Alan Greenspan Loses His Mind

Judging by a just-released Washington Post interview, ex-Fed chair Alan Greenspan has gone mad. There is an upside, of course, in that he has delivered the quote of the year so far.

Here is Alan, talking in an interview about how misguided his critics are for suggesting that the recently-ended real estate bubble had its roots in the post dot-com bubble low rates. Implicit in this, of course, is that he should have increased rates sooner to arrest the real estate bubble's expansion:

Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time.

Well, there's no denying you can't get any evidence on the matter from Greenspan's career: He avoided raising rates during both bubbles with which he was faced.

And Greenspan continues, offering the following:

"If it weren't the subprime crisis it would have been something else," he said. That is because an era was ending that had seen "disinflationary forces" from developing countries such as China and a "protracted period" in which there was an "underpricing of risk."

Really? Really? Greenspan's Fed didn't prick the real estate bubble because it was saving us from another bubble, whatever it was, that would have been worse? What was it? A lava dome under Los Angeles? Sewer gas under New York? Something else? Because it's really hard to imagine what would have been worse than the real estate bubble, but maybe I lack imagination.

But the tricksy Mr. Greenspan doesn't stop there. Having first said that raising rates doesn't prick asset bubbles, and then sneaking around the side of the issue by arguing that another bubble would have formed anyway, he then spun about and said the following:

Even after the Fed starting raising short-term rates, long-term rates did not rise. He said that at the time "it became apparent that we lost control" of long-term interest rates "as did the Bank of England and all the central banks. As a consequence, we had very little ability to put a brake on the rise in home prices."

Oooh, awesomely argued Alan. In short, even if you had raised rates -- which you wouldn't have, because the Fed can't prick bubbles, and because another worse (unnamed) bubble would have happened anyway -- nothing would have happened, because the Fed lost control of long-term rates. You were totally boxed, and anyone who criticizes you is a clueless nitwit for not seeing that.

Does anyone buy that? I know I don't. Greenspan ably demonstrated that he would cut rates in the face of falling asset prices, so why so skittish about raising them in the face of rapid asset price increases? Something doesn't work in that illogic.

Then again, what does Greenspan care. He has built a career out of this sort of thing, of dancing around clumsy questioners' questions, and this is easy stuff for a skilled obfuscator. Greenspan's minting money as a hedge fund advisor, speaker, and author, and likely giggling every day at the mess that he left on Ben Bernanke's desk.

[via Washington Post]

Comments

[UnKle AL:]

No matter how he tries to evade it this sub-prime problem has got to be aptly named "THE GREENSPAN FIASCO" . My wife's Bridge Club predicted what would happen if lending policies weren't changed. How come the so-called greatest economist of our time was not astute enough to see it coming?? Mr. Greenspan, no matter how many books you write and no matter how many lectures you give claiming that no- one could have forseen this coming, it happened on your watch and it is your fault and failure. Stop trying to blame it on mysterious factors

2008 Mar 21 12:34 PM

[Britishsteel:]

We must give up this fiat money system and then inflation and deflation would not be a problem. We must all refuse credit it feeds the system pay as you go should be the mantra. If the budget reform act was renewed at the end of the Clinton admisitration that may have kept George Bush and his war mongering in check,. At the very least we might have a balanced budget now. But our surpluses were stolen by Democrats and Republicans to help special interests groups, lobbiyists, and pork barrel ' bring home the bacon groups"

2008 Mar 21 01:15 PM

[smooth ride:]

British Steel: Since you mentioned unconstitutional and Republican and Democratic parties in the same post, I submit to you that the institutionalization of these major parties is likewise unconstitutional and has been wrongfully and unconstitutionally achieved by activist appellate courts at the state and federal levels with the assistance of the legislators who benefit from them. Direct me to exactly where in the Constitution it references 2 or any number of permissible parties, major political parties, 3rd parties, etc.???

2008 Mar 21 02:03 PM

[electric car:]

Why blame Greenspan and the Fed? When the twin Towers fell and economic activity went into freeze mode, the Fed came through and restarted the economy. That single action makes having the Fed worth while.

If you are looking to blame anyone blame the 9/11 terrorists who hurt the economy (Bin Laden was an economics student ) and led us into the inflationary Iraq war. The Five deferment Dick and Dubya show shares a lot of the blame for prolonging the inflationary spiral. Greenspan's Fed did the patriotic thing and the right thing at the time.

The Fed's problem is one of moral hazard. They can lend the money but cannot overcome the greed and other deadly sins of the borrowers. They cannot change human nature. That is not the business of the Fed.

It is unfair of Kedrosky and others to blame one single individual. What pray did any of these critics do when the economy froze in 2001?

2008 Mar 21 02:44 PM

[john1:]

Weren't all you "conservatives" in love with Greenspan a decade ago? Or was that just the fascists-conservatives that were in love with him, but the libertarian-conservati... weren't? Does "raining money" on the military count as gov’ment spending? Or is THAT monsoon ok just as long as we build cool-military-toys as opposed to giving "those people" HANDOUTS (and all true “conservatives” know who “those people” are. Look out, they’re gonna git yer daughter!) Just wondering what part of the gov'ment will be cut if 1/3rd is cool-military-toys, 1/3rd is social-security, and the other 3rd is waste like: freeways for the politician's developer buddies, free airports for the airlines, super-duper security systems for the rapid-growing police state, and all the rest of the "worthwhile" government crap we so desperately need.

Last I recall, the most immoral president EVER (and a known fornicator) ran the last gov’ment surplus. Not that $4 billion is a drop-in-the-bucket on a $9 trillion deficit, but still – the rules (in our much worshipped but increasingly ignored constitution – remember that quant habeas-corpus “concept”, the rules) say the executive branch makes the budget and the Congress approves it. I don’t recall a “conservative president” sending a balanced budget to Congress for awhile. If you “conservatives” would elect real conservatives – instead of fascists (which is just a word meaning xenophobic, big gov`ment for the rich, socialist) perhaps we wouldn’t be here now, worried about the Democrats (who ARE socialists) getting elected. And just imaging how pissed off God will be when Americans don’t vote for His favorite party but – instead - elect a woman (can you imagine, a WUMAN!!!) to run the universe’s best country. How can He keep punishing the fornicating harlots without the help of his favorite party, HUH? Just wait until America faces the wrath of God AND the socialists over the next 4 years. You’re DOOMED!!!

2008 Mar 21 02:51 PM

[Angry Physi...:]

Alan Greenspan is dumber than a bartender.

Any bartender knows that the way to deal with an unruly drunk is to cut him off from liquidity, completely. Not raise the price of beer to everybody by 50 cents.

The Fed didn't need to raise interest rates to deflate the obvious bubbles. It needed to 1) raise margin rates sharply in 1999-2000, 2) majorly crack down on bank underwriting & lending standards and increase capital ratios against mortgages.

Both could have burst the bubbles, without harming the economy as a whole more than necessary.

2008 Mar 21 04:30 PM

[vaduz:]

greenspan has saved us in any crises he faced, but at the price that there will be later an ever bigger crises. this has now ben bernancke to face.
i guess wll see all over lower prices for some time to come-

2008 Mar 21 04:37 PM

[J.P. Hannan:]

I've always felt the Fed grossly overreacted to the tech bubble, raising rates too much and too fast to try to stop something that was otherwise going to fail on its own merits. They then refused to step in when they should have to curtail the lending abuses and housing bubble when they could have still brought it in for a soft landing... probably out of fear of over reacting again.

Hindsight is 20/20, but I knew the housing market was going to crash and burn just by reading Barrons in 2004 and looking at the disgusting prices people were paying for tract homes in my neighborhood. I believed it so much I sold my home in CA and rented, banking the profit and not looking back.

I always laugh when these fed officials say no one saw it coming or that it happened so fast. They had at least 2 years to plan. I have always found it hard to believe Greenspan couldn't see that coming as well, but never figured out what the motive otherwise could be to just let it ride.

2008 Mar 21 04:47 PM

[Football Geek:]

Greenspan was a number cruncher, and had no clue about the pulse of the economy. How he ever was in office for so long was a joke. He is about as exciting as watching paint dry. This mess from sub-prime is his doing

2008 Mar 21 05:05 PM

[Britishsteel:]

Very good smooth ride , you are absoultely right BUT What I was reffering to was not the number of parties per say but the fact that we actually have a majority in this country who have aligned themselves to one or the other based on family tradition, or ideals that were originally intended by each respective party and that these ideals are no longer valid and have become blurred and melded so that their is no difference between the two. Therfore what I was reffering to was the corporatization of both parties and the fact that there are alternatives. Also nowhere in the constitution is it invalid to form a political party, although this idea was vexing to our original founding fathers.

here is a little piece from a paper written by Robert Wigton in 2005 to the American political science associtation.

Political parties have always been something of a constitutional anomaly within the American
political system. They possess attributes of both public and private organizations and undertake
activities found in both types of organizations. This hybrid quality of political parties has posed
difficult questions for the courts. Increasingly, the courts are called upon to balance the benefits
of party independence with the needs of public regulation.
The constitutional uncertainty surrounding parties grows out of the fact that they are extraconstitutional
creatures which did not exist at the time of the nation's founding. Many of the
Founding Fathers manifested a deep suspicion of such organized interests and believed that they
were detrimental to a political system.1 The constitutional silence on political parties was part of
a calculated effort on the part of this nation’s founders to frustrate the emergence of political
“factions.” James Madison is perhaps the most famous early opponent of political party
formation, stating in Federalist Number 10:
The latent causes of faction are thus sown in the nature of man; and we see them every where brought into
different degrees of activity, according to the different circumstances of civil society. A zeal for different opinions
concerning religion, concerning Government and many other points, as well of speculation as of practice; an
attachment to different leaders ambitiously contending for pre-eminence and power; or to persons of other
passions, have in turn divided mankind into parties, inflamed them with mutual animosity, and rendered them
more disposed to vex and oppress each other, than to co-operate for their common good.2

2008 Mar 21 06:11 PM

[Fabien Hug:]

What's great with capitalism is that it privatizes profits and socializes losses. Look at it, it works all the time. Why do people buy that ? Because nothing else has really worked and let's be fair, when things go well everybody receives or can receive a fair enough share of the profits.
Let's live with it but what is there to do now ?
-There is a bail out going on and the fundamentals will worsen. There is no big technological break through in sight that would lift the boat.
-I think that growth in emerging markets was a by product of this credit inflation in the Western World and that it will not last (I don't believe in decoupling, the axis of innovation stays around the North Atlantic ocean).
-I don't think that a democrat president will be elected in November (nothing to do with my political opinion, just watch the always wrong pols) and the US will continue to suffer of bi polar disorder; US stays in Irak and tax increases are postponed.
That leads me to think of the following;
-Commodities prices will drop.
-Emerging countries will not be able to finance the deficits the way the used to and long term interest rates will rise (Blackstone's boss said in the last BW that the last place he would like to be is in Treasury Bonds).
-Financial institutions' conditions will slowly improve, bad investment hidden under the carpet until better times come.
-This new stabilized order will last numbly for some times.
What I can't imagine is the speed of these adjustments.

2008 Mar 21 08:20 PM

[Britishsteel:]

fabien,' What's great with capitalism is that it privatizes profits and socializes losses."
what is great about that? You are paying for the socilzation of risk, YES YOU! And that is not how a free market works. If you have ever studied economics every economics book is written by a socialist except this book
CAPITALISM:
A Treatise on Economics
by
George Reisman
If you wish to know what capitalism is all about then get the book a dry read but very informative and written by a true capitalist.

2008 Mar 21 09:11 PM

[pitchingpen...:]

I read an article recently with the opening sentence: “The word credit comes from the Latin "credo"—meaning "I believe."

What happens when the collective “we" stops believing in our financial system, our political system? What happens when “we” lose our faith that we will be able to live our lives as we’ve come to expect. When “we” begin to fear that our long term well being and financial security are in real jeopardy?

The fact is, “The Press”, the Politicians and Ben Bernanke & His Elfin Band, have sucked the "I believe" out of the national psyche. The Press by an act of commission, the Politicians, as always, late for the party, and wielding their well ground axes, and the FED by a sin of omission, have created a palpable national and worldwide tone of fear, uncertainty, and doubt which now extends from the titans of Wall Street to John and Mary on Main Street. This tone now extends worldwide.

“The Press”, or as I like to call them, the “If there isn’t a crisis, then we’ll create one crowd”, has beaten the “Real Estate Bubble, the Subprime Meltdown, and now, the “Inflation! Inflation!” drums for well over five years. After all, “What do we have to talk about after we blew up the Dotcoms?” When in need, they simply whip out their “jawbone of an ass” and get to work (BTW, those of you in the commercial real estate market had better get ready to duck, the jawbone of an ass is headed your way, ditto for the commodities markets). What do you call an institution that measures its’ success by the amount of alarm and misery it creates? Don’t we arrest people who yell fire in a crowded theater?

The Politicians, as always, have seized the moment to do what they do best – pontificate, theorize, and hold televised hearings as they quite publicly look to find the scapegoats who will best serve their next election efforts. What will follow will be another spate of overregulation which will only serve their parochial needs and probably actually lengthen the period of financial dislocation.

Now, Ben Bernanke & Company are not supposed to be a group of ingénues. They are supposed to be an astute and savvy bunch of people with high horsepower under their domes, chrome or otherwise. Their late realization that the catalyst of this financial chaos is a collective loss of faith, the absence “I believe”, does not speak well of this group of supposed MENSA Members. Perhaps "deer in the headlights” is a more apt descriptor of their collective wisdom. Late to the party is an understatement, the FED almost didn’t show up. My Father-in-Law, a grizzled old Cattle Rancher, may he rest in peace, would have called this group “a bunch of educated idiots”as well. This old cowboy could have clearly explained to us what happens when a herd of cattle are spooked by a threat, real, or imagined. He could also have explained the swift action needed to stop a stampede before it reaches a fever pitch, versus letting the herd bolt and gain momentum until it is unstoppable. The FED is guilty of not seeing, not knowing, and not acting to stop our current financial stampede. We have the wrong Trail Boss leading the drive and it looks like the herd will simply have to run and run until it is exhausted, scattered, and stands panting, many miles off course.


Say what you like (all you financial columnists and Ron Paul enthusiasts) about the most recent FED Chairman, Alan Greenspan. Go ahead. Try and blame him for the current situation. Whine about him keeping interest rates at 1% for too long and creating a real estate “bubble” Go ahead. Accuse him of being asleep at the switch. Sorry, your criticism simply doesn’t wash.

The fact is that Greenspan was dealing with “the conundrum”. Let’s not forget that under his direction the FED Funds Rate was increased at 17 consecutive FED meetings. With an eight to twelve month lag time for those increases to actually impact the markets empirically, well, you do the math.

Chairman Greenspan was attempting to “boil the frog”. Gradually and incrementally, he was orchestrating the leveling off of a too-hot (Greenspan called it “frothy”) market. They have not called him “Maestro” for nothing. He only opines recently that this strategy and any others may have become ineffectual on long term rates in a globalized economy.

Alan Greenspan understood what the FED can and can not accomplish with its somewhat limited bag of tools in a diverse, complex, and interrelated financial landscape. Alan Greenspan understood the numbers and econometrics, and, by the way, loves them. Greenspan understood the world and the increased effect of a globalized economy on what we have to deal with as a cog (albeit a large cog) in that new system. Alan Greenspan understood risk, and the financial markets’ never ending search for Alpha (excess yield). Over time, his worst “best guesses” have been profoundly insightful, and put to shame most of the supposed “Experts” commenting from the peanut gallery.

Alan Greenspan had “The Mojo”. He possessed that “secret something”, that “gift of knowledge” that the current crowd just can’t seem to get their heads around.

Perhaps they have taken it out of the curriculum in the Ivory Towers, or perhaps, dropped it from the economic textbooks and the literature available for review. Maybe “It” was just too simple, juvenile, academically unchallenging, or simply too uninteresting a concept to merit any further study.

Somehow, Alan Greenspan was able to capture and put into practical application, both quickly and effectively, the conceptual essence of this mysterious “secret something” and impart it to the world.

Yes, yes, he knows the secret. Are you ready? Lean closer now and he will whisper his “magic secret” in your ear -

“I Believe”.

Thank you Uncle Alan, wish you were here.

2008 Mar 22 08:07 PM

[Britishsteel:]

Alan was a puppet of the "invisible hands of globalism" and if you are not part of the solution you are part of the problem

2008 Mar 22 08:48 PM

[Cowpens:]

I don't envy Bernanke, he's left to clean up Greenspan's mess. As time goes by, it will become more apparent to the world that Greenspan was one of the worst Fed chairmen of all time.

2008 Mar 23 08:27 AM

[PDTC:]

Greenspan is the Robin Hood that stole from the poor and gave it to the rich. He forced every retiree (the only savers around) to leave the CD market and plunge in the Stockmarket.......a guaranteed total loss for these people and all their money is again flowing to the rich gambling crooks.......but then why would all you rich greedy grabbing crook want to admit this......so you foolishly defend the master thief your hero Greenspan to justify you selfish sick behavior.This is for the defenders of Greenspan.

2008 Mar 23 11:42 AM

[Michael B. ...:]

Everyone likes a good scapegoat.

The reality is that while fed rates too low for about 1.5 years, they did NOT create this credit bubble.

It was the 'flawed model' that created the credit bubble. Everyone went quant, followed models based on a low volatility standard deviation, and they worked long enough to make them 'right' in everyone's eyes.

This was a function of not just money supply and poorly thought out consumption based fiscal policy (blame Mr. Bush for that), but the result of technology and math making their way into the markets as a justifying force as what is right.

Guys: If subprime CDO tranches were more properly rated in the first place, subprime would have never happened. Subprime loans would have cost 9%-12% to the end buyer, not half of that.

From there, its a cascading waterfall.

And like the perennial bears say: Even low rates won't fix an overlevered consumer. So why did low rates allow the consumer to be overlevered before? They didn't because they were low rates; they did because someone (ratings agency in possible collusion with Wall street banks?) was modelling unrealistic loss levels on everything from junk debt to subprime.

Simply put, increased money supply didn't help, but it was not the primary cause of our maladies. The primary cause was risk free euphoria associated with anything to be bought - houses, commodities, junk bonds ... (with the most ironic exception: stocks, we have a financial memory from 2000 what that leads us to).

At least healthy risk models are coming back to the markets. We'll have an era of real returns coming up for investors worth the risk taking.

2008 Mar 23 12:00 PM

[pitchingpen...:]

MKrause: Thank you. Finally a little rational thought mixed with the previous obvious anger. The Ghost's group of savers were obviously forced into abandoning their beta returns in the CD markets and that must be why they are posting to this site, they were "seekng alpha" right along with the quants. BTW, I am not retired, I am a saver, and own zero equities at this time. Being a gardener is great, until all your hedges die. I will remain a fan of behviorist theory.

2008 Mar 23 12:21 PM

[victor1212:]

Greenspan could have done more to spur banks to tighten lending standards. Instead, he equipped himself with the merest of figleafs, which is no longer enough to obscure the economic damage those practices have done since they began being applied to more affluent Americans.

But we all knew what was going on.

We were reading about predatory lending in the general news media for a decade before this housing bubble finally burst. Financial professionals didn't care about the mostly poor, mostly innner-city victims then because they overwhelmingly perceived them to be members of "them," rather than "us."

Today, many of you still don't seem to care about "them." I still see postings here that say in essence "they're dumb, let them suffer."

Greed is good, huh? And if you don't have enough money to really participate in the U.S. electoral process by hiring a lobbyist to amplify your vote's influence, that's your problem right? Have you noticed that TV campaign ads don't even ask for money anymore? Clearly, the $10 or $20 most Americans would send in just isn't worth the paperwork anymore, right?

But I digress.My point is really that this whole climate reminds me a bit of that famous line from a Catholic priest who failed to act during the run-up to the Holocaust. He said something like, "first they took the Gypsies, and I wasn't a Gypsy so I didn't say anything. Then they took the Jews and I didn't speak because I wasn't a Jew. Then they took away the homosexuals ... etc ...

Well, the percentage of dummies is getting bigger and bigger and includes more and more financial professionals every day.

It's really not wise to be callous to the suffering of your countrymen. You may wake up one day and find out you're one of "them" - the dummies who rode Countrywide and Hovnanian down and who are going to be left holding the bag when oil prices normalize - and no longer one of the precious, fortunate few who so deftly parasite off their fellow Americans.

Do you really think there hasn't been an unannounced war on the American working class since Regan took offfice? Or did you just not care because they were "them" instead of "us?"

Who is going to speak up for you guys when you're selling your Beemers, boats and second homes?

2008 Mar 23 01:35 PM

[Warm_Paw:]

Greenspan was the Fed Chief, not a mortgage broker. What was he doing publicly advising the masses to seek ARMS? (Adjustable Rate Mortgages) Better yet, investment bankers believe in stability. That would be a fixed rate mortgage.
The interest rates were set amazingly low leading up to that.

Has Greenspan ever been employed as an advisor to Goldman Sachs.
If yes, it answers alot of questions.

2008 Sep 03 12:15 PM