Why Alan Greenspan is a menace
Greenspan’s easy money policies precipitated the market bubble, and his speeches made folks feel and act as if nothing bad could happen. He was wrong, and the public is paying the price.
By Bill Fleckenstein
Right now, it is the quiet season on the earnings front, while on the war front the market continues to mark time. I thought I would put the lull to good advantage this week by talking about Alan Greenspan, and why I regard him as such a menace.Fast filing
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Why does this matter? I believe that Alan Greenspan fomented what was the greatest mania in the history of the world. Its ending was not some self-contained event, but rather an ongoing aftermath, whose painful consequences continue to take people by surprise. I believe, however, that as the aftermath unwinds, no one need be caught by surprise if they understand what came before.
Many people do not realize that it is the unwinding of the mania that has rendered the 12 rate cuts since early 2001 and the 2001 tax cut useless in terms of helping the economy and the stock market. They wonder why the Fed chairman seems to have lost his "magic" touch at managing the economy. I hope to show in my column this week that he had no magic touch.
People want to believe that the government or the Fed or somebody can do something to make this bad period go away. In fact, no one can manage an economy. Just ask the central planners from the former Soviet Union. And, unfortunately, bubbles cannot be cured. They can only be prevented. People who understand this are not tempted to look to the Fed, the government or Wall Street for advice or help.
For the many new readers who are unfamiliar with my longstanding opinion of the Fed chairman, and, as a review for regular readers of "The Contrarian Chronicles," I have selected four articles as background. Though Mr. Greenspan has little use for what history can tell us about bubbles, the history of this bubble rouser should prove most useful for readers. The pieces are:
"Spinning Financial Illusions: the Story of Bubblenomics," a speech I gave at the Contrary Opinion Forum in October 1999.
"Alan Greenspan, Friend or Foe," my March 7, 2000, rebuttal of his speech delivered at the top of the bubble.
"Alan's Monetary Insurance Policy Features Lifetime Benefits for Acute and Chronic Cluelessness," circa Feb. 27, 2002. This was my assessment of his speech two years into the bust, which I labeled "I Still Don't Get It."
(To see these, click on the links at left.)
In addition, see "They won't ring a bell at the bottom." I wrote this last September, following his infamous speech at Jackson Hole, Wyo., where he said the Fed neither caused the bubble nor ended it.
Fiscal Fed fake
In view of his ongoing cluelessness (demonstrated most recently before the Senate Banking Committee a few weeks ago), I must again break my promise not to speak about Easy Al. His boundless arrogance leaves me no other choice. In a novel twist during his fool-on-the-Hill (formerly called Humphrey-Hawkins) testimony, our unelected self-important king devoted half his time to discussing fiscal rather than monetary policy. I guess his logic went something like this: “I caused the biggest bubble in history, but since the headline data still look OK (even though anyone operating at ground level knows the economy feels awful), I'll just attribute all the economic weakness to geopolitical stuff, I'll vapor on about fiscal policy, and maybe no one will notice.”
He actually had the nerve to blame our economic trouble on "concerns about corporate governance, which intensified for a time, were compounded over the late summer and into the fall by growing geopolitical concerns. In particular, worries about the situation in Iraq contributed to an appreciable increase in oil prices. These uncertainties, coupled with ongoing concerns surrounding macroeconomic prospects, heightened investors' perception of risk, and perhaps their aversion to such risk."
So, by implication, were it not for those concerns, everything would be OK. I think anyone in the eighth grade probably could figure out that this is simply not the case. If that were true, the economy wouldn't have needed and been unresponsive to all those rate cuts that pushed the Federal Funds rate from 6.5% in 2001 to 1.75% today.
30-year trailing yearnings
He naturally went on to credit tax cuts and productivity – the same lame argument that allowed him to rationalize the bubble -- for why things are as "good" as they are. "Underlying productivity has accelerated considerably in recent years," he crowed. Well, one of the reasons for this "recent" acceleration is that the prior productivity he had glorified during the bubble was revised lower. Of course, he wouldn't want to bother mentioning that what he has done is not as great as what William McChesney Martin did as Fed chairman in the 1950s and 1960s. As my wise friend Jim Grant noted last spring, productivity growth averaged 2.6% during Martin's Fed tenure, compared with an average growth of 1.6% since King Al's do-it-yourself crowning in 1987.
Then it was on to housing, where Al basically said that as long as housing prices keep going up, people can keep taking money out and there aren't going to be any problems. He also correctly noted that taking money out of one's house has helped to hold the economy together. So, as we deal with the aftermath of the biggest speculative activity the country has ever seen, he credits leveraging up one's house for shoring up the economy, and sees nothing to fret about. (The housing bubble hasn't come unstuck, so everything is OK.) Bubble-blind, he opined: "Other consumer outlays financed partly by the large extraction of built-up equity in homes have continued to trend up. . . . Moreover, owing to continued large gains in real estate values, equity in homes has continued to rise, despite sizable debt-financed extractions."
Green-stamped pink slips
Further, he cited how consumers' debt obligations are below their previous peaks "and do not appear to be significant cause for concern at this time." Of course, that presupposes you still have your job, because if you don't have your job, you have a real problem. Of course, that is the trouble the country faces in large measure, as all those Chicagoans who recently turned out at dawn on rumors of hiring by Ford could testify. (See "3 investing myths you shouldn't buy into.")
There is a real problem in the job market, partly because corporate America is suffering through a period of profitless prosperity, thanks to all the excess capacity that was created by the misallocation of capital from the bubble Greenspan fomented.
But nonetheless, he went on to ignore all that as he dredged up his favorite economic elixir, information technology, from which "dramatic gains . . . have markedly enhanced the ability of businesses to address festering economic imbalances before they inflict significant damage." It is rather surprising -- given what is going on in corporate America and the attendant lack of profits and the attendant layoffs spawned by the lack of profits -- that he can say information technology has allowed businesses to adjust so that a retrenchment isn't so severe. Also, I don't think corporate America sees it his way. Recently, in fact, McDonald's (MCD, news, msgs) shut down a huge IT project launched during the bubble as part of a cost-saving measure. That is the most visible example I am aware of, but I'm sure there are many others. So, this claim is complete nonsense.
Reinventing the weasel
Then, after basically wandering around incoherently trying to say that everything is better than it is, he spent half his time talking about fiscal policy, the budget process and the need for more discipline. This is something I happen to agree with. But it's sort of ironic that he could lecture Congress about discipline when, in his conduct of monetary policy, he categorically refused to be an adult and, in fact, acted like a dolt by using productivity to rationalize the bubble.
Perhaps the most disingenuous and sleazy comment of all was that the present inflation adjustments for individual tax brackets basically are costing the government money. He suggested that the government switch its present method of using the "official CPI index" to a "chained CPI index" that is even lower. Had we done this last year, all things being equal, it would have cost taxpayers an extra $40 billion (never mind the fact that the CPI understates the cost of living in the first place).
So, the man who would be czar, who in reality is the most incompetent and irresponsible Fed chairman in history, wants Congress to raise your taxes in new and "improved" ways. Unable to conduct monetary policy, he now wants to move the goalposts and lecture on fiscal policy. His ineptness is overshadowed only by his lack of shame. |
