The Greenspan Myth Dies
Something was a bit wrong yesterday. The dollar failed to rally into the close yesterday and got hit hard overnight. It opened down near 104. If the market really bottomed yesterday the dollar should have rallied too. We also should have gotten some real follow through in the market indices today.
The weakness began overnight in Europe. At around 4:30 AM EST a reporter on CNBC Europe attributed yesterday's rally to the Federal Reserve and the Treasury Department. Rumor has it that someone bought a big block of S&P 500 futures on the low yesterday. As soon as that story came out the European markets got hit hard and the dollar fell to a new 52 week low. The Nasdaq and S&P 500 futures turned down and dropped into the 9:30 open.
I think what you saw was noteworthy. There is no evidence that Greenspan actually created yesterday's rally. I doubt it. But there is at least a perception that he is trying to make the market go up and for good reason. Back in September before the market opened back up the Fed and Treasury Department openly said that they were going to take measures to protect the market from dropping. In January at a FOMC meeting Greenspan said that the Fed might buy stocks or financial instruments to make the market do what they wanted if they came to the conclusion that interest rates would not be enough.
What is alarming is that the market dropped after rumors of Greenspan's command and control efforts came out. This means that European investors no longer believe that Greenspan can rescue the market. In fact they may even view any attempt on his part to do that with alarm. The myth of Greenspan ended last night.
And by the myth of Greenspan I mean the belief that Greenspan will bail out the market and make it go up. People believed this because he bailed out the stock market in 1987, the S&L crisis in the late 1980's, Mexico in 1994, Asia in 1997, International bankers with bad loans in Latin America and Russia in 1998, and the Long Term Capital Management hedge fund in 1998. He has bailed so many people out in the past - and with apparent success - that people assumed that he could do it again and again. And he encouraged this belief.
But when that belief ends then the myth of Greenspan will end and that sets the market up for another reason to panic.
The stock market is in a bear market and the economy is in a slump for one reason: we are suffering from the unwinding of a speculative bubble that was fueled by Alan Greenspan successive bail out programs on behalf of international bankers who never knew a bad loan when they saw one. In order to bail them out he created money and credit that ran out of prudent investments in the real economy to flow into. So all of that money flowed into the stock market and created a bubble. When bubbles pop credit contracts and the economy slows up. Stocks that were once overvalued fall to "cheap" levels. Nothing can be done to stop the process. No real recovery can come until all of the wild debt - fueled by the past excesses - is worked off. That can only take time - and ironically Greenspan, President Bush, and Congress have made things worse by trying to create more debt in order to force the economy up. That is why we the current account deficit has exploded and the United States is now experiencing a dollar crisis.
When Greenspan talks he tries to draw your attention away from these problems and place their blame somewhere else. Last year he spoke to the Congress after September 11th and lied to you when he told you that the economy was in recovery until the terrorist attacks. He blamed the recession on terrorism even though it really began almost a year earlier in the Fall of 2000 when corporate investment spending went negative.
Today he spoke to the Congress and once again blamed today's market and economic turmoil on the closest villians at hand: the corporate pump and dump artists. He said:
"The recent impressive advances in productivity suggest that to date any impairment of efficiency of U. S. corporations overall has been small. Efficiency is of course a key measure of corporate governance. Nonetheless, the danger that breakdowns in governance could at some point significantly erode business efficiency remains worrisome. Well-functioning markets require accurate information to allocate capital and other resources, and market participants must have confidence that our predominately voluntary system of exchange is transparent and fair. Although business transactions are governed by laws and contracts, if even a modest fraction of those transactions had to be adjudicated, our courts would be swamped into immobility. Thus, our market system depends critically on trust--trust in the word of our colleagues and trust in the word of those with whom we do business. Falsification and fraud are highly destructive to free-market capitalism and, more broadly, to the underpinnings of our society."
"In recent years, shareholders and potential investors would have been protected from widespread misinformation if any one of the many bulwarks safeguarding appropriate corporate evaluation had held. In too many cases, none did. Lawyers, internal and external auditors, corporate boards, Wall Street security analysts, rating agencies, and large institutional holders of stock all failed for one reason or another to detect and blow the whistle on those who breached the level of trust essential to well-functioning markets."
"Why did corporate governance checks and balances that served us reasonably well in the past break down? At root was the rapid enlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community. Our historical guardians of financial information were overwhelmed. Too many corporate executives sought ways to "harvest" some of those stock market gains. As a result, the highly desirable spread of shareholding and options among business managers perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising. This outcome suggests that the options were poorly structured, and, consequently, they failed to properly align the long-term interests of shareholders and managers, the paradigm so essential for effective corporate governance. The incentives they created overcame the good judgment of too many corporate managers. It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously."
"Perhaps the recent breakdown of protective barriers resulted from a once-in-a-generation frenzy of speculation that is now over. With profitable opportunities for malfeasance markedly diminished, far fewer questionable practices are likely to be initiated in the immediate future. To be sure, previously undiscovered misdeeds will no doubt continue to surface in the weeks ahead as chastened CEOs restate earnings. But even if the worst is over, history cautions us that memories fade. Thus, it is incumbent upon us to apply the lessons of this recent period to inhibit any recurrence in the future."
There is truth to what Greenspan said in these paragraphs. In fact today is the closest he has ever come to publicly admitting that stocks reached bubble valuations. However, he places the blame for this on corporate executives, accounting gimmicks, and optimistic analysts. No where did he admit his own role. None of these things would have happened if the speculative bubble wasn't created and it was created by Greenspan wild bail outs needed low interest rates and open monetary spigots.
He is a total liar and the actions of overseas investors last night in response to a Greenspan rumor proved that people are beginning to lose confidence in him. This process will pickup over the next few days and cause the market to dump hard again and bring a real panic low.
When Greenspan came to the Senate the Senators knew this. The Chairman of the Senate Banking Committee, Phil Gramm, tried to pump him up and reassure the television audience by introducing him as "the greatest central banker of our era" and then by saying that we have a "monetary policy that is the envy of the world."
Of course the market responded to Greenspan by dropping.
With the dropping market you are seeing the final destruction of the Greenspan myth. It will take time for him to reason, but future policy makers will learn from his mistakes. On July 4th Stephen Roach, the head economist of Morgan Stanley, wrote a report that asked for real leadership in the United States to steer it out of this financial calamity. We might not have it now, but we'll eventually get it.
I'll close with some remarks by Ron Paul. A Congressman you'll see on TV tomorrow grilling the daylights out of the Scared Crow:
"But what is not discussed is the actual cause and perpetration of the excesses now unraveling at a frantic pace. This same response occurred in the 1930s in the United States as our policymakers responded to the very similar excesses that developed and collapsed in 1929. Because of the failure to understand the problem then, the depression was prolonged. These mistakes allowed our current problems to develop to a much greater degree. Consider the failure to come to grips with the cause of the 1980s bubble, as Japan's economy continues to linger at no-growth and recession level, with their stock market at approximately one-fourth of its peak 13 years ago. If we're not careful – and so far we've not been – we will make the same errors that will prevent the correction needed before economic growth can be resumed."
"What is not discussed is that the current crop of bankruptcies reveals that the blatant distortions and lies emanating from years of speculative orgy were predictable."
"First, Congress should be investigating the federal government's fraud and deception in accounting, especially in reporting future obligations such as Social Security, and how the monetary system destroys wealth. Those problems are bigger than anything in the corporate world and are the responsibility of Congress. Besides, it's the standard set by the government and the monetary system it operates that are major contributing causes to all that's wrong on Wall Street today. Where fraud does exist, it's a state rather than federal matter, and state authorities can enforce these laws without any help from Congress."
"Second, we do know why financial bubbles occur, and we know from history that they are routinely associated with speculation, excessive debt, wild promises, greed, lying, and cheating. These problems were described by quite a few observers as the problems were developing throughout the 90s, but the warnings were ignored for one reason. Everybody was making a killing and no one cared, and those who were reminded of history were reassured by the Fed Chairman that "this time" a new economic era had arrived and not to worry. Productivity increases, it was said, could explain it all."
"But now we know that's just not so. Speculative bubbles and all that we've been witnessing are a consequence of huge amounts of easy credit, created out of thin air by the Federal Reserve. We've had essentially no savings, which is one of the most significant driving forces in capitalism. The illusion created by low interest rates perpetuates the bubble and all the bad stuff that goes along with it. And that's not a fault of capitalism. We are dealing with a system of inflationism and interventionism that always produces a bubble economy that must end badly."
"So far the assessment made by the administration, Congress, and the Fed bodes badly for our economic future. All they offer is more of the same, which can't possibly help. All it will do is drive us closer to national bankruptcy, a sharply lower dollar, and a lower standard of living for most Americans, as well as less freedom for everyone."
"This is a bad scenario that need not happen. But preserving our system is impossible if the critics are allowed to blame capitalism and sound monetary policy is rejected. More spending, more debt, more easy credit, more distortion of interest rates, more regulations on everything, and more foreign meddling will soon force us into the very uncomfortable position of deciding the fate of our entire political system."
"If we were to choose freedom and capitalism, we would restore our dollar to a commodity or a gold standard. Federal spending would be reduced, income taxes would be lowered, and no taxes would be levied upon savings, dividends, and capital gains. Regulations would be reduced, special-interest subsidies would be stopped, and no protectionist measures would be permitted. Our foreign policy would change, and we would bring our troops home."
"We cannot depend on government to restore trust to the markets; only trustworthy people can do that. Actually, the lack of trust in Wall Street executives is healthy because it's deserved and prompts caution. The same lack of trust in politicians, the budgetary process, and the monetary system would serve as a healthy incentive for the reform in government we need."
The stock market will bottom soon. The country will survive. Eventually the country will prosper. But this era of manic command and control on the part of Wall Street interest and international bankers will never be forgotten.........It cannot be, because it cannot be repeated ever again. |
