Greenspan's Incessant Contradictions

By: Brady Willett | Tue, May 27, 2008
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In yet another attempt to defend his legacy, Greenspan resorts to semantics and outrageous contradiction (FT Article). On the topic of asset 'bubbles' - which Greenspan preferred to completely ignore as they acquired air and help reflate after they burst - he asked the following:

"Is there a bubble today in food, energy, gold, currencies? If so, what specifically should we do about it?"

With all due respect Mr. Greenspan, the more appropriate question is whether or not Fed policies play a role in determining today's food, energy, gold and currency prices. The answer to this question is, of course, yes - when you combine many years of easy/reckless money policies with regulatory neglect you encourage speculation not only in stocks and real estate (as seen during Greenspan's tenure) but also commodities and currencies. Distill a degree of control at the Fed and the financial markets would surely trade less wildly out of control.

This is not to avoid Greenspan's question. After all, it is easy to play along:

In order to combat the 'bubble' in commodity prices, if indeed there is one, you force the CFTC to produce completely transparent COT information on a daily basis, you immediately stop pension funds from investing in commodities, you close the 'swaps loophole' and/or force all speculators to face position limits (See Masters, PDF), and you trot Bernanke and every other major central bank out once a day to explain that commodity prices do not reflect the fundamentals. Within a week the commodities bubble, if indeed there is one, would be busted.

Next, in order to combat the bubble in 'currencies' (perhaps Greenspan should specify exactly which currency he means - wink, wink), you abolish the Federal Reserve. Failing this seemingly extreme measure, you reinstate Volcker as Fed boss and within an hour the currency markets are dealt a deathblow of calm because the dollar bottom is in...

These are some basic ideas to counteract the bubbles Greenspan asks about. Surely there are many more. Incidentally, what didn't come to mind when Greenspan asked the above question is 'keep the printing pressing going full tilt, do absolutely nothing on any regulatory level, and cut interest rates like a madman when you hear a pop.'

After his regular bubble fare, Greenspan turned to discussing the credit crisis with the following:

Mr Greenspan said the most sensible thing to do was "to increase the capacity of our financial institutions to absorb shocks in general. That means more capital".

He said the market was already demanding higher capital on the part of financial institutions in the wake of the crisis. Regulators should allow this market-led process to run its course before deciding to what extent to raise regulatory capital.

But it would in principle make sense to vary the amount of regulatory capital that banks needed to hold at different stages of the economic cycle, he said.

"I have always been in favour of counter-cyclical capital requirements," Mr Greenspan said. "There are virtually no bad loans made at the bottom of the cycle. The bad loans are all made at the top."

Mr. Greenspan, am I reading your words correctly? Are you suggesting that regulators should alter bank capital requirements at different stages of the economic cycle? Did you really say "I have always been in favour of counter-cyclical capital requirements'??? Seriously, are my eyes deceiving me?

In case whatever medication Greenspan is on hinders him from comprehending written text, please find someone to scream this into his best ear: RAISING RESERVE/CAPITAL REQUIREMENTS IS EXACTLY WHAT YOU SHOULD HAVE DONE AS THE SUBPRIME MANIA TOOK ROOT!!!

(Incidentally, as anyone paying attention will have no doubt surmised, Greenspan answered his own question about bubbles with 'counter-cyclical' regulatory measures).

Every Sentence A Fascinating Contradiction

Mr. Greenspan now believes that counter-cyclical efforts should be undertaken by regulators because, as we all know, bad loans are made during the best of times. However, Greenspan apparently also still believes that regulators should keep their grimy paws away from any form of regulation and that it is impossible to accurately recognize anything resembling a 'top' (or 'bubble' nowadays).

For the record, Greenspan cut reserve requirements on banks twice during his tenure (December 1990 and April 1992), and he never raised banking reserve requirements or margin rates. He also failed to adopt any regulatory pressure to try and counter one of the biggest housing manias in U.S. history, even though his peers warned of widespread fraudulent lending practices and housing prices were being bid up to insane levels with the help of many blatant 'bad loans'. And still the confusion gets worse:

On the regulatory side, "I have no doubt that we can very effectively quash a bubble," he [Greenspan] said. It was a question of the costs involved. "What price do you pay in terms of suppressed economic activity?"

But Mr. Greenspan, I thought bubbles were only identifiable after they burst? How do you 'very effectively quash' what can not be seen? Have you been lying to us all these years or is this just another of your many innocent contradictions? Last but probably not the last we hear from him:

The former Fed chief said he would be "fully supportive" of "leaning against the wind" with interest rates when asset prices are rising rapidly if someone could provide a credible framework for doing so. But he said: "I have just not seen any evidence that it is feasible."

Is the man whose policies, or lack thereof, have helped push the U.S. financial markets to the edge of destruction really going down the 'evidence' and 'feasible' path? What, Sir Alan, feasibility study were you adhering to when you allowed financial players to take the Fed hostage and put the entire financial system at risk? What 'evidence', dear sir, did you draw upon to conclude that all financial market history needed to be erased because of your twisted desire to see the markets self regulate (was not the Fed brought to life because of the supposedly dire need to more efficiently regulate money?)

In short, rather than incessantly romanticize about a dreamy anti-bubble handbook we all know doesn't exist, why doesn't Greenspan be honest and admit that he messed up? However hard he tries, Greenspan is not going to convince anyone that his tenure as Fed boss is to be adored by future generations like a Picasso. Rather, the appropriate portrait is that of a lazy regulator that loved to throw a party, and whose cantankerous contradictions after leaving the Fed dumbfounded all.



Brady Willett

Author: Brady Willett

Brady Willett

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