Mish comments on Greenspan Speech
The record of the past twenty years appears to underscore the observation that, although pressures for excess issuance of fiat money are chronic, a prudent monetary policy maintained over a protracted period can contain the forces of inflation.
Hmm he thinks HIS monetary policy, the policy that fueled the bubble was prudent.
The meaning of deflation and the characteristics that differentiate it from the more usual experience of inflation are subjects being actively studied inside and outside of central banks. As I testified before the Congress last month, the United States is nowhere close to sliding into a pernicious deflation.
Is that why we had a panic 1/2 point rate cut?
Although the U.S. economy has largely escaped any deflation since World War II, there are some well-founded reasons to presume that deflation is more of a threat to economic growth than is inflation. For one, the lower bound on nominal interest rates at zero threatens ever-rising real rates if deflation intensifies. A related consequence is that even if debtors are able to refinance loans at zero nominal interest rates, they may still face high and rising real rates that cause their balance sheets to deteriorate.
Doesn't this contradict the previous snip? He covered it up with mindless babble in between.
Taken together, these considerations suggest that deflation could well be more damaging than inflation to economic growth. While this asymmetry should not be overlooked, several factors limit its significance. In particular, more rapid advances in productivity can make this asymmetry less severe. Fast growth of productivity, by buoying expectations of future advances of wages and earnings and thus aggregate demand, enables real interest rates to be higher than would otherwise be the case without restricting economic growth. Moreover, to the extent that more-rapid growth of productivity shows through to faster gains in nominal wages, there will be fewer instances in which nominal wages will be pressured to fall.
Is he so blind to not be able to see that the productivity miracle comes at the expense of jobs? Never does he put 2 and 2 together.
One also should not overstate the difficulties posed for monetary policy by the zero bound on interest rates and nominal wage inflexibility even in the absence of faster productivity growth. The expansion of the monetary base can proceed even if overnight rates are driven to their zero lower bound. The Federal Reserve has authority to purchase Treasury securities of any maturity and indeed already purchases such securities as part of its procedures to keep the overnight rate at its desired level. This authority could be used to lower interest rates at longer maturities. Such actions have precedent: Between 1942 and 1951, the Federal Reserve put a ceiling on longer-term Treasury yields at 2-1/2 percent. With respect to potential difficulties in labor markets, results from research remain ambiguous on the extent and persistence of downward rigidity in nominal compensation.
Clearly, it would be desirable to avoid deflation. But if deflation were to develop, options for an aggressive monetary policy response are available.
Isn't this discussion admitting more than a little fear of deflation?
Irrespective of how deflationary forces might influence it, our economy has the benefit of enhanced flexibility, which has, at least to date, allowed us to withstand the potentially destabilizing effects of some substantial negative shocks.
More fears of deflation
If the bursting of an asset bubble creates economic dislocation, then preventing bubbles might seem an attractive goal. But whether incipient bubbles can be detected in real time and whether, once detected, they can be defused without inadvertently precipitating still greater adverse consequences for the economy remain in doubt.
An attempt to wash his hands and absolve himself of the blame he deserves
But it is difficult to imagine stock prices of most well-established and seasoned old-line companies surging to wholly unsustainable heights. With some prominent exceptions, their capabilities for future profits have been largely tested and delimited.
Once again the man does not know a bubble when we are still in it.
The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely illusion."
Once again an attempt to absolve himself of guilt.
It is too soon to judge the final outcome of the strategy that we adopted. The contractionary impulse from the decline in equity prices appeared to be diminishing around the middle of this year. But then the fallout for stock prices from corporate governance malfeasance, argued by some as having been spawned by the bubble, became more intense. This, in turn, damped capital investment and trimmed inventory plans. More recently, of course, geopolitical risk has risen markedly, further weighing on demand. Though unrelated to the bubble burst of 2000, it has muddied the evaluation of the post-bubble economy.
It is interesting that he refers to this as post-bubble. Thanks to his policies, we have 4 bubbles where before we only had 1.
If the postmortem of recent monetary policy shows that the results of addressing the bubble only after it bursts are unsatisfactory, we would be left with less-appealing choices for the future. In that case, finding ways to identify bubbles and to contain their progress would be desirable, though history cautions that prospects for success appear slim.
Never put of till tomorrow what you can put off until the day after that. By all means add fat to the fire by pumping liquidity into the markets at the peak of a bubble.
As I noted earlier, it seems ironic that a monetary policy that is successful in inducing stability may inadvertently be sowing the seeds of instability associated with asset bubbles.
Adding fat to the fire at a bubble peak is not adding stability.
Regardless of history's verdict on a policy that addresses only the aftermath of bubbles, we still need to improve our understanding of the dynamics of bubbles and deflation to contain the latter, if not the former.
Yet another attempt to absolve himself of blame.
The recovery, however, ran into resistance in the summer, apparently as a consequence of a renewed weakening in equity prices, further revelations of corporate malfeasance, and then the heightened geopolitical risks. Concern on our part led the Federal Open Market Committee to reduce its targeted federal funds rate 50 basis points at our early November meeting as some insurance against the possibility that the weakening would gain some footing. Although our most probable forecast already was that growth would pick up, we judged the cost of the insurance provided by additional easing as exceptionally modest because we viewed the risk of an imminent rise in inflation as remote.
Give me a break. Are we fighting inflation or deflation here. He desperately wants inflation. What a crock.
The limited evidence since the November easing has supported our view that the U.S. economy has been working its way through a soft patch. And the patch has certainly been soft. The labor market has remained subdued, as businesses apparently have been reluctant to add to payrolls. The manufacturing sector remains especially damped, and nonresidential construction has trended lower. By all reports, state and local governments continue to struggle with deterioration in their fiscal conditions. Oil prices have recently risen and, not least, the economies of most of our major trading partners have shown little vigor.
Finally an admission of the problem. But he chooses to call it a "soft patch". Kind of like calling advanced lung cancer a small problem.
More broadly, strong growth of labor productivity, supplemented by reduced tax payments, has provided a boost both to incomes and to spending.
He still does not see that productivity is a direct result of loss of jobs.= and without jobs there will be nothing to spend.
In the end, capital investment will be most dependent on the outlook for profits and the resolution of the uncertainties surrounding the business outlook and the geopolitical situation. These considerations at present impose a rather formidable barrier to new investment. Profit margins have been running a little higher this year than last, aided importantly by strong growth in labor productivity. But a lack of pricing power remains evident for most corporations. A more vigorous and broad-based pickup in capital spending will almost surely require further gains in corporate profits and cash flows.
A second hint that perhaps he understands PART of the problem
A full enumeration of the caveats surrounding the economic outlook would, as usual, be lengthy. But often-cited concerns about the levels of debt and debt-servicing costs of households and firms appear a bit stretched. The combination of household mortgage and consumer debt as a share of disposable income has moved up to a historically high level. But the upward trend in the series reflects, in part, financial innovations that have increased access to credit markets for many households. These innovations include the development of a deep secondary market for home mortgages, along with the advent of credit scoring and automated underwriting models that have enhanced the ability of loan officers and credit card companies to identify good credit risks. These innovations lower the risk level of any given amount of debt.
Greenspan at his worst. Financial derrivatives have gone exponential and Greenspan thinks that is the answer. Bankruptcies and credit problems are everywhere and he has his head burried up his ass on this issue. These innovations lower risk level of debt. What is this man smoking? Is he really stupid enough to think this? I believe he is.
To be sure, the mortgage debt of homeowners relative to their income is high by historical norms. But, as a consequence of low interest rates, the servicing requirement for that debt relative to homeowners' income is roughly in line with the historical average. Moreover, owing to continued large gains in residential real estate values, equity in homes has continued to rise despite very large debt-financed extractions. Adding in the fixed costs associated with other financial obligations, such as rental payments of tenants, consumer installment credit, and auto leases, the total servicing costs faced by households relative to their income appears somewhat elevated compared with longer-run averages. But arguably they are not a significant cause for concern.
Greenspan in 4 years will look back and say the housing bubble was "impossible" to detect.
Some strain from corporate debt burdens became evident as rates of return on capital projects financed with debt fell short of expectations over the past several years. While overall debt has not been paid down, corporations have significantly increased holdings of cash and have reduced their near-term debt obligations by issuing bonds to pay down commercial paper and bank loans.
So increasing long term debt is the answer to all our problems? Push the risk from banks to bond holders, pension plans, and little old ladies. Lovely.
Indeed, one of the most remarkable features of the performance of the U.S. economy over the past year had been the extraordinary gains in productivity. The increase in output per hour over the year ending in the third-quarter--5-1/2 percent--was the largest increase in several decades. That pace will not likely be sustained, but it suggests that the underlying supports to productivity growth have not yet fully played out.
At the rate of loss in jobs, yes he is correct. It is not sustainable.
Unfortunately, unemployment can and will get a lot higher. |
