Greenspan has been skewered recently for helping to create the subprime "bubble" by keeping interest rates too low too long. In my opinion, this is not his biggest policy failure. His biggest sin is writing a book whereby he acknowledges the inequities of the Bush tax policy, that the Iraq war was all about oil, and the dangers of Republican fiscal policies with respect to the fiscal and trade deficits. Yet, when he was the Chairman of the Federal Reserve and had the bully pulpit from which to impact these issues, he said virtually nothing. This is Greenspan's biggest sin: he was more worried about keeping his job than he was about the economic welfare of the middle class and what was best for our country as a whole.
I remember, year after year, tuning in to watch his appearances on TV thinking surely now Greenspan, the "maestro", would take exception to "Republican" policy which was completely out-of-whack with traditional Republican principles. Well, he didn't. Not even when prodded by Democratic politicians (long suffering from their reputations as "tax and spenders") would Greenspan reprimand the administration. He'd launch into circular verbal ka-ka when really all that what called for was a very simple statement: "current tax policies and growing the size of the US government will run up a huge fiscal deficit which is not in the long term best interests of the country". Period. But he did not make such statements. I lost all respect for Mr. Greenspan. Further, to pen a "know-it-all" book after the fact is the height of hypocrisy and is unforgivable. Farewell Mr. Greenspan, and I hope no one enables you to profit further by buying your new book in which I understand you will vigorously defend yourself. In my opinion, there is no defense for someone who sells their soul for their job - especially public servants.
Fast forward to recent Federal Reserve and Treasury Department policies. Are they any better? In a word, NO. The biggest "bailout" that has taken place over the past few years is not Bear Stearns (NYSE:BSC) - it's the ratings agencies Moody's (NYSE:MCO), Fitch, and S&P (MHP). Paulsen wants to talk about how the markets need more regulation because things have gotten so complicated in "modern" financial markets. Poppycock! The whole mechanism for allowing the sub-prime disaster was very very simple, and very well known: bundling 10 sub-prime high risk loans into 1, waving a magic wand, and having one of the three agencies slap a "AAA" rating on it. Were it not for this mechanism (I would call it fraud), the repackaged loans could not have been traded and the original loans not have been made to being with. No lender would have made these loans if they had actually had to keep, service, and take the risk of default on the loans themselves. Yet the Fed and the Treasury let this fraudulent activity continue for years. It was their job to step in and stop it. Meanwhile, the profits at Moody's, Fitch, and S&P soared ever higher, along with the salaries of CEOs at Countrywide (CFC), Bear Stearns (BSC), and many other companies involved in the big charade.
We are told now by the Fed and Treasury now that "modern financial markets" are so complicated they conjure up visions of PhDs writing C++ creating financial instruments so difficult to understand that we must now allow them even more power to "regulate" these markets. BS. The fraudulent lending mechanism was very easy to spot. I have an acquaintance who is a single mother with a low-income job. She relies on the state for food-stamps and medical care for her and her child. Yet she somehow qualified for a loan on a nice single family home. I wondered, how can this be? Perhaps someone lent her a big down payment? No, that wasn't the case. All of a sudden I felt like an idiot for going to engineering school, getting a good job, and living frugally for two years so that I could buy my first house in San Diego back in 1982 with 5% down (and had to pay closing costs) and a 1 year adjustable ARM loan which I was very lucky to even qualify for in the first place. Heck, I should have just been a slacker and waited for the turn of the century. Apparently Bush really was a "compassionate conservative", who would have thunk it? Nope, this fraudulent behavior was very easy to spot. Even Pimco's Bill Gross and Berkshire Hathaway's Warren Buffet were being outspoken about the dangers of what was going on years ago. Yet, the Fed and Treasury didn't see it? Give me a break. They enabled it by doing nothing - no doubt under great pressure from all the folks profiting so handsomely by the fraud.
Making matters worse for the long term prospects of US financial markets was the fact that a lot of these repackaged loans were sold to investors abroad. I remember the exasperated look on a German finance minister's face when he said "we cannot trade these debt instruments for we cannot even obtain a quote for them". In other words, the debt was so NOT "AAA", there was not even a way to figure out what their current value was, let alone trade them(!) So, as we move into the era of peak oil, which will surely put pressure on our financial systems, will we be able to finance our alternative energy policies (assuming someday we actually wise up and develop a real energy policy), by selling our debt instruments to foreigners? Good luck. I don't think an "AAA" rating from Moody's, Fitch, or S&P means anything but "DANGER!" to most foreign traders. I had to laugh a few weeks back when one of these ratings agencies put out a "SELL" recommendation on Citigroup (NYSE:C). Am I the only one that sees the irony of this situation? Heh heh heh.
As Naomi Klein so correctly points out in her excellent book "The Shock Doctrine", the Bush administration (among others...) seems to thrive on exploiting "shocks" (9/11, Katrina for example) by using the US Treasury as personal ATM machines. The latest financial "shock" is no different. What was the response of the Fed and Treasury to the recent subprime fraud? Did they punish the three ratings agencies involved at the core of the fraud and levy large fines for their "misbehavior"? No. Did they hold the CEOs of the companies involved responsible and garnish some of their past millions in fraudulent earnings? No. What they should have done, simply, was to take away the rights of ratings agencies and instead create an independent agency within the Department of Treasury to issue the ratings going forward, with a promise to foreign investors that from now on, "AAA" will really mean "AAA". No, my friends, the biggest bailout of the sub-prime disaster was not Bear Stearns, it was the ratings agencies themselves for not being held accountable to their critical role in enabling the entire fiasco.
What they did instead was put the entire fraud on the backs of the US middle class taxpayer. I have visions of Gomer Pyle ("surprise, surprise, surprise!"). Is this not once again very hypocritical of a Republican administration who epouses "free markets" to allow the government to implement a "bailout" which puts all the risks of $30 billion of fraudulent high risk loans onto the backs of the US middle class taxpayer? Not at all, read "The Shock Doctrine". This is a perfect implementation of it. Apparently, the model now is to allow publicly traded private investment firms to get all the benefits of financial wheeling and dealing while placing all the risks (i.e. losses) to be backed up by the Federal Reserve, that is, the taxpaying middle class - you and I. This is an unprecendented move in the anals of US financial policy! Yet, in the midst of a financial and market SHOCK...we now see the DOCTRINE. And, we are told "trust us". Yet the very first implementation of this new policy was a deal for Bear Stearns at $2/share. Ooops, sorry, just kidding, days later it's $10/share. OK, everyone can be a bit off in a deal, but by 500%?! Give me a friggin break.
Few of you have probably stayed with me this long and I am sure most of you would rather listen to some nice music or read a good book then spend your spare time reading such unpleasant musings. However, like Iraq, and like peak oil, it is time Americans to START PAYING ATTENTION. How do we invest in an environment such as this?
Anyone who has read my previous submissions on peak oil knows that I am very concerned about the future value of the US dollar, rising inflation, and US equity markets. The current financial policy "circus", for lack of a better word, further justify my concerns. The US dollar has dropped roughly 45% since Bush took office. The Federal Reserve is now in a situation where it is cutting interest rates in the face of higher inflation. People ask, well, how much further can the US dollar drop? Plenty more, I fear. I read somewhere (it may have been in The Economist magazine) that the British pound dropped 80% when it was dethroned as the world's reserve currency of choice. This may even be a conservative estimate based on the US's exposure to peak oil and therefore continuing higher oil prices. So, I continue to pound the table for US investors to buy energy, commodities, and precious metals. Here are some good long term choices: ETFs PowerShares DB Commodity Idx Trking Fund (NYSEARCA:DBC), United States Oil Fund LP (NYSEARCA:USO) and streetTRACKS Gold Trust (NYSEARCA:GLD). Some stock picks might include Schlumberger (NYSE:SLB), Conoco Philips (NYSE:COP), and energy trusts paying high dividends such as Permain Basin Royalty Trust (NYSE:PBT), San Juan Royalty Trust (NYSE:SJT) or perhaps BP Prudoe Bay Royalty Trust (NYSE:BPT). From a tax perspective, these trusts are better held in your IRA accounts. Some good funds might include Fidelity Select Fund's Energy, Natural Gas, and Gold which give you some good diversitication. You should also have a portion of your cash in US dollar hedges. Some good choices there are the Merk Hard Currency Fund [MERKX] and the Prudent Global Income Fund [PSAFX]. The Energy Select Sector SPDR (NYSEARCA:XLE) would also be an excellent long term holding to protect you from higher inflation and a falling US dollar (ie. rising oil prices). Another interesting play for the risk taker might be real estate in foreign markets which have their currencies pegged to the US dollar.
Disclosure: The author is long DBC, SLB, COP, PBT, MERKX, and PSAFX.