Hi Maurice, for your morning reconsideration, a post from me to you quite some time ago;0)
Message 15481977
"My issue is also more particularly with the maestro. He was not brilliant, but people treated him as so. He is filled with vanity, incoherence, and is now possibly senile. He is failing to understand. He needs to step down. He sought popularity, away from Volcker’s shadow"
and now this ...
mips1.net
Is Alan Greenspan demented or just senile?
By: Tim Wood
Posted: 2002/09/05 Thu 14:00 | © Miningweb 1997-2002
NEW YORK -- What an astonishing speech by Alan Greenspan at Jackson Hole, Wyoming last week. I would have written about it sooner, but I have had to read it repeatedly to be sure it's for real.
The Jackson Hole event is an annual pow-wow for the Kansas City Fed (who knows what yellow brick road takes Kansas to Wyoming…). It was themed "Rethinking Stabilization Policy". Cynics might say the "rethinking" bit was unnecessary, simply substitute "Fed" and you've got exactly the same insecurity.
The Greenspan speech reeked of defensive legacy building, a lot like Bill Clinton's obsession with squeezing in a Palestinian-Israeli peace before he left office; anything to wash away a few of Monica's stains. More than anything, the true Greenspan / Rubin / Summers legacy jumps out to grab and shake you violently – an unusual, borderline compulsive obsessive, preoccupation with the stock market by monetary and treasury authorities.
Greenspan was already in defensive mode last year when he opened with this zinger that anticipatorily deflected blame: "The rapid technological innovation that spurred the advancement of the 'information economy' has resulted in some dramatic capital gains and losses in equity markets in recent years." In other words, blame Bill Gates and Larry Ellison, the Fed was just an innocent bystander.
And who can forget last year's howler: "…The propensity to spend out of realized gains is likely to be greater than the propensity to spend out of unrealized gains." No kidding.
Anyway, guess what, Joseph Schumpeter was the posthumous guest of honour at Jackson Hole as Greenspan reprised his 2001 opening: A wave of innovation across a broad range of technologies, combined with considerable deregulation and a further lowering of barriers to trade, fostered a pronounced expansion of competition and creative destruction."
Greenspan still has that annoying intellectual tic – a belief that the New Economy was not just some happening thang (like, I mean), but real. At Jackson Hole he said that while it had fostered instability in a micro sense, the macro benefits were worth it since the economy became more resilient and the Fed more effective. Really.
"The massive drop in equity wealth over the past two years, the sharp decline in capital investment, and the tragic events of September 11 might reasonably have been expected to produce an immediate severe contraction in the U.S. economy. But this did not occur. Economic imbalances in recent years apparently have been addressed more expeditiously and effectively than in the past, aided importantly by the more widespread availability and more intensive use of real-time information."
That is the heart of Fortress Greenspan, but it is compromised by serious breaches – the "apparently" qualifier and the mystical alchemy that turned the chaos of individual business failures into a soothing balm for a ten trillion dollar economy.
It might be the harmless ramblings of a man desperate to collect an overdue pension, but Greenspan tied a logic knot that defies fixing. He said the Fed recognized a bubble in the mid '90s, and scrambled to know what to do about it, but then decided that it couldn't know what a bubble was until it burst:
"The struggle to understand developments in the economy and financial markets since the mid-1990s has been particularly challenging for monetary policymakers. We were confronted with forces that none of us had personally experienced. Aside from the then recent experience of Japan, only history books and musty archives gave us clues to the appropriate stance for policy. We at the Federal Reserve considered a number of issues related to asset bubbles--that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact--that is, when its bursting confirmed its existence."
Does this inspire any confidence? Any at all? If you can't figure this sort of thing out with all the resources of the Fed, how do you manage a strong dollar or inflation? Does it even matter what MZM is anymore?
It is fascinating that Greenspan suffers a Freudian lapse in attributing the bubble to a form of economic schizophrenia – stocks over inflated independently of the economy: "Pre-empting [the bubble would have required] the central bank (note the casual use of "central bank" – it used to be avoided at all costs) [to] induce a substantial contraction in economic activity--the very outcome we would be seeking to avoid." Forgive me, but in 1996, with all that irrational exuberance stuff, wasn't it better to take away the booze then and prevent the monstrous hangover we now have?
Am I such a stupid slob that I just can't get it?
Greenspan said the Fed was afraid to shrink stock prices back then (aha! an admission that the Fed has a direct line to the S&P 500) because it would just accelerate repricing afterward in the absence of the economy contracting. Then why not just shrink them again and again until people got the message?
This is a cop out. Greenspan is deliberately evading the primary problem which was the misallocation of capital occurring within the businesses issuing that hyperinflated stock. No one buys the notion of a schizoid American economy where stocks are priced independently of underlying fundamentals. Sure, investors misread things, but they were being egged on. A story was written for them by the Fed and they trusted the author.
Maestro claims stock prices just ignored every rate increase. Are we so gullible that we believe that official rates are the sole effective weapon of the Fed? Why does Greenspan say not one word about the Long Term Capital Management rescue? Why nothing about the massive, secretive interventions to insulate the US against Asian contagion in the wake of the Thai baht's collapse in 1997? Or Mexico before that and the latter billions poured into Russia and now South America's toilets? Stupid us, that money never found its way back to the Dow. Why is the property market in the US looking so precarious; why are people buying cars at record levels as unemployment rises?
Greenspan is blowing smoke in our faces in a way that should get him fired.
He further indicts himself with this foolishness: "Nothing short of a sharp increase in short-term rates that engenders a significant economic retrenchment is sufficient to check a nascent bubble. The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion."
I would bet that had LCTM been allowed to fail, and the miserable banking practises of South East Asia been allowed to clear, the right signal would have been sent forcing a retreat from already risky behaviour. Yet there was the Fed saying there was nothing too risky or dubious for it to underwrite. I
ndeed, Greenspan has the temerity to redefine the Fed's purpose as being to span the gaps between business cycles – lift the troughs, ignore the peaks and pray like crazy for lower amplitude and longer cycles.
There is a word for this. Terrifying.
Greenspan blames increased investor appetite for risk for the bubble, but he refuses to address what made them hunger for equity. It's just part of that mysterious economic schizophrenia where we all awoke one morning and decided that Cisco was better than T-Bills. Sure, he blames an unrealistic expectation for increasing corporate profits, but where did that expectation come from; perhaps that madly sloped yield curve and zooming monetary aggregates?
It was your fault, not the Fed's. Got it? Your stupid decision to invest in Enron had nothing to do with rescuing LCTM, okay?
With the Fed now admitting it is powerless to deal with bubbles, Greenspan thinks they might be inevitable. Think about the implications of this. We know that bubbles can be manufactured and there is an enormous incentive to do so. What Greenspan is saying is that the Fed will turn a blind eye to the next Meeker-Blodget project, merely waiting for it to collapse before it takes action.
Are you terrified yet? You should be, because it's all your fault. Now go get a job at the IMF and wait for the next bubble. |
