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Tuesday, September 11, 2007 11:56 PM


No Greenspan, Conditions are NOT Like 1998


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The Wall Street Journal is reporting Greenspan Says Turmoil Fits Pattern

Former Federal Reserve Chairman Alan Greenspan said cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 current market turmoil is in many ways "identical" to that which occurred in 1987 and 1998, when cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 giant hedge fund Long-Term Capital Management nearly collapsed.

"The behavior in what we are observing in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 last seven weeks is identical in many respects to what we saw in 1998, what we saw in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 stock-market crash of 1987, I suspect what we saw in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 land-boom collapse of 1837 and certainly [cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 bank panic of] 1907," Mr. Greenspan told a group of academic economists in Washington, D.C., last night at an event organized by cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Brookings Papers on Economic Activity, an academic journal.

Bubbles can't be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and "stopped cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 nascent stock-market boom," but when stopped, stocks took off again. "We tried to do it again in 1997," when cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Fed raised rates a quarter of a percentage point, and "cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 same phenomenon occurred."

"The human race has never found a way to confront bubbles," he said.
The truth of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 matter is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Fed (and in particular Greenspan) has embraced every bubble in history, adding fuel to every one of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365m. Let's consider cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 last two bubbles.

The Fed's Role in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 DOTCOM Bubble

Acting in misguided fear of a Y2K calamity, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Fed stepped on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 gas with unnecessary liquidity, having previously stepped on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 gas to bail out Long Term Capital Management in 1998.

And after warning about irrational exuberance in 1996, Greenspan embraced cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 "productivity miracle" and "dotcom revolution" in 1999. Mid-summer of 2000 Greenspan believed his own nonsense, and right as cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 dotcom bubble started to burst, he started to worry about inflation risks.

The May 16 2000 FOMC minutes prove this.
The members saw substantial risks of rising pressures on labor and ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r resources and of higher inflation, and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y agreed that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 tightening action would help bring cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 growth of aggregate demand into better alignment with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 sustainable expansion of aggregate supply. They also noted that even with this additional firming cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 risks were still weighted mainly in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 direction of rising inflation pressures and that more tightening might be needed.

Looking ahead, furcá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r rapid growth was expected in spending for business equipment and software. ... Even after today's tightening action cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 members believed cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 risks would remain tilted toward rising inflation.
How could Greenspan have possibly been more wrong? Over cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 next 18 months CPI dropped from 3.1% to 1.1%, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 US went into a recession and capex spending fell off cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 cliff.

The Fed's Role in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Housing Bubble

In 2001 Greenspan went overboard cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r direction embarking on a campaign that eventually slashed interest rates to 1%, while embracing cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 miracle of derivatives, and encouraging consumers to get into ARMs along cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 way.

And right as cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 bubble was busting Greenspan dismissed cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 idea of a national housing bubble.

No National Housing Bubble

Flashback May 21 2006
Greenspan says "Housing Prices Won't Fall Nationally".

History suggests that betting against Greenspan is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 correct thing to do. Thus I mockingly talked about his call on May 27 2006 in Greenspan Predicts Housing Bust.

Confronting Bubbles

As for "confronting bubbles", cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Fed foolishly only watches (takes action on) consumer prices. Thus cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Fed ignores expansion of credit when that credit fuels asset bubbles as opposed to prices of consumer goods.

The Fed could easily target credit with higher interest rates if it cared to, but it does not care to.
This is not a matter of attempting to identify bubbles in advance, this is a matter of attempting to identify credit conditions that create bubbles. And cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 fact is, runaway expansion of credit fuels one of two things (or both) in some combination: asset bubbles and/or consumer prices increases.

Bernanke is equally as bad as Greenspan, if in fact not worse, by supporting positive inflation targets. (See Inflation Targeting is Flawed and/or Can cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Fed control prices? for more on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 silliness of inflation targeting)

Is it 1987 or 1998?
  • In 1987 we had cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 internet revolution to look forward to. Yes that was a productivity miracle but it also allowed cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Greenspan Fed to open cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 credit spigots wide open because rapidly increasing productivity is highly disinflationary.
  • In 1998 as cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 internet boom was starting to peak cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re was still one more bubble up cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 bubble meister's sleeve: The Housing bubble.
  • In both years cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ability of consumers to take on (and afford) debt was vastly different than it is today.
  • In both years cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re were numerous new credit products to exploit coming up on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 horizon: CDS, CDO, SIV, ABS, LBO, conduits, MBS, "Swaptions", etc, etc. etc. See Swaptions and Financial Turmoil for more on swaptions and off balance sheet conduits at Citygroup (C), as well as leveraged buyout turmoil at Citigroup (C), JPMorgan Chase (JPM), Lehman (LEH), and Bear Stearns (BSC).
  • Massive junk bond financed share buybacks, LBOs, and speculation in mergers, and swaps, etc were on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 horizon in 1998. Those are now history.
  • Credit standards were both poised to fall to insanely low levels but are now swinging back cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r direction. In fact, loose credit standards made a secular low that will not be seen again for decades, if ever.
  • Off balance sheet garbage not marked to market was never as high as it is today.
  • Various carry trades fueled all sorts of speculative investments. Those carry trades have yet to be unwound, but cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y will be. And cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y are orders of magnitude bigger than anything we saw in eicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r 1987 or 1998.
  • The China factor is vastly different today than it was even as late as 1998. The resultant deflation in wages as a result of outsourcing and manufacturing moving to china and service jobs to India is still being felt.
  • There is now $300-$500 trillion (yes trillion with a T) in derivatives floating around, depending on who you believe. But even cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 smaller number is many orders of magnitude greater that eicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r 1987 or 1998.
To suggest that conditions are "identical" to eicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r 1987 or 1998 Greenspan is one or more of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 following:
  • A misguided fool
  • Lying
  • Blinded by his own arrogance
  • Attempting to rewrite history
  • Attempting to lay cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 blame on Bernanke
  • Some combination of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 above
Whatever it is, Greenspan is above all .... wrong. Furcá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rmore, Greenspan has been consistently wrong at every major turn in his entire history as Fed chair. The only thing he has been correct on is his unwavering support for free trade. And on that issue ironically enough, hardly anyone listens to him.

With that in mind I have to wonder just what Pimco thinks cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y can get out of hiring Greenspan as an advisor. All I can figure out is: a) Pimco is hoping somehow to cash in on Greenspan's list of contacts, or b) Pimco is asking for Greenspan's advice and betting cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r way.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

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