Greenspan: Still Almost Childlike in His Idealism 12 comments
- Profile & More Articles
- Tim's blog: The Mess That Greenspan Made
- Subscribe to Iacono Research
-
Font Size:
-
Print
- TweetThis
Former Fed Chairman Alan Greenspan wrote in yesterday's Financial Times of more bank failures to come and warned on the need to resist heavy-handed regulation in an effort to prevent the re-occurrence of what happened on his watch.
Falling home prices are the critical factor in the current crisis. That is, the reversion to the mean for property values that rose at annual rates of between 10 and 20 percent during the first half of the decade when everyone was dismissing the low savings rate and marveling at how wealthy we had all become.
The insolvency crisis will come to an end only as home prices in the US begin to stabilise and clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities. However, US home prices will stabilise only when the absorption of the huge excess of single-family vacant homes that emerged as the US housing boom peaked in 2006 is much further advanced than it is now. New single-family home completions are currently barely under the rate of home demand generated by household formation and replacement needs. Only later this year will the current suppressed level of housing starts be reflected in completion levels consistent with a rapid rate of liquidation of the inventory glut, and this, of course, assumes that current levels of demand for housing hold up.
Look for the inventory glut to be "rapidly liquidated" later this year. This year? Really?
And why is it that no one talks about rapidly de-flating "equity cushions" like they talked about them when they were in-flating a few years back.
It sounds as though the current crisis just snuck up on everybody. Though surely there were steps that could have been taken to prevent the occurrence of this particular epidemic (e.g., tighter lending standards that successor Ben Bernanke eventually provided), the failure to recognize impending problems (e.g., thinking that home prices only go in one direction) makes these events, by definition, unanticipated.
A financial crisis is heralded, in fact defined, by sharp discontinuities of asset prices. The crisis must thus be unanticipated. The fact that risk was heavily underpriced for much of this decade was broadly recognised in the financial community, but the timing of the sharp price correction was nonetheless a surprise.
Recent history is replete with such underpricing persisting for years. Those market players who withdraw from “long” commitments at the first sign of an excess of exuberance, risk losing market share. They thus continue “to dance” as Chuck Prince, the former Citigroup chairman put it, but always assume they will have time to exit the markets. The vast majority invariably fail. When the current crisis emerged, it was assumed that the weak links would be unregulated hedge and private funds. The losses, however, have been predominately in the most heavily regulated institutions – banks.
It seems the underpricing of risk would be a bit more difficult if money wasn't so cheap and regulation so light, both of which are the purview of the central bank.
And those "heavily regulated banks" somehow managed to accumulate all kinds of toxic waste that were somehow kept off of their balance sheets until such time that people started to question exactly what was in them and then all hell broke loose.
Finally, the warning that government meddling will only make things worse.
We may not easily confront or accept the price dynamics of home and equity prices, but we can fend off cries of political despair which counsel the containment of competitive markets. It is essential that we do so.
Look where "competitive markets" have gotten us.
He still seems to be almost childlike in his idealism and similarly challenged to understand just what it was that happened when he sat in the big chair in the big white building on Constitution Avenue.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 12 comments:
If the bank owners were personally responsible for loan losses do you think they would have made all those bad loans? They can socialize the losses and take all the profits, so they do. Fractional reserve loaning is totally corrupt, a government-approved Ponzi scheme.
Loans from fractional reserve banks are inherently “liar’s loans”, the lie being, the bank is loaning money that it really doesn’t have. The Fed and the thousands of banks creating these liar loans create inflationary conditions that actively discourage thrift: people throw their money at something that hopefully will go up a lot in price in order to hold onto the buying power of their money, trading the certainty of being screwed in the long run for the chance to possibly avoid being screwed at that future time. Debt-money leaks out value like a bucket with a hole in the bottom leaks out water.
This is just going to keep happening until the basic cause gets fixed.
First of all, WE NEED OUR OWN DEBT-FREE CURRENCY, backed by all of the real estate owned by the United States (which is, in fact, all of the real estate within the national boundaries, and really more than that including other nations whose continued claim to existence depends on U.S. defense of that claim; case-in-point, Kuwait, 1991), we should distribute that new currency in monthly equi-dollar amounts to all legal residents (amounts due minors to be held in trust accounts). Also, we need bankers to be held financially responsible for any loss of depositors’ money (if they want to gamble with fractional reserves, it’s the bank owners who should pay, not taxpayers, and if you lose your own money by depositing it in a fractional reserve bank, again, it’s YOU who should pay, not taxpayers. How can we ever expect things to get right with a system based on socializing losses?
Next, we should REPLACE ALL FEDERAL NON-CONSUMPTION TAXES with a one-half percent(+/-) Tobin-type tax on ALL outgoing electronic transactions (avoidable by using cash for all transactions, and, since avoidable, the tax will be arguably being paid voluntarily) in order to:
1. Pay off the national debt,
2. Repair the damage that the U.S. government has done to persons and the free market by favoritism (reparations for having “Constitutionalized” slavery might be considered) and excessive regulation (e.g., we need about 4 times as many doctors and healthcare professionals as we currently have in order to have enough competition extant to get medical costs back to the realm of affordability, and we would have had them had there been a free market in medical education), and
3. Extract and destroy excess currency as required to avoid inflation.
No other form of Federal non-consumption tax would be allowed (this tax could go to zero when it has done its job if there is no inflation in the system).
The monthly equi-dollar distribution amounts should be of sufficient quantity (assuming $1000, that’s $24,000 Federal tax-free per couple, plus whatever wages and other income they bring in) to be considered sufficient replacement for all forms of corporate, farm and personal welfare, including subsidies, welfare, tax incentives, Social Security (to be phased out), Medicare, the Federal Minimum Wage law, and ALL OTHER forms of Federal financial redistribution schemes; there won’t be any need for separate Federal retirement accounts since there won’t be any income or investment taxes.
For those who like their political solutions morally justified, the monthly equi-dollar distribution amounts can be considered “justified compensation” for the denial of free access to all the property that the government has privatized.
With everybody getting the same monthly amount, and everybody paying the same percentage increase of fiat money, there is no redistribution nor inherent injustice in the plan.
Also, until Washington is CLEANSED of politicians, nothing will be done to implement your plan.
For something to help the US consumer NOW, Go TO:
www.stopoilspeculation.../
AND SIGN THE PETITION.
The FDIC issued a report recently on the banks it insures. What they found is that despite a 400% increase in loan loss provisions from 2007 levels, reserve growth is not keeping pace with rising non-current loans as troubled mortgage loans continue to increase.
More banks will need to raise capital to keep from becoming in solvent and some of them will be unable to. Link to download the FDIC report
www.ushousingmeltdown....
"A government big enough to give you everything you want, is strong enough to take everything you have".
-Thomas Jefferson
alan's plan is interesting, but jjason quickly shines the light of reality on the chance that any real cure of significance will ever occur that must be agreed to by the 535 member terrorist cell on Capitol Hill. We might just as well propose that we simply monetize the Federal debt and start over again on Monday.
I seem to be a lone voice in my support for Uncle Alan. If wishes and buts, were candy and nuts, my fondest wish would have been that AG had not retired from the Chair for another two years. Considering the bumbling "fixes" offered to us from the politicians, called by the oxymoron "good government", the complexities and vagaries of our integration into a global economy, and the fact that a free market is the only market that works, AG was not a "childlike idealist" but a stone pragmatist. I believe he would have sensed the panic building 1.5 years ago and actually acted to not let it come to full flower. With the constraints listed above, the only way the situation could possiby have been managed was by a subtle but affirmative assurance by the man in the Chair. What was really needed was AG's skill at putting his hand on our collective shoulders and assuring us like a kindly grandfather that "everything will be OK". With our collective psychies calmed, he would then have gone about his busines of solving the problems (quietly and out of our view). Instead, we got a "deer in the headlights" Fed Chief who took, to our national detriment, too long scratching his prodigious bald noggin, and then pushed the panic button. We have all responded naturally and fully to the alarm. And so it goes.
All for a man who continued to bend over backwards to encourage home ownership during his years at the Fed, and did anything but "regulate" banks and the financial structure for providing housing credit.
The American people have every right to be angry and should be deeply concerned for the future. It is no longer a matter of housing prices and when those prices improve, or when the supply of homes starts declining. It is now a question of how severe will the national ,systemic loss of family wealth be. Will it be in drips and drabs? The slow movement from affluence to poverty over time. Or will it come very suddenly with a 5000 point drop on the Dow? Something on the scale of October 1929.
I have no confidence anyone in Washington, Wall Street, or Main Street has a clue of what lies out there and how to come to grips with it.
A year from now, we may be witnessing a total social meltdown plunging the nation into civil war and anarchy.
We would be better off if he actually did that to kill time than to open his mouth on tv or write articles.
I then use my semi-supercomputers to plug in a dozen key variables in 2007, historic, numbers, percent chance based on human nature weightings. There is more to economics then black and whites, human nature being the same for 10,000 years of documented history is actually far more telling and can be charted. My studies of the Mayan culture taught me that. They figured out "Trend" almost a 1,000 years ago.
Chance of Recession in June 2007 was 100%. I was ridiculed and scoffed at. It is the age of arrogance and unreason. Facts and numbers don't matter, King Sized ego's do, right? The chance of Depression at the time was 25%. Greenspan didn't exactly lie, he simply looked at classis definitions of decline and because the margin of error could be off a couple of points (depends on how you build your analytic construct of course).
But he did worse then lie in my opinion!
Current chance of Depression now is 100% cumulative negative 19%-25% GDP by end of 2011. Washington and energy are what will determine if we have a 1930's era or if we see a Bull run in 2013. That I cannot predict with numbers or a computer, I can only state the current House party of dimwhits is likely to remain in power. And look how they have acted know this?!?! Vote for 5 week recess to come back and vote on wether to release SPR in September. The American people will fix this, but I do hope this is voter revolt in 2012 and not a Bastille event. Even if gas is $20 a gallon, you could be sure a couple million armed Americans would have no real problem storming and occupying the White House permanently. Of course, our competing countries which may as well be called enemies would take swift advantage of our turmoil. I hope for the best but prepare for the worst and I will do my part. This is MY country and I was taught young freedom is worth dying for.