Bill Fleckenstein On Alan Greenspan's 'Don't Blame Me' Attitude

Alan Greenspan’s “don’t blame me” op-ed piece in the Wall Street Journal was greeted with more than a dose of cynicism by hedge fund manager Bill Fleckenstein, whose book, "Greenspan’s Bubbles: The Age of Recklessness at the Federal Reserve,” is scheduled to come out next month.

In today’s Daily Rap piece on his subscription website, Fleckensteincapital.com, Bill says:

He would have you believe that it was the collapse of communism that created the mortgage crisis. However, he does get a couple of points correct: “The root of the crisis, as I see it, lies back in the aftermath of the Cold War, when the economic rule of the Soviet block was exposed with the fall of the Berlin wall.”

He is right. That is approximately when the crisis began, but that’s because it was close to the beginning of his term at the Fed, which started in mid-1987. It’s the mistakes made during his tenure that created these problems.

As to his comment — “I have reluctantly concluded that bubbles cannot be safely defused by monetary policy — that, too, is right. There is no safely defusing bubbles. There is only the prevention of bubbles. The attempt to safely defuse or create soft landings only creates more problems, as we have seen with this housing bubble that followed the equity bubble.

He does acknowledge that perhaps the Fed held rates too low, too long. But then, he suggests that he was right for doing so, because “the potential threat of corrosive deflation in 2003 was real.” That nonsense requires no rebuttal.

Lastly, he claimed: “The impact on demand for homes financed with ARMs was not major.” I guess that depends on what the definition of “not” is.

Onward…

Comments

[Hugh]

If GM builds an automobile that will achieve 80 MPH, and if you drive it at 80 MPH in a school zone and kill a child, is that GM's fault?

For all of you people out there who spent most of their developing years in public school, the answer is: NO.

Likewise, if the Federal Reserve makes it possible to borrow a million dollars at a low rate to buy a house, and you do so, even though you work at flipping hamburgers at $8 per hour, is that the Fed's fault?

Again, if you spent a great deal of time in government schools, let me suggest an answer: NO

Low interest rates create a lot of power in an economy. If fools put their foot to the floor, it;'s not the fault of the economic engine, it the fault of the drivers.

2007 Dec 13 10:09 PM

[HARM]

Nice try, Hugh, but the fact remains that dropping FF rate to 1% (below inflation) was basically like giving the banks a license to print their own cheap money --which they naturally did-- and lend it to any mouthbreathing idiot speculator, risk be damned.

The Fed knew what would happen (rampant credit fraud, speculation, misallocation of capital, asset bubbles), but they went and did it anyway, because we can't allow recessions any more, can we? That "creative destruction" thingie is just soooo capitalistic. We've repealed the business cycle, don't ya know? Heads I win, tails you lose.

Were there other causes? Sure MBSs/ & CDOs made it possible for banks to sell the loans (and default risk) downstream to investors, so they could lather, rinse & repeat. Congress created the GSEs, passed the "any two will do" MID rule, $250K/500K capital gains exemption, 1031 exchange, "Don't 1099 me, bro!", etc. Tons of moral hazards to blame Congress for --that still doesn't excuse Easy Al for his actions.

The Fed is not supposed to be an enabler of reckless lending, but it was. They are supposed to ensure the "soundness" and "stability" of the banking system, but they did the exact opposite. You know, the dreaded "R" word: regulation, fiducuary responsibility and all that jazz.

If you want a scenario, here's one for you:

A teenager asks his dad (”Alan”) for the keys to the family SUV. “Alan” happily turns the keys over to “‘lil Tangelo”, and then also hands his unlicensed, underaged son a 5th of scotch to “get the party goin'”. Teenage son has one hell of party with his friends for a while, but (no surprise) ends up rolling the family SUV in a ditch before the night is over.

Q: Who was most responsible for the crash? “Dad” (in the role of family “regulator”) or the irresponsible teenage son (mortgage lenders & borrowers)?

Now, obviously parents (regulators) cannot always keep their irresponsible teenagers (lenders & borrowers) from doing irresponsible things like getting drunk and rolling the family car. But… at the very least, can we expect them not to actively ENCOURAGE bad behavior, and maybe even DISCOURAGE it once in a while? Is that really too much to ask from a (theoretically independent) "central bank"?

2007 Dec 13 10:47 PM

[EffHugh]

Hey Hugh,

I can only surmise that you went to "private school" because mommy and daddy had enough money to send you there. Well good for you, but to make a snide comment that suggests that anyone that went to public school needs "help" understanding the merit of not being overwhelmed by bad debt and financial decisions is so completely pompous and completely discredits your entire post and makes you look like an asshole.

You're no better than anyone else, whatever you level of education and where you got it from.

2007 Dec 13 11:39 PM

[Hugh]

Poor try on your part: People buying houses weren't kids. Moreover, I don't know of anyone who bought an over-priced house while they were drunk No, your analogy is a very poor one. Mine was just right.

After spending 12+ years in public school, it seems most of these people are now stunned that the numbers don't work. That's my point. After 12 years of 7 hours and day, 200 days a year, don't you expect more, or do you think people ought to be forced into going for 25 years of government school?

2007 Dec 14 01:25 AM

[HARM]

@Hugh,

First off, "EffHugh" and I are not the same poster (though your snotty dig against public education annoyed me too).

RE: the drunken teenager scenario, you do know what an analogy is, right (comparison for purpose of illustration)? Simple fact: the Greenspan Fed was an enabler of reckless behavior (lending), thanks to AG's easy-money rate policy, much like "daddy Al" in my story.

The fact that AG did not personally distribute mortgages or put a gun to borrowers' heads is beside the point. Mortgage lenders base ARMs on LIBOR & Prime, which are mainly derived from the FF rate. They also look to the Fed for guidance on loan underwriting. Greenspan is more responsible for this mess than anyone but Congress.

2007 Dec 14 04:03 AM

[3Sigma]

The score is:

HARM = 2
Hugh = 0

2007 Dec 14 11:39 AM

[Hugh]

Most sensitive people are in denial. I can tell you folks have had more training in evading personal responsibility than the simple idea of “caveat emptor,” or “let the buyer beware.”

It seems to me that, after having spent thousands and thousands of hours in school, that somewhere along the line this idea would be taught, that it would be driven into the heads of students. After all, school ought to prepare young people for the real world. The real world is mostly the market place.

The fact is that government schools (probably private as well, but I have no first hand experience with private schools) mainly teach people to evade responsibility. If you get fat, McDonalds is at fault. If you sign a contract to pay a mortgage payment of $5000 per month, when your income is only $4000, the Fed is at fault.

This is a leftist/statist concept designed to place all blame for all people’s ills on the American system. The American system is evil; it is destroying the earth with global warming, killing all of the animals with pollution, destroying people’s financial lives with the Fed. Everyone is a victim of the system. The answer: kill the system and replace it with more government, a statist construct of some sort. The cost is your freedom.

One book that will never make it into public schools: “Capitalism the Unknown Idea,” by Ayn Rand and Alan Greenspan. In this book Greenspan shows how Central Banks (The Fed) create mal-investments, recessions and depressions do to inflationary expansion of money and credit. His cure: A Gold Standard.

Forty years ago, Greenspan showed us exactly how this whole mess is created by Central Banks. I remember as a sixteen-year-old high school student showing this book to my “civics” teacher. He was a mindless jerk and blew it off. I wonder if he is now facing a reset on his mortgage…

2007 Dec 14 01:26 PM

[Hugh]

Seems that Hugh blew you guys out of the water.

Hugh: 28
opponets: 0

2007 Dec 15 01:15 AM

[Gitup the LADDER & LOOK AT IT!]

Hey Guys - OVER HERE! (I mean..., I'm up here!)

I aaa...... uuu... pppp... Here... Dammit!

Ya SEE that 20ft tall step ladder that you guys been runnin into / & walking underneath of / all the damn time? ? Thats it, Thats right...

Well git over and stand ur ass next to it -- then look straight up into the sky...
Thats better... thats me waving to ya...

...NOW CAN YOU SEE ME?
VERY Good...


So..., there now...,

...while you guys been doin nothin but arguin bout nottin, which will git you nothin... I, on the other hand, have been sitting way up here, seein everything as it actually is..., which not only lets me see this Greenspan character for what he is... I can also see you guys making fools of yourselves... (yakitty yakking amongst urselves) ...just Hold on now, wait your turn... get back down..., & listen for a second... Let me xplain something to you all first. Then you;ll each get the chance to see THE TOTAL PICTURE from up here as well...

To avoid any further delayz & mist-conclusions, I am just going to go ahead & point out to ya all - whats really going on & what to look out for... cuz - once ur up here, ur on ur own...

When each ones of u's gits ur turn to climb on up here, I want you to take a good hard look at mizter greenjeans over there (out there) & then take a good moment to check out what everyone else is doing as well... the reason I says this, is because when you look at it really hard - you start to realize that mr greenjeans has a peculiar & odd behaviour pattern... that is truly one of a kind - his and his alone (well almost)...

Now whach him; watch him carefully... you SEE THAT?

Look at him, what is mr greenspan NOT DOING -- THAT WHICH NOBODY ELSE CAN't HELP BUT DO, DO, AT SOME POINT in TIME OR ANOTHER?

Thats right, Greenpants over there, WILL NEVER, EVER, LOOK UP INTO THE SKY & PONDER...

You will never see him do that! not happenin! NOway, No how!

Whereas you will notice that everyone else - if ya katch them in just the right moments - well, we all, at some time or another - pauses from what it is we were doin: & we take a gander upwards into the sky; with or without that stupin look on our faces, and we do this because we naturally ponderz who & what we are. (kinda like a dog that stops to lick his nudds, then stares at them, as if it ponders as we do...) ...It is during these "spiritual" moments, that we normal humans - tend to ask stupid questions, like, where do the stars come from? Who am I? what are we here for? is there a god? did god create us? what is good vs evil? & all the other puzzlements that we know we can never answer for our ownsleves... (like, which wall does the universe end at? duh, I mean, there haz ta be a dead end at some point - yet, there can't be?? / don't make any sense from where I'm standing -- but all is good!; this kinda thinking is quite healthy & natural ... for most of us NORMAL PEOPLE)

ya all feel me on this? ya feel me?

I'll pause here - given that I figure I wasted about as much of your time, as mine was wasted reading the previous posts up til now...

Go ahead & rip me a new azzho.... but, in my next posting -- No more hic talk.

I will follow up on what I started to say; was I was trying to convey here...

BE RIGHT BACK!

2007 Dec 23 01:49 AM