Greenspan, Bailouts and Fed Policy

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 (BSC) - it's the ratings agencies Moody's (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 (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 (DBC), United States Oil Fund LP (USO) and streetTRACKS Gold Trust (GLD). Some stock picks might include Schlumberger (SLB), Conoco Philips (COP), and energy trusts paying high dividends such as Permain Basin Royalty Trust (PBT), San Juan Royalty Trust (SJT) or perhaps BP Prudoe Bay Royalty Trust (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 (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.

Comments

[kowalski:]

Excellent article. Welcome to the real world.

2008 Apr 14 08:31 AM

[wawhittaker:]

Distorting the truth and twisting reality in order to be the High Priest of Mammon is nothing new. Anybody ever hear of Alexander Hamilton?

2008 Apr 14 09:22 AM

[Crookedwood:]

I agree fraud is the word for the actions of the rating agencies. Economic and political leadership failed. We need men of ethics and courage in leadership and Paulson, Snow, Greenspan as well as both political parties failed the people, Time for the people to wake up.

2008 Apr 14 09:39 AM

[Tracy:]

The saddest part of it all is that most Americans have no idea of what is happening to them.

2008 Apr 14 10:34 AM

[Michael Fit...:]

thanks for your comments. yes, I have been reading about Alexander Hamilton in David McCullough's great book "John Adams". i started reading this book after watching the HBO Series on Adams. sure it's TV, but the book has really made me a John Adams fan, and and it makes me realize how far the US has fallen in terms of the REAL patriotism, vision, and the statesmanship of its "leaders". User 130138 is, unfortunately, dead-on correct. the vast majority of Americans have been taken in by the "distractions" the power-elite provide for their ready consumption: emphasis on "Britney-esque" type idols, sports, gay marriage, preaching on "moral values", sensationalism in journalism, reality TV - all the things that don't really matter for the welfare of our country. Even CNBC, a supposed "financial network" continues to fully back Bush fiscal, foreign, and domestic policies even after it is so abundantly clear that they have been a complete and unmitigated disaster from the point of view of the middle class (that said, the upper 0.001%, those with net worths of over $100 million, have been doing great) and the sovereignty and security of these United States. this is why i am so concerned about peak oil...i mean if the middle class is stuggling now with oil at $100/barrel (and the price of gasoline hasn't even caught up, yet...) what will happen when oil hits $200/barrel, or worse yet, when the government takes control of supply and begins to ration it as they see fit. that day is certainly coming if we don't develop a *real* energy policy NOW. but think about it, perhaps that is why Congress isn't developing an energy policy. what better way to control the masses than controlling their energy and ability to transport themselves?

so, that's why i am on Seeking Alpha, which is one of the very few places people like us can get unedited viewpoints distributed in a fairly wide fashion (i first saw it on yahoo finance, which is very heavily used). am i a cynic, or is it correct to wonder how long it will take rupert murdock to take over Seeking Alpha and put an end to this discussion forum? i mean he's got the wall street journal ... how much longer do you think we'll get accurate and non-biased editorials out of the WSJ, the craddle of american financial journalism? not that the WSJ was non-biased and much of a proponent of the middle class to begin with....

2008 Apr 14 11:09 AM

[nukldrager:]

Since you are getting at root causes etc., isn't it a at the root of the central banks mo to eliminate competition?

2008 Apr 14 12:46 PM

[Jason Rines...:]

To The Ftizman and others:

1) Socialism will be the instruement of the politician to stave off depression, it will fail as it has always failed in the last 6,000 years of modern history since it has been tried. American's don't know all the reasons why their quality of life is quicjly eroding before there eyes. So the collective cries bailouts and they are getting them. The word is Socialism and it simply means the responsible are forced to repair the damage of the irresponsible. Expect 2-3 years of Socialism until America gets the tax bill, then expect a further economic contraction and collapse of our fiat currency system. Banks cannot regain there momentum when customers can't or won't borrow money. Congress, Bernanke and this Administration just don't get it. I don't need to provide a thesis to convince you that Socialism is happening, the bailouts and Fed power grabbing to cover up bad government and fiscal policy sums up what is occuring. Actions speak louder then words.

2) I don't believe NOT creating an effective energy policy is a plan to control the masses. The real problem is politicians can invest in energy and have direct inside information you and I can only dream about. This is the true reason our nation didn't stay the course on energy independence after the last energy crisis of 1980. Back then, the crisis was caused be geopolitics. Right now, peak oil is a consideration but the higher energy and food prices has far more to do with horrible fiscal policy. Partying our way out of debt has never worked either in modern human history. Only sacrifice and ingenuity saves a culture from retreat and misery. Every empire needs the raw materials to maintain a quality of life. The Romans had slaves, this kept the top echelon in power while the border frontiers and empire began to contract. Energy is our slave labor and our economic power has begun to contract.

A lot will change and for the better after the Socialism stage made in point number one. Americans will go from wondering why such pain occured to knowing exactly whom is to blame and how to repeat these mistakes. 2012 our country will be considered second class with serfs serving the top 1%. We will elect responsible leaders and will begin holding them accountable to performance standards. This will also go for businesses which will go back to focusing on fundamentals. America is now learning and will keep learning from pain. Such is the nature of us humans, despite our arrogant claims to complex fiscal mastery/models run by supercomputers.

2008 Apr 14 12:49 PM

[ROOSTERMAN:]

IF THOSE HEAVY HITTERS THAT HAVE TAKEN THEIR BATH ARE NOT/WILL NOT/CAN NOT IMPOSE A DISCIPLINE ON THE RATING AGENCIES, SO BE IT. I CANNOT BELIEVE THERE WAS AT LEAST ONE "HEAVY HITTER" THAT DID NOT CHALLENGE AN AAA RATING.

2008 Apr 14 01:34 PM

[Cousin A.:]

Thanks for another interestng article Fitzman. And User 130138 is, sad to say, truely right on target.

2008 Apr 14 07:56 PM

[User 158320:]

Baloney,

Greenspan warned of the perils so often he was like a broken record, a softspoken monotone broken record that nobody listened to, its not his fault 99.4% of the population didn't listen to his state of the economy speeches and fell asleep before he made his points or heed his warnings, he warned over and over and over for years, its not his fault the people and Congress followed Paris Hilton more closely than Alan Greenspan's numerous DIRE WARNINGS.

You can buy his speeches, take a red bull, tough it out listen & analyze the speech maybe even more than once-he definitely warned and advised of GSE reform over and over and over.

For the folks looking for a more "proactive" fed chief maybe they should have appointed MrT as fed chair, Greenspan aint gonna scream or bitch slap anybody, other than that I'd say he gave FAIR WARNING of the housing problem YEARS IN ADVANCE.

2008 Apr 14 09:29 PM

[Michael Fit...:]

iThinkBig: i respectfully disagree. it's not socialism, it's something the europeans readily spotted, and something that Jim Garrison, district attorney of New Orleans understood in the only trial brought to the courts for the assassination of JFK: it's FASCISM. here is the wikipedia definition:

en.wikipedia.org/wiki/...

the only difference here is that the "state" has been replaced by the super wealthy.

so, as in nazi germany, we have a militaristic government which is leading to a debased currency and inflation. my question is this: for the super wealthy in america, why stand by and watch this? i mean, what country are they going to escape to that would be better than the US (were the US to fix all these idiotic problems)? i just can't understand it. don't they have kids? and, once you have a few billion in the bank, why do you need more?

User 158320: i don't need to buy greenspan's speeches and drink red bull to know what he said - i watched them LIVE for years after Bush and the Republicans took charge and started their shannigans. the best greenspan ever did was a very, very, mild slap on the wrist when what those guys needed was a kick in the balls. besides, if he knew so much, and really wanted to do something, why didn't he get with the head of the Treasury Department and actually DO something. i repeat, all they had to do to stop the fraud was go to Moody's, Fitch, and S&P and tell them to stop the fraudulent AAA ratings that enabled the entire fiasco. no sir, greenspan was in a position to do something, and did nothing. then he wrote a book describing everything that was wrong (under his watch) as though to obsolve himself! it was the height of hypocrisy.

2008 Apr 15 07:03 AM

[Iconoclast421:]

It sounds like the author is pretty close to accepting the dark truths. They took over the treasury in 1913. Caused a depression in 1929. Bought up all the gold in 1933 (for a mere pittance). They killed Kennedy when he got in their way. They staged the Gulf of Tonkin to drag us into a war whose ONLY purpose was to inflate the currency and get us to consume as much of our resources as quickly as possible. Then they created voodoo economics and used the television mind control devices to sell it to the people. This allowed us to enter a period of ostensible prosperity when in reality only the elites were really getting richer. And of course the orwellian mind control box constantly told us that all the deficit spending was completely normal and acceptable. And now, here we are. Up the creek, blindfolded, without a paddle…. And slowly realizing that the sound we’re hearing is the sound of an approaching waterfall.

I think any geopolitically awake person today would agree with what I just wrote.

But why did they do all of this? Here is my one-sentence answer: To get us to consume the world's resources, so that the elite feudal lords can return the serfs to their proper place.

Oil and coal and natural gas were the poor's ultimate weapons against tyranny. As long as we had some level of control over those resources, tyranny didnt have much of a chance to thrive. But just look at history. Any time resources begin to deplete, tyranny always comes in to fill in the gap. That's why the US spends a trillion a year on "defense". For the sole purpose of bringing to an end "the age of oil" so that they can resume their thrones of power. Democracy stands no chance of survival in an era of declining resources. The US resource base has been in decline for 35 years now. And that is why what we have doesnt resemble democracy anymore. People may think it does, but that doesnt mean anything. Most of those same people also think they're going to be raptured into heaven. Maybe they will, but that is irrelevant here on earth.

2008 Apr 15 02:56 PM

[Carz:]

Excellent article. It was interesting listening to Alan Greenspan on NPR after his book was published. Greenspan got defensive about why he encouraged people to get ARMs (saying that he himself always get 30 year fixed rates . . . hmm), that the cost of the Iraq war is insignificant (double hmm), and lastly, that he supported the Bush tax cuts, and destroying the the budget surplus and the Social Securities trust fund because without a gigantic national debt, the trust fund would have to be invested in Wall Street, leading it to, essentially control businesses. Hence, it had to be destroyed, and the US left with a large and growing national debt. And, further, the greatest problem for the government today is that it won't be able to pay the baby boomers the social security benefits they've been promised (because the trust fund is a mirage, due to Bush, Greenspan, et al) and the government must solve it by cutting benefits and raising the retirement age further.

Thank you, Alan Greenspan, for vaporizing my social security benefits.

2008 Apr 17 12:58 PM

[mike mohr:]

Greenspan is a crook!

2008 Apr 18 01:36 AM