Great section on Greenie in Noland's latest:
prudentbear.com
February 12, 2003 - Representative Bernard Sanders: “Mr. Greenspan, I always enjoy your presentation, because frankly, I wonder what world you live in.”
Alan Greenspan does appear increasingly detached from reality, while his stature in Washington is in strikingly steep decline. For a senator to call (rather disrespectfully) for the Fed Chairman’s resignation on national television is in stark contrast to the idolatry of too many years past. And there is no denying that Greenspan’s analysis is poor and lacking of credibility, even to those that have revered him. He is clearly overstating the current economic impact from the imminent conflict with Iraq. In the same vein, he is determined to disregard the severe economic maladjustments imparted over his long tenure. His unrelenting fixation on some heroic productivity miracle is an historic blunder. And, importantly, he is seemingly hopelessly distracted from the critical issue of the impending financial and economic quagmire.
Chairman Greenspan continues to trumpet the exceptional performance of contemporary finance and the U.S. financial sector specifically, while appearing oblivious to the developing dislocations throughout “structured finance.” He cannot say enough postive things about the household housing/mortgage environment, but then plays cautious when it comes to its Master, the GSEs. He can't have it both ways. And, remarkably, in just two days of testimony he at the same time disappointed the Administration and the “Keynesian” inflationists. Perhaps Dr. Greenspan has been rattled by the energy price spike and heightened inflationary pressures. Things simply could not be more fascinating.
Greenspan Testimony to Senate Banking Committee: February 11, 2003 Q&A
New Hampshire Senator John Sununu: “I have one final question about the mortgage industry. You talked about the degree to which mortgage rates, being at historic lows, have encouraged refinancing, and refinancing activity is at a very high level right now. In the past, you’ve been very candid about your concerns regarding the GSEs and your thoughts regarding changing some of the current legislation that provides benefits to GSEs. Let me talk about one particular reform, which I think is topical because of the Sarbanes-Oxley bill, and that is oversight -- greater oversight or involvement of the SEC in the mortgage market and the secondary mortgage markets in particular. To what extent do you, I guess, support, or would you support SEC oversight or involvement in the GSEs, but to what extent would that affect costs of mortgages and liquidity in the mortgage markets?
Chairman Greenspan: “Without stipulating whether I would agree in any particular proposal, because without seeing the specific proposal, just basically saying that this agency should oversee this part of the economy, I don’t think is enough information. But having said that, the major issue here is to what extent is the subsidy, which is implicit in the GSE debentures, even though they are not legally an obligation of the United States government, they are not backed by the full faith and credit of the United States, it’s the market which presumes that they will be bailed out that effectively enables them to sell mortgages at a number of basis points below what the market would otherwise be. As a consequence of that, some of that does go through into lower mortgage interest rates, but as best we can judge, it is a very small number. So I’m not at all convinced that many of the proposals really make all that much difference to the secondary mortgage market or to the level of mortgage interest rates to the American public.
My comment: The “major issue” is certainly not related to any nominal “subsidy” shared amongst the GSEs, their shareholders, and the American homeowner. Chairman Greenspan’s analytical framework focuses on the marketplace’s perception of implicit backing of the U.S. government, which “enables them to sell mortgages at a number of basis points below what the market would otherwise be.” From this perspective, a few “basis points” would surely seem unworthy of alarm. But this completely misses the critical issue of unfettered contemporary money and Credit creation. Today, their “government-sponsored” status has created a momentous market distortion. The GSEs have the capacity to issue unlimited liabilities (monetary liabilities, as well bonds and mortgage-backs) with virtually no impact on borrowing costs (abrogating the relationship between supply, demand and the price of Credit). This structure has allowed virtually the entire country to refinance mortgages – creating unprecedented new mortgage debt in the process – while borrowing rates have declined to 40-year lows. This is no less than an absolute breakdown in the critical market pricing mechanism for Credit. The critical issue is the recognition of this dangerous market distortion and the necessity of avoiding government guarantees (explicit and implicit). And in the case where market perceptions of implied guarantees foster Credit excess and fledging distortions, the Fed must move quickly and aggressively to regulate against self-reinforcing Credit and speculative excess.
Georgia Senator Zell Miller: “This also is a question that comes from personal experience. I’m sitting here between two former governors, one’s left, but from time to time -- I don’t know about them, but from time to time, we get to thinking that maybe it would be better to be back in the statehouse. Except right now, it’s not too good back in the statehouse. And so my question to you is, do you think the Congress should address in any way the budget shortfalls that the states are having? And if so, what would be your approach?
Chairman Greenspan: “This is a difficult question, largely because the source of the problem in many of the states, as you know, Senator, has been that with the fairly substantial surge in revenues that the states had, in many cases, and it’s hard to know how many, permanent programs for expenditures were financed. And to a large extent, because the tax rate on capital gains and options and the like are --or, I should say the tax rate on capital gains in the states are pretty much equivalent to the regular income tax rates, since the adjusted gross income from the federal returns are what are used for the income tax where it is applicable for the states. And we saw a very big surge in federal revenues, but for some states, because the tax rates are relatively higher, they saw an even greater surge. So that you have to weigh the fact that some of the states overexpended and should and will and are appropriately pulling back, and others didn’t. And the question is, how does one – how does the Congress or the federal government appropriately handle that without essentially treating those who were not sufficiently conservative t contain their funds from those who are less conservative? In other words, how does one make a program which is fair to everybody?
I have no objection, obviously, to having federal funds go to the states. That’s – we’ve been doing that for decades. But I must admit, I do have some problems how one - how would one in fairness create a program which did not essentially benefit those who are the least conservative in their programs relative to those who were. If that can be done, then I think that there are obvious arguments in favor of it.”
My comment: Dr. Greenspan explains this most important and difficult issue quite clearly, although he certainly avoids accepting responsibility for the unfolding crisis in state and local government finances. It cannot be explained too many times that this quagmire is the predictable consequence of the massive inflationary surge that has so distorted the entire U.S. financial and economic system since the mid-to-late 1990s. Wild money, Credit and resulting speculative excesses created inflated revenues (for taxpayers, homeowners, investors/speculators, businesses, industries, lenders, and governments). As one would expect, most state and local governments responded to this apparent bonanza by increasing spending. Why wouldn’t they - especially when the talk from our top central bankers was of New Eras and economic miracles? Politicians, again not-surprisingly, often found it advantageous to reduce fees and taxes. The self-reinforcing inflationary bulge had disparate distorting affects on revenues, costs, and the general structure of demand. More recently, rampant mortgage Credit inflation has displaced the stock and corporate bond market Bubbles, again with disparate inflationary manifestations. Government revenues are now de-Bubblizing, while costs are not. And as Dr. Greenspan articulated, there is today no easy solution. Importantly, the necessary painful adjustment period for state and local government finances should be recognized as a microcosm for the tough medicine necessary to treat the maladjusted U.S. Bubble economy. The cure will in no way be found with only greater inflation. As Dr. Richebacher has always explained to us, “The only “cure” for a Bubble is to not allow it to develop.”
Texas Representative Ron Paul: “I have a question relating to the speech that you gave at the economic club in New York in December. Because you introduced your speech with three paragraphs dealing with gold and the -- and monetary policy. And you made some very pertinent points about gold, indicating that from the year 1800 to 1929 the price levels were essentially stable under gold. And after we got rid of the gold restraint on the monetary authorities, prices have essentially increased by over tenfold since that time. But you also follow that by indicating that inflation, when it was out of control in 1979, monetary policy changed direction in a way, and they were able to take care of inflation, more or less conquer inflation, and that now you are more or less not concerned about inflation, that your concern, really, is about deflation. And it was interesting that you brought up the subject of gold, of course. And there’s a lot of speculation as to exactly why you did this and what this means.
But my question deals with whether or not we should forget about inflation, whether or not this has been dead and buried. Federal Reserve credit for the last three months has gone up at the rate of over 28 percent. Inflation is a monetary event, so therefore we have monetary inflation. The median CPI is almost going up at twice the rate as the CPI, close to 4 percent. The Commodity Research Bureau index is going up in the last 15 months over 35 percent. Gold is up 36 percent over 18 months, or 15 months. Oil is up 60 percent. So we have a lot of inflation. And we have medical care costs skyrocketing, housing costs going up, the cost of education going up, the cost of energy going up. And to assume that we shouldn’t be concerned about inflation, all we can do now is print money, I would suggest that this is what we’ve been doing for three years, the monetary authorities. We’ve ... you’ve lowered the discount rate 12 times, and there's still no signs of good economic growth. So when - when will you express the concern about an inflationary recession? Because that to me seems like our greatest threat, because that has existed before, we even had a taste of it in the ‘70s. We called it stagflation. So I’d like you to comment on that as well as follow on your comments on just why you might have brought up the subject of gold as the New York speech.
Chairman Greenspan: “First of all, we have not lessened our concerns about inflation. Indeed, our general presumption is that we seek stable prices. And stable prices mean no inflation or deflation. The reason I raised the issue of gold is the fact that the general wisdom during the period subsequent to the 1930s is that as we moved to essentially a fiat money standard, that there was no anchor to the general price level. And, indeed, what we subsequently observed is, as you point out, a very marked increase in general price levels, indeed, around the world as moved ourselves from commodity standards, and specifically gold. I had always thought that the fiat money system was chronically and inevitably an inflation vehicle, and indeed, said so repeatedly.
I have been quite surprised, and I must say, pleased by the fact that central bankers have been able to effectively simulate many of the characteristics of the gold standard by constraining the degree of finance in a manner which effectively has brought down the general price levels. The individual price levels to which you allude are certainly correct. I might say the gold and the oil issue are clearly war related and not fundamental. But we still -- looking at the broadest measures of average inflation, and the best statistics that we have, still indicate very low inflation with no evidence of an acceleration. That does not mean, however, that we believe that inflation is somehow inconceivable anytime in the future. We will maintain a considerable vigilance on the issue of inflation, and are looking all the time for evidences of an emergence of inflation, which at this particular time we do not see. But that does not mean that we believe inflation is dead and that we need not be concerned about it. We will continue to monitor the financial system as best we can to make certain that we keep prices stable. They are stable now, and we hope to be able to continue that indefinitely into the future.”
My comment: There has been considerable debate in the gold community regarding the intent of Greenspan’s recent observations on gold. I think his response to Representative Paul’s poignant question clarifies the issue. Instead of laying analytical groundwork for a future return to some type of gold-backed monetary standard, Chairman Greenspan is propagating the opposite: Although central bankers did get off to a quite rocky start in their management of a global fiat monetary regime, their experience and newfound discipline has evolved into a system that “effectively simulates” the stability of a gold-anchored monetary regime. Indeed, Greenspan’s comments are consistent with Fed Governor Bernanke’s recent assertion that central bankers’ commitment to “price stability” has provided a solid “anchor” for contemporary monetary systems. That such comments could be made nowadays (with a straight face) – after recurring global financial crises and a bursting of an historic global stock market Bubble, while in the midst of out of control U.S. (and, to a lesser extent global) mortgage lending excess, out of control U.S. trade deficits, a faltering dollar (world’s reserve currency), and surging gold, energy, and commodity prices – is simply incredible. The faltering global financial system is absolutely anchorless and heading towards the rocks. Skipper Greenspan, refusing to heed increasingly desperate warning calls from the upper-deck, is locked in his quarters with the sheets pulled over his head. |
