The debate about whether it was Alan Greenspan’s “fault” will continue for generations, the “other side” summed up their position nicely in a quip that came up in the debate about whether to let the Fed have more power, “ That’s like buying your teenager a sports car after he wreaked the family saloon”.
Greenspan did point out at one stage that with $100 trillion of debt created by the private sector of which $20 trillion was “manufactured” between 1998 and 2007 by securitization of assets in USA, something that the Fed had, or elected to have, no control over, what the Fed did or did not do to with the base rate was largely irrelevant.
But the Fed did have a mandate to ensure financial stability, what just happened was not “stability”. Even if they did not perhaps have the tools or the authority, they should have either got the tools or got out of the kitchen, in other words if Greenspan “saw” what was going to happen he should have made a fuss, got the tools, done something, or resigned.
In that context his best defence is that he “didn’t know or didn’t understand”, because if he did know and wilfully did nothing, he should be shot.
He famously said more than once, “you can’t tell if you are in a bubble when you are in one”.
That’s baloney and I proved it, that’s how for example I could predict in January 2009 that the S&P 500 would bottom the day it passed through 675 (that happened on the 6th March), and in May that the Dow would go up to 10,000 without a serious reversal (it hit that last week). That wasn’t luck (http://www.marketoracle.co.uk/Article14234.html ).
The logic behind the “Too Big To Fail” bailouts was that the banks in USA that created the problem, by creating a bubble in securitized debt (that’s what a bubble is, when the price that assets (NASDAQ:RMBS) sells for is wildly more than what they are worth, that’s a bubble, the pop is when people realise they are not worth that), was that the economy needs debt to function.
There is a logic there, although as the credit crunch clearly demonstrated, if the debt is used for speculation, that is lunacy; Ty Andros dug up a prescient quote on that (www.marketoracle.co.uk/Article14313.html):
“Cheap money is a stimulant, also an intoxicant. If the dose is large enough, a substantial temporary effect can be brought about, but headaches follow. If the matter really were that simple, everybody could be an economist, and only the perversity of central banks would keep us from endless prosperity. Merchants and manufacturers will not be induced to increase borrowings, since interest on money borrowed is only one small factor in total costs. But if merchants and manufacturers will not use cheap money, speculators will”. Benjamin Anderson, Chief Economist of Chase National Bank, New York Times, April 1930
The money that got pumped into the US economy by the Fed over the past year didn’t get anywhere near “merchants and manufacturers” or small businesses that are now the backbone of the US economy, and it’s nothing to do with the interest rate; if you are a bona fide business in USA right now you will pay through the nose for debt.
It went to the banks, in part to create some sort of illusion of capital adequacy, although until there is a market, a real market with real buyers and sellers for that $20 trillion of dollar denominated securitized debt that is clogging up the gullets of the financial sector both inside USA and abroad, that’s just Alice in Wonderland.
And what did they do with it?
They speculated, they borrowed at 0% plus or minus short term and bought 10-Year and 30-Year Treasuries, that’s speculation, pure and simple; if the yield on those instruments goes up which sooner or later, and my view is sooner rather than later, the “Too Big To Fail” will need another shot in the vein to cover their losses.
There is a suspicion that they are “playing”, or more likely “gaming” the stock market with part of that money, and now it looks like they are getting ready to create a bubble in oil prices (anything above $80 now is a bubble). That would be ironic, the US taxpayer advances money to speculators so they can game the oil market so the US taxpayers pay more for oil, talk about having your cyanide-laced cake and eating it.
It is the JOB of the Fed to ensure financial stability, what they are doing now is trying to create bubbles to get themselves and their “constituents”, i.e. the lobbyists who prowl the halls of Washington, out of the hole that they dug together, by creating bubbles.
Gold is a bubble now (don’t believe me, I said target $600 a month ago – have a look at http://www.marketoracle.co.uk/Article14336.html), long term Treasuries are a bubble, the yield has to go up that is nothing to do with perceptions of inflation, that’s just supply and demand, and the housing market cannot be inflated now, that’s impossible.
Right now America is wounded, deeply wounded, and those wounds are the results of foolishness and cronyism that occurred over the past ten years. Right now the Fed is trying to get the patient to jump up and play in the NFL Final by pumping it full of steroids and painkillers.
That’s not just foolish, that is wilfully irresponsible, what America needs right now is time to heal, bed rest, and tender loving care.
Raise the rate Ben, don’t try to get the patient to run before it can walk, or you will risk causing it far more damage than you ever imagined.