Immoral Hazard

Have a look at Jeremy Grantham’s latest missive: Immoral Hazard
The 1Q 2008 letter looks at asset bubbles and puts the role of the Fed under the leadership of Greenspan and Bernanke under the microscope, with a wistful nod to Paul Volcker:

It’s not that the former Fed boss Greenspan was incompetent that is remarkable. Incompetence is common enough after all, even in important jobs. What’s remarkable is that so many people don’t seem, even now, to get it. Do people just believe high-quality self-justifying blarney?  Or is it just that they apparently want to believe that critical jobs in a great country attract great talent by divine right. 

Sometimes, of course, they do, but sometimes the most important jobs – even that of a presidency or a Fed boss – end up with mediocrities.  Let us pause here to regret the absence of Mr. Volcker and wonder what a parallel Volcker universe would have been like. Just as we can wonder how much a few votes in Florida or a vote in the Supreme Court would have changed our world from what it is today. 

Paul Volcker inherited about as big a mess as we have today. He worked out what he had to do and did it with unusual lack of concern about what Congress thought of the necessary pain involved and the number of enemies he might make. He paid the price for forthright behavior by being replaced, despite a record for correct and tough behavior that makes for the most invidious comparison today. When Volcker was replaced, by the way, he did not moan and groan but like an old soldier quietly disappeared. There were no high-profi le announcements about the economy or any $300,000-an-evening appearances paid for by financial firms. . . .



Immoral Hazard
Jeremy Grantham  4/25/2008

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  1. Mel commented on Apr 26

    Democracy only works when the voters are informed. The last 20 years has seen a huge decline in news reporting–a lack of in depth analysis–a lack of combative questioning. Reagan won the hearts and minds of the press and it’s been downhill since then. Now with Murdoch taking over the WSJ, I’m not expecting things to get better.

  2. Ross commented on Apr 26

    Grantham is great. He is on my ‘must read’ list along with Jim Rogers, Marc Faber and others.

    If anyone in the Southwest would like to hear Faber, he will be in Dallas at the Dallas CFA confab in May. I forget the date but will look it up and put in a subsequent post. It is, i believe, open to the public with a modest entry fee.

    Grantham’s firms website is and is also open to the public. There are others at GMO that do very nice work.

    Now back to your regularly scheduled program…

  3. David Pearson commented on Apr 26

    Wow, what a tour de force. Thanks for highlighting it, Barry.

    The “Maestro’s” sterling reputation ranks right up there with belief in the CPI as proof of the madness of crowds. That of course brings us to the current juncture, which has the S&P testing resistance on the back of an unbelievable conjecture, an implausible idea. I’m speaking of the notion that by skipping one rate cut (or at least letting Greg Ip know that he’s noodling on it), the current Chairman can reestablish the Fed’s inflation-fighting credibility!

  4. JasRas commented on Apr 26

    Barry you found Grantham’s latest prose before I did! I believe you may be looking forward to these quarterly musings as much as I do!

    Thank you for the heads up!

  5. fred commented on Apr 27

    I disagree that Volcker has distinguished himself post-Fed. Although he has recently chosen to join the public debate and criticize Bernanke, he was MIA while Greenspan created the mess we find ourselves in today.

  6. Eric Davis commented on Apr 27

    Thank You Barry,

    Great read, Thanks for pointing it out, this is one of the reasons I continue to be a henchman in the army of the 12 monkeys, oh wait…. that is the Blog Army of the Philosopher King B.R.

    (p.s. don’t let that go to your head)

  7. Francois commented on Apr 27

    BTW, let’s not forget that Volcker stayed at the helm of the Fed, even with his wife very seriously ill. He could have easily resigned for “family reasons” that, for once, wouldn’t have been a classic grade-AAA bullshiting spin blurb.

    That speaks volumes about how dedicated he was to his country, instead of his CV.

    That he was replaced at the end of one term after an awesome job surely modulated Greenspan’s approach to his job. If you displease your political masters, it just won’t goddamn mattered how well you served the common good.

    Alas, Easy Al learned the lesson way too well.

  8. Philippe commented on Apr 27

    Here are several issues deriving from the present state of applauses and denials.

    Is the US central bank independent enough?
    If not, is it a cause for problems not only for the citizens but for the incumbent governors ?

    Mr Greenspan gave an answer the now days problems are not to be blamed on him (read I was a genius at the time of the Greenspan’s put and I remain an unknown genius at the time of Greenspan’s call)

    Is the actual economic situation asking for the same remedy as at the time of Mr Volker ?

    Is the ECB designed as an independent Central Bank (that is to say to be out reach from politicians) doing a better job ?

    PS Please any Phd Thesis of more than 10 pages please abstain!

  9. Blissex commented on Apr 27

    «Immoral Hazard»

    Well, every investment banker has learned from Bear Stearns that if they create a large and complex enough web of shady transactions that threatens the financial system the Fed will give them 30 billion dollars as a reward for their achievements. This means that any CEO of an investment bank who is not an idiot will instruct his people to try and deepen the tangle of shady transactions in which they are involved, and to make their bank as large a threat to the stability of the financial system as possibile, as doing is rewarded by a very very valuable “too big to fail” Bernanke put.

    That is not immoral and not a hazard: what is immoral is to leave suckers their money, and there is no hazard, because the Bernanke put is guaranteed by USA taxpayers.

    «It’s not that the former Fed boss Greenspan was incompetent that is remarkable.»

    That’s utterly ridiculous! Greenspan has demonstrated great skills at rewarding the financial industry for taking risks guaranteed by taxpayer money, at rewarding asset price owners for their superior wealth, and conservative politicians for starting large expensive foreign wars funded with tax cuts.

    Greenspan is no fool and knows exactly who benefits (Republican campaign donors) from the monetary policies adopted during his tenure and continued with such skill by Bernanke. From the point of view of the people who matter, Greenspan and Bernanke have been great geniuses, delivering a lot of benefits.

    re were no high-profile announcements about the economy or any $300,000-an-evening appearances paid for by financial firms.»

    Volcker is lucky not to have been thrown in jail for his Communist attitude, as he protected the undeserving little people from irrelevant inflation instead of protecting the productive executive class from the ravages of deflation.

    One lesson of the Volcker/Carter years was that Communist-style anti-capitalist policy is not what the Republican party stands for, and for the couple decades since, starting with Saint Ronald, Republican administrations have all been for sound money, or more precisely for the sound of money gushing out of the printing press and of the federal budget deficit and finding home in the deep pockets of asset owners, as they (and Clinton and Rubin) have been fueling one asset bubble after another, much to the horror of traitor anti-capitalist killjoys such as Bartlett.


    If you displease your political masters, it just won’t goddamn mattered how well you served the common good. Alas, Easy Al learned the lesson way too well.»

    Well, Easy Al and Helo Ben know very well who the real masters are, the *sponsors* of the political class.

  10. Steve Barry commented on Apr 27


    If Volcker hasn’t distinguished himself post-Fed, who on earth has? I distinctly recall him saying several years ago, while everyone was still dancing and partying, that there was a 3 in 5 chance of a third world style debt crisis in the U.S.

  11. fred commented on Apr 27


    Several years ago was a tad late, dontcha think? Where was Volcker in the ’90s when it might have mattered? Making money as chairman of an investment banking firm and sitting on corporate boards.

  12. Michael Blomquist commented on Apr 27

    Yes, Greenspan and his pro-business policies/statements have been a large contributor to our current crisis, but it is foolish to compare our current situation to the one Volker inherited.

    If we combined the S&L crisis, LTCM, Enron, NASDAQ bubble and even the financial costs for the war in Iraq we would still fall short of the inflationary, deflationary, globalization (employment) and moral hazards we are now facing.

    Securitizations and outsourcing was a blip during Volker’s reign.

    Our economy is now leveraged beyond reality and Bernakes solution is to inflate our way out of this problem…We are doomed to fail with this policy. The banks and their bond/share holders should take their lumps. The FBI and other enforcement agencies need to prosecute.

    The system is already broke; Bernake is digging a much bigger hole in order to bail out the criminals that got us in this mess.

    Because of the rampant inflation and high interest rates in the 70s and 80s our government disconnected inflation from reality. Interest rates (housing payments) were thought to be too volatile and thus the largest component of CPI Shelter/housing was changed to be on owner’s equivalent rent.

    What a joke! Any 5th grader can recognize the fallacy of this inflation barometer.

    Our government has done everything it can to distort reality and we are now faced with the reality of bankruptcy.

    Ohhh the irony.

    It has been said that the LOVE of money is the root of all evil.

    Those who have manipulated and distorted sound money and reality could have completely destroyed our currency. Even if you invest in commodities; is your money safe in the institution that holds your investments?

    If you were to put your money in an overseas account will their be retribution against America/Americans for introducing all of the toxic debt to the financial markets. Yes, many other countries participated, but per capita toxicity is much more concentrated in the US

  13. Winston Munn commented on Apr 27

    How long can the U.S. continue the pretense of holding out our hand to the world and saying, “Could I borrow another $20 today? I’m a little short for lunch,” while with the other hand sticking a pistol into the ribs of the world and whispering, “Oh, this? It’s nothing. It only goes off when I’m really hungry.”

    Some day soon the world is going to figure out that their lunch-money loans have been paying for the bullets, and all they have to do to get the upper hand is stop playing the game.

  14. VennData commented on Apr 27

    The subtext of the ’90’s political/economic discourse for the GOP media machine was to credit Greenspan with all the wonders of the 90’s to minimize the credit going to Clinton. Remember the Humprey Hawkins hearings of the time? Fawning GOP Congressmen… “Aw shucks I don’t understand him, he’s just a genius” (and they HAD to get those damn Democrats’ name off those hearings, too btw.)

    It was all about getting the the base’s mind off the GOP’s comical claim that the first Clinton budget was going to cause a recession.

    The Greenspan myth just simply grew over time since it was pounded so heavily then.

  15. pft commented on Apr 28

    People have no idea about where money comes from.

    Read Ellen Browns Web of debt, google it, especially if what follows sounds insane (it should because it is, but it’s the why that is the secret).

    China has lent us 1 trillion dollars and change. Where did they get it? Of course, you say they got it from us, since we import so much. The thing is, we didn’t send it to the Chinese central banks account, we sent it to the manufacturer or exporters USD account, and they exchanged it for Remnibi. But where did the Central Bank get the Remnibi to get the money to buy USD? They printed it out of thin air, just like the Fed does when they buy treasuries. So let me ask you, why are we borrowing the money we need from China, and not the Fed, since they return us the interest they pay us, at least they have since the 70’s, which is one reason why they don’t want to create money for our own government, but instead let the commercial banks create it by loaning to sub-prime borrowers.

    So we borrow the money from China, and pay them interest, which comes from your income taxes, when we could just get no interest loans from the Fed, or better yet, create our own money and lend it to the commercial banks who would then loan out money that exists, and with the interest received from the banks, there would be no need for income tax, or at least a reduced level of tax.

  16. Alfred commented on Apr 28

    I am not so sure this assertion that most people don’t get it (what a fraud Greenspan was)is true. It is certainly not true for this audience and probably not so for a big part of the financial blogo’s sphere. Those who don’t get it are working on Wall Street and their business and bonuses are testament to their indulgence of Greenspan’s Fed. In light of this it is not surprising to see huge resistance to any meaningful changes in central bank policy.

  17. Novafp commented on Apr 28

    The one thing missing from this story is the fact that Carter appointed Volcker as inflation was getting worse recognizing the steps that were probably going to result and willing (tho certainly not eager) to absorb the political consequences that would fall to Carter, not the Fed. In early 2000, Carter also withdrew his initial budget with a deficit of about $20B because it was criticized as inflationary. He replaced it with a balanced budget, or at least a much smaller deficit. These steps laid the foundation for a big cleansing recession (the worst since WW2) which led to the big disinflation of the next two or three decades. Carter could have deferred the pain, but did what he felt was necessary to solve the inflationary crisis.

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