I wish CNBC could do a little more coverage on what the FED will do—-I don’t think
24 / 7 is enough!!!! It’s not like the national debt topped 9 trillion dollars last week—or some very bad reports about Iraq came out last night—or a host of financial problems face this country—-I guess that I just don’t get it—the Fed will sprinkle its holy water on the market and all is for given—up, up, and away to infinity!!!!!!!
wunsacon;
http://www.treas.gov/press/releases/hp560.htm
line 1
line 9
line 19
and the fact this was or July before the dollar really started showing more sell offs in August.
If he was a savant, he’d be an idiot savant.
Stuart/Wun-
How many different ways can you spell China….
that’s what the current TIC report says to me
line #9 is scary……….
Ciao
MS
I understand a janitor or an auto worker not understanding the connection between this cause-and-effect relationship, but aren’t brainiacs with Ivory Tower degrees and decades of experience supposed to know this?
I bet they do.
Who wants to argue that Greenspan didn’t know where his policies would lead us? Anyone?
In a court of law, this behavior is known as criminal negligence.
Techy…it’s called a mid cycle slowdown.
^^^^all too easy to see that one coming….
and if the market takes off as a result of the fed pandering to the brokers I’m sure you will say it was the end of cycle pick up….
that had nothing to do with the continuation of cheap easy money to further bloat the market so that the brokers can somehow “weather the credit issue” and not mark any of the bullshit on it’s books to something resembling a real valuation.
All too “neat” of an explanation from fred.
Ciao
MS
Stuart/Wun/MS,
Actually the scariest line is #3!
Investment banks have an incentive not to be first on the block to write down toxic sludge. Doing so before others makes the bank vulnerable to (apparently) stronger competitors.
For now, the actual damage isn’t too bad, and is probably well within the bounds of the models. I expect they’ll be trying to figure out how to force each others hands though.
Posted by: The Financial Philosopher | Sep 18, 2007 10:16:39 AM
TFP – LET ME COMMEND YOU FOR HAVING THE BEST POST OF THE DAY!!! (imo of course)
Brady Sneath
FRED…you remind me of religious Conservatives.
they never want to get into a intelligent debate….just one line well rehearsed sentences all the time…
same thing with Bulls…
so you think now you bulls realise that things fell all of a sudden into a slump….oh my what a surprise….i wonder what the cause for this slump is?? (must be something falling from the sky)
why dont you simply agree that its all about equity markets…..you want them to just keep going north…..and if they dont…you want some cheap money…..
i wonder what will you say next, if rate cuts do not help the market after 60 days (i expect markets to go up and stay positive for a week or so, but there is only so much adrenaline shots can do..)
i wonder if you analyzed the effect of rate cut on dollar, oil …leading to negative effect on economy in the long run….maybe not….
maybe you think, it may just work….it maybe the cure for all that ails the economy….
btw i beleive we need a rate cut just to soften the impact of all the debts consumers are carrying….
The Greenback is fortunate that the TIC report was released today, not tomorrow. All eyes today on the Fed so it’s somewhat off the radar screens.
The markets don’t seem to ‘understand’ the inflation ‘problem’. Over the last 12-15 years the CPI has run about 2.5% per year. The inflation projection over the next 20 years (using the 20yr TIP vs the standard T-Bond) shows the expected CPI to be 2.5%. What in the world are we worried about?
cutting the rates (both) does nothing at all to the various consumers who have piled on all that debt. A rate cut will help no one but the banks and brokers…..who, according to Lehman, “the worst is over”
If you are drowning in debt….please show me how a rate cut will help you…..
Ciao
MS
techy…
A mid cycle slowdown is a healthy correction from the extremely strong growth (that you predidcted would never happen in the first place). The difference is most here (perhaps you?) are in the (crowded) view that we are falling off a cliff. I don’t.
The recent “crisis” was caused by the freezing up of capital markets, caused by a contraction of leveraged CDO markets…not from an earnings led recession. Leverage was way too “loose”, and has been reigned in somewhat, allowing “confidence” to return to most of the credit markets. The Fed did the right thing not panicing, and will continue the path of restoring CONFIDENCE in the credit markets. This is NO bailout.
Rate cuts will help the ECONOMY — discount rate will drop Libor, and Fed Funds cuts will drop Prime rate. This will restore some confidence into the panic that was caused by the credit freeze.
Yes, the stock market will discount these effects and will go on to new highs (with or without you).
Like in 1995, the DOLLAR WILL RALLY, as global flows discount the future growth of our economy.
By all means, bet against each and every point I’ve made with your capital…
Good luck!
Confidence……
Yes we all have a healthy dose of that since none of these banks or brokers have or will come clean as to the amount of shit percolating in it’s own balance sheets.
But let’s just let the Fed make it all better by continuing to play market maker for the various entities that refuse to play by the same rules that we ,as retail people, MUST play by.
you forget to factor in all the help that the “growth story” you spout has had. Remember how CAPEX and productivity was going to save us??….Apparently it only matters when it fits what qualifies as an argument in your book
Sweeping generalities is what I’ve been accustomed to seeing from Fred…
Cherry Picking at it’s finest.
Ciao
MS
MS,
Were you born negative, cynical, paranoid and foul mouthed, or did you grow into this state?
50 BPS!
The monetary central planners delivered an upside surprise of their own today, cutting both the federal-funds rate and the discount rate by 50 basis points. Stocks immediately surged when the numbers were released. The Fed had widely been expected to…
«Volcker had the advantage of public horror at the pace of inflation. Public horror faded, and Greenspan couldn’t be Volcker.»
There is also another big, BIG difference: now, as part of a policy designed to make more voters feel conservative, nearly all voters are home owners (and many of them with mortgages), and a significant percentage are stock owners, and they will vote their wallets, providing a very strong boost to the party of inflation; and as Milton Friedman should have said, inflation is always and only a political phenomenon.