Page 1 of 3 BOOK REVIEW The Fed's king of bubbles Greenspan's Bubbles - The Age of Ignorance at the Federal Reserve
by William Fleckenstein
Reviewed by Julian Delasantellis
Even in old Russia under the authoritarian rule of the Tsars, there was a
tradition that even the lowliest peasants and workers could petition the Tsar,
their "little father", their batiushka, for redress of grievances or
intercession with a problem.
One such petition occurred in 1875, in the Ukraine’s Chigrin District. An
outside agitator had tried to organize resistance, to stir up trouble, with the
local peasantry. After being found out and expelled, a petition asking for Czar
Alexander II’s forgiveness was drafted by the locals.
"How could we, simple, backward people, not believe in the
kindness of our beloved monarch, when the whole world attests to it, when we
know of his love and his trust for his people, his concern for them."
If you think that such bootlicking fawning obsequiousness could never happen in
the United States, freedom’s home, the land where the people rule and the
rulers serve, you haven’t watched a Congressional hearing with a US Federal
Reserve Board chairman recently.
It
happens two or three times a year, and it’s always the same. After an exchange
of pleasantries, the Fed chairman delivers his opening statement. During the
Alan Greenspan era, this invariably meant about a half hour of indecipherable
economic gobbledygook flowing thick like molasses; the financial markets could
understand what was being said, and frequently reacted violently in response,
but few average citizens could. (Hillary Clinton recently announced that, if
elected, she wanted Greenspan to head a commission studying the foreclosure
crisis, although, in her continuing effort to prove herself just one of the
guys downing shots and beer nuts around the bar in working class Pennsylvania,
she admitted that "I never understand what he's saying.")
Then the committe members are permitted to question the great oracle.
Sometimes, you can tell that the solon is just reading something written by
somebody on his staff who once passed an economics course. Sometimes, since the
great augur was obviously in possession of wisdom in all matters of the
physical domain, the questions might be related to areas totally beyond the
chairman’s purview, like, "Tell me, Mr Chairman, what’s your opinion, chains or
studded snow tires?" Frequently, like a local asking for the blessing of a
Mafia Don for the success of a new enterprise, the questions would be totally
parochial, like, "Tell me, Mr Chairman, isn’t the real problem with our economy
the lack of funding for post offices in southwestern Wyoming?", asked by, of
course, the representative from southwestern Wyoming.
But the main phenomenon of this process was that the questions were almost
always asked with the maximum amount of awe, deference and respect, and,
invariably, the questioner would not get a straight answer to his question.
With the US economy now falling into recession, the questioning for the current
oracle, Federal Reserve chairman Ben Bernanke, are becoming more pointed, even
more desperate. At a recent hearing, Representative Elijah Cummings of Maryland
tried to butter up and cajole the chairman into uttering some manner of
actionable, understandable wisdom about the subprime crisis by telling him that
"You’re the expert. You’re the one that we depend on. You’re the superstar."
But veteran Senator Edward Kennedy of Massachusetts was tiring of the charade.
He questioned the chairman about how the states were going to deal with the
budget deficits the slowdown was creating. He even had the temerity to raise
his voice to the Great God!
"I’m asking what we ought to be doing. What’s your position with regard to the
states? Are you going to provide help and assistance to the states so that they
do not have to cut back in terms of services?"
When Kennedy received no answer to his question, he became even more insistent.
"What’s your recommendation? We have monetary and fiscal policy. You have
responsibility in monetary, Congress does in fiscal policy. But you have to
have some position in terms of the economic crisis that we’re facing."
But still, the statue of the deity remained silent. Kennedy tried one more
time, his voice almost rising to a shout.
"You’re not prepared to tell us, to try and provide help and assistance to the
states ... to try and help and assist families, working families."
But just as there was no answer when Jesus asked why God had forsaken him on
the Cross, there was still no answer from mammon’s great God of money. Kennedy
moved to another question.
Yes, the subprime crisis is hitting home, and Americans are looking for
someone, a scapegoat, to blame. Everybody knows that the blame can’t reside
with the US Congress, for it has been a very long time since the focus of their
legislative efforts was something other than gay marriage and flag burning.
Sowing the seeds of crisis
Since this is an issue that seems to be related to matters of money, it is no
surprise that more than a little focus is falling on the shoulders of the man
who was Federal Reserve chairman when the seeds of the current crisis were
planted and nurtured. We're starting to see books arriving at the bookstores
dealing with the current crisis. Next week Charles R Morris’ The Trillion Dollar
Meltdown: Easy Money, High Rollers and the Great Credit Crash will be
published by Public Affairs Books. Next month, George Soros’ The New Paradigm
for Financial Markets: The Credit Crisis of 2008 and What It Means will
be at your local bookstore, although it’s already available to be purchased and
read online.
But the award for the author who seems to have gotten to the publisher first on
this matter goes to MSN Money columnist and money manager William A
Fleckenstein, who, with Frederick Sheehan, has just had published Greenspan’s
Bubbles - The Age of Ignorance at the Federal Reserve.
Last September, with the crisis not nearly as serious as it is now (it was
basically then still well contained in the banking and financial system and had
not yet spread out into the general economy), Greenspan published the august
weighty tome of his autobiography, The Age of Turbulence (for review see
"Reaping
what is sown, Asia Times Online, October 4, 2007.)
A passage in his book obviously seemed to have been ordered by his editor to
make the offering at least somewhat relevant to the rapidly deteriorating
situation, but still, Greenspan stood tall and true. Back then, in happy long
ago last September, Greenspan was proud of his role in the early part of this
decade’s housing boom, but, as to the possibility that things were getting out
of hand, he noted that "The Fed tracked such developments closely". I noted
that, even if that was so, Greenspan’s Fed did nothing to stop the building
housing bubble. Fleckenstein goes even further. Not only did Greenspan not stop
it, his actions actively caused it.
Greenspan was first appointed by Ronald Reagan as Fed chairman in the summer of
1987, but, according to Fleckenstein, this was hardly the commencement of his
Reign of Error.
Both when president of the economic consulting firm Townsend-Greenspan and
president Gerald Ford’s chairman of the Council of Economic Advisors from 1974
to 1977, Greenspan’s predictions were notable in that they were invariably most
bullish when things were just about to turn black, and most bearish just before
the return of good times.
At Greenspan's confirmation hearing to be Federal Reserve chairman in July,
1987, Senator William Proxmire wished him well, sending him off on the
encouraging note that "when you get to the Federal Reserve Board, everything
will come up roses. You can’t always be wrong".
As a private citizen, in the mid 1980s, Greenspan also publicly supported the
ultimately disastrous deregulation of America’s savings and loans housing
finance banks, failing to mention that at the time he was a paid consultant to
Charles Keating’s Lincoln Savings and Loan. This bank’s 1989 bankruptcy cost
the US taxpayer US$2.5 billion, with Keating subsequently convicted on charges
of criminal fraud.
But it was in the 1990s that Greenspan provided the US, and the world economy,
with the gift that, as the subprime crisis takes more and more victims every
day, just keeps on giving.
Out goes H W
In the early '90s, with the US economy struggling under the twin burdens of the
S&L crisis and the threefold rise in the price of oil that followed upon
Saddam Hussein’s conquest of Kuwait, Greenspan aggressively lowered the Federal
Funds target rate, from 9.75% in February, 1989, to 3%, in September, 1992,
which was, and I’m sure this was just a coincidence, two months prior to fellow
Republican George H W Bush’s ultimately futile attempt at re-election.
Ok, so, what if you were somebody, maybe retired or living on a fixed income
pension, who had come to rely on the fat yields previously available in bank
certificates of deposit and money market mutual funds? How would you make up
that lost income?
You’d probably be forced into shifting your investments to stocks and bonds, or
stock and bond mutual funds. According to chairman Greenspan, that was just
fine. In 1994 Senate testimony cited by Fleckenstein, Greenspan elaborated on
this phenomenon.
Lured by consistently high returns in capital (stock
and bond) markets, people exhibited increasing willingness to take on market
risk by extending the maturity of their investments. In retrospect, it is
evident that all sorts of investors made this change in strategy, from the very
sophisticated to the much less experienced. One especially notable feature of
this shift was the large and accelerating pace of flows into stock and bond
mutual funds in recent years. In 1993 alone $281 billion moved into these
funds, representing the lion’s sharer of net investment in the US stock and
bond markets. A significant portion of the investment in longer term mutual
funds undoubtedly was diverted from deposits, money market funds, and other
short-term lower yielding, but less speculative investments.
Thus,
Greenspan led US investors out of the bondage of low-yielding investments to
the rich promised land of the stock market.
But every earthbound paradise has its serpent. Here, in essence, and for the
rest of his term, Greenspan seemed to feel and act as
Head
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Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
It
happens two or three times a year, and it’s always the same. After an exchange
of pleasantries, the Fed chairman delivers his opening statement. During the
Alan Greenspan era, this invariably meant about a half hour of indecipherable
economic gobbledygook flowing thick like molasses; the financial markets could
understand what was being said, and frequently reacted violently in response,
but few average citizens could. (Hillary Clinton recently announced that, if
elected, she wanted Greenspan to head a commission studying the foreclosure
crisis, although, in her continuing effort to prove herself just one of the
guys downing shots and beer nuts around the bar in working class Pennsylvania,
she admitted that "I never understand what he's saying.")
