Greenspan's Latest: Oil Boom Will Likely 'Go on Forever' 37 comments
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Alan Greenspan was in the headlines again on Monday after statements he made in a speech in Saudi Arabia. The former Fed Chairman said that economic growth in the US has stalled and that the recovery, when it happens, will take longer than usual. Even more interesting, however, are Mr. Greenspan's comments regarding oil. Even though he sees a more protracted than average decline in US economic growth, he believes the boom in oil prices is likely to "go on forever" because demand for the commodity is unlikely to weaken.
Before we all go out buying oil futures on Greenspan's comments, we would remind readers of some of his other calls. First, in December 1996 he made his famous irrational exuberance speech where he implied that the market, especially tech, might be overvalued. The bull market went on for another three plus years. While Greenspan seemed to be bearish on tech stocks in 1996, in March 2000, he couldn't stop singing tech's praises. As a result of technology's productivity enhancing characteristics, he said that "it has become increasingly clear that this business cycle differs in a very profound way from the many other cycles that have characterized post-World War II America." We all know what happened next.
Regarding interest rates, in February 2004, Greenspan highlighted the evolving trends in the mortgage industry and said "there are lots of innovative programs, especially targeting low-income and first time buyers." He went on to suggest that homeowners could save thousands of dollars by switching from fixed-rate to adjustable rate mortgages (We won't even go into how those comments were basically an endorsement about what is going on in the sub-prime mortgage industry).
Below we highlight a chart of the Fed Funds rate over the last eight years. Almost right after Greenspan suggested homeowners switch to adjustable rate mortgages, the Fed then went on to raise the rates that these adjustable rate mortgages were tied to! While his ill-timed calls regarding the stock market are understandable, Greenspan's comments regarding short-term rates are especially puzzling. Unlike the stock market where he had no direct control, Fed Chairman Greenspan had ultimate control of where the Fed Funds rate was headed.
Suggesting that homeowners migrate out of fixed rate and into adjustable mortgages right before a three-year 5.25% increase in the key short-term rate was not only a bad call, but also irresponsible.
click to enlarge
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This article has 37 comments:
1 year teaser rate products and others are much harder to justify and I don't think he them in mind when he pointed out that many people could benefit from them.
Anyway, it should be said that all would have been fine and dandy if there were adequate oversight. I'd also point out that the rates going UP so fast wasn't the brightest idea and was totally unnecessary.
Finger pointing is easy, especially in hindsight. I get tired of Fleckenstein and others saying Greenspan was the devil. You want someone to blame? Blame Washington for their lack of any plan on the last 20 years to solve the REAL debt crisis - as our baby boomers move to retire and we move towards federal insolvency. Who cares about a few banks? That problem is minor in comparison.
As "NY EE" points out, an ARM does not equal sub-prime. There are many types of adjustable rate mortgages and they aren't evil. His statement is correct, you can usually save money when short term rates are lower than long term.
Most ARMs are fixed for a period of time (3,5,7,10 years). So for the majority who got an arm in the 3 or 5 year fixed range, the changes in the federal funds rate did nothing to them. Also, many if not most ARMs are tied to the Libor and not treasury indicies... while libor tends to follow treasuries, it doesn't all the time.
About technology: Greenspan praises the way in which technology affects global commerce as well as how the technology sector offers a lot of room for economic growth. He did not however believe all the hype of these over-valued stocks. Also, Greenspan hiked up the funds rate prior to the bubble bursting as he was trying to slow down the unprecidented growth (to curb possible inflation, and keep markets from acting too exuberant in any direction).
Regarding a real estate bubble. Yes, the lowering of interest rates (which was necessary following the tech burst and 9/11) made home financing cheaper and helped to create the bubble. But our economy was also in a panic after those two events, and we needed something. Besides that, even though the federal funds rate was raised from '04 - '07 long term interest rates still remained low - to the surprise of almost everyone. This kept financing cheap, and if the Fed can only raise rates (or inject/retract money) and long term interest rates still remain low, then it isn't all their fault.
also, i agree with Greenspan, oil prices will continue to rise in the long term. the rate (averaged) at which they will rise is debatable.
Oil prices would be governed by the $ and US deficits (Fed money printing) not as much by fundamentals. Chinese/Indians etc now have infinite reserves of dollars to buy oil. Once upon these countries were $ starved and could not have bought any oil. So the $ supply in the world will cause oil price rise (in dollar terms). McCain wants to continue and increase war efforts – that would contribute to the oil prices (if he wins – seems unlikely)
Greenspan was instrumental in both the .com and housing bubble. He is shameless and corrupt and shrugged is shoulders- what bubble! Now he wants to create the commodity bubble. The commodity bubble is inevitable – the world will have to invest their vast currencies ($) somewhere – if not treasuries that earn negative interest returns it would be Oil, Gold,…
Buy commodities on dips.
@travis: nice job of repeating the official mantras without even bordering to think about their silliness. I suggest you look into some books e.g. peter schiff#s "crash proof" or even read some earlier articles and speeches by greenspan which totally falsify each and every of your points.
regarding lon-term rates: Greenspan made it clear time and again that he wanted long-term rates low and that he would keep short-ter, rates low as long as possible. There was very active encouragement by the fed of getting the long yields very very low via excessively low short term rates. how did it work? well, by virtually guranteeing market players that short term rates won't be raised anytime soon and even if, not very much, greenspan induced a much wanted run by big institutions to buy long bonds and financing that with lower short-term debt. that m,echanism brought the long bonds slowly but steadily down to absurd levels and that is still the case today! It is a vastly distorted market. Even offcial inflation runs at more than 4% now and the unmassaged and unmanipulated numbers are way above that (just think of the nonsense of "core-cpi" being cpi less the most needed things (energy and food) with the most inelastic demand). In a free (i.e. not manipulated) market nobody would buy 10yr/30yr treasuries yielding barely 4% and hence losing money in real terms! so give me a break her. the notion trhat the fed cannot and is not manipulating long-term rates is pure nonsense disproved by reality
Greenspan is distressingly similar to Bill Clinton in his apparent desire to present a message that his audience of the moment will receive favorably.
And now that he is shilling for Bill Gross instead of the political party in power, one should always look at his statements in light of what they will do for the bond markets.
Greenspan in a Republican political tool. Expect nothing more out of this Miserable Failure of a partisan, idological broke-down-and-discred... NeoCon fiasco.
fxtrader07: I completely agree that the Fed and the Chief are very powerfull people in domestic and due to the factor of our economy being "number 1" world economics. I just feel that a lot of the results of monetary policy decisions and the reasons for any policy changes are somewhat out of the hands of the Fed and our economy.
Globalization has made it much more diffuclt for our monetary policy to be as effective. Sure, the Fed has done its work to manipulate long term rates, but the fact that so many good and services are produced over seas by cheaper labor has kept global inflation low. Until the world maximizes out on using its cheap resources, inflation should remain low (in comparison to ultra-high inflation experienced in the 70s-80s, or in other countries).
I agree that inflation is terrible. And I also think its pretty silly to not include energy or food in a "core" cost of inflation. Especially energy since higher energy costs get passed onto consumers in the "core" products. But by having as much cash in the world, by having so much liquidity, helps us weather recessionary storms - people and institutions still have cash to invest and make purchases. I guess I don't see the amount of money infused into the system as evil as you do.
Another note on inflation, a lot of the food inflation (wheat for example) is due to shortages in supply, not just the declining dollar. And while I believe a declining dollar is bad in the long run, it will help reduce our trade deficiets right now. Everything works in cycles.
Now I agree there is a fear that if our dollar devaules too much, or our economy starts really slipping, then we risk having oil be exchanged in euros or something else, and governments selling off our bonds... But with the amount of treasuries other countries (China for instance) have, they wont want to do any massive sell offs and lower the price of the asset they are holding onto... at least thats what we can hope for!
we have no acceptable replacements for oil at any price today, yet all of the world's economies are utterly dependent on oil.
sure, we can produce a little $200/barrel biodiesel for greenwashing purposes, but there is absolutely no way that we can produce enough to run an economy. there just isn't enough land or fresh water to do it at any price.
we don't have half of the electric infrastructure necessary to switch to a fully electric economy. and the infrastructure we do have is rapidly approaching the ugly end of the bathtub curve.
with energy, we can do anything. without it, our economy cannot exist. that is why energy is wealth. we have no replacement for oil, not even in theory.
forever is a long time and the price, by definition, cannot go up forever since we will eventually run out.
but, for as long as the world's economy expands, oil will keep getting more expensive
Good luck and good investing!
J
Eventually (and we are seeing the first seeds of change), alternative energy solutions (algae based biofuels, cellulosic ethanol NOT food based fuels) will make a gigantic impact on energy demand. The argument that oil demand will rise indefinitely and that alternatives will take hold in 300 years is akin to saying in 1989 that the cellphones and the internet would be niche technology for at least 30 years (and yes people said that in the early tech boom).
While I share utter comtempt for Alan the Almighty and have written so for at least the last 5 years, I must add one qualifier to your article.
In your article you say, "the Fed then went on to raise the rates that these adjustable rate mortgages were tied to!"
It is true, as your chart shows that the FED raised rates for 17 consecutive meetings (I think), each by 25 basis points, taking the FED FUNDS RATE from 1% to 5.25%.
Unfortunately, house mortgages are not tied to the FED FUNDS RATE....they are very closely tied to the yield of the much longer 10-year TREASURIES. I do not have the numbers in front of me and am too lazy to look them up, but much to Alan's surprise, as he (they) raised the FED FUNDS RATE, the yield curve flatened (and eventually INVERTED, so while the FED FUNDS RATE was cranked up by some 425 basis points, the long side (10 & 30 year) for some unknown reason, barely budged.....I am going to guess that the 10 year TREASURIES had an increase in yield of about 150 basis points, while the FED FUNDS was raised 425 basis points.
Did Alan the Almighty cause this??? hell no! It was pure serendipity (until someone provides a plausible argument)................
When will we stop rolling over while they get us?
That's flat out untrue, the chairman doesn't have the authority to dictate interest rates and even if the whole body of federal reserve members voted for an action the market responds accordingly checking whatever move they make, the federal reserve only mitigates interest rates to reflect economic conditions, the market sets interest rates, not government.
If the fed could manipulate interest rates by simply changing them without market counter actions we'd never have a recession and have a continual boom forever, unfortunately that's not the case.