The Fed is not our friend.
Posted on 03/04/2009 11:02:23 PM PST by dennisw
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The economist Ludwig von Mises is more succinct in his analysis: There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. The basic problem originated with the Federal Reserve when former Fed chief Alan Greenspan lowered interest rates below the rate of inflation for 31 months straight which pumped trillions of dollars of low interest credit into the financial system and ignited a speculative frenzy in real estate. Greenspan has spent a great deal of time lately trying to avoid any blame for the catastrophe he created. He is a first-rate "buck passer". In Wednesday's Wall Street Journal, Greenspan scribbled out a 1,500-word defense of his actions as head of the Federal Reserve, pointing the finger at everything from China's "low cost workforce" to "the fall of the Berlin Wall". The essay was typical Greenspan gibberish. In his trademark opaque language; Greenspan tiptoes through the well-documented facts of his tenure as Fed chief to absolve himself of any personal responsibility for the ensuing disaster. Greenspan's apologia is a masterpiece of circuitous logic, deliberate evasion and utter denial of reality. He says: I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1 per cent rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major. "Not major"? 3.5 million potential foreclosures, 11-month inventory backlog, plummeting home prices, an entire industry in terminal distress pulling down the global economy is not major? But Greenspan is partially correct. The troubles in housing cannot be entirely attributed to the Fed's "cheap credit" monetary policies. They were also nursed along by a Doctrine of Deregulation which has permeated US capital markets since the Reagan era. Greenspan's views on how markets should function were -- to great extent -- shaped by this non-interventionist/non-supervisory ideology which has created enormous equity bubbles and imbalances. The former-Fed chief's support for adjustable-rate mortgages (ARMs) and subprime lending shows that Greenspan thought of himself as more as a cheerleader for the big market-players than an impartial referee whose job was to monitor reckless or unethical behavior. Greenspan also adds this revealing bit of information in his article: The value of equities traded on the world's major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles world-wide, Japan and Germany (for differing reasons) being the only principal exceptions." ("The Roots of the Mortgage Crisis", Alan Greenspan, Wall Street Journal) This admission proves Greenspan's culpability. If he knew that stock prices had doubled their value in just 3 years, then he also knew that equities had not risen due to increases in productivity or demand.(market forces) The only reasonable explanation for the asset inflation, therefore, was monetary policy. As his own mentor, Milton Friedman famously stated, "Inflation is always and everywhere a monetary phenomenon". Any capable economist would have known that the explosion in housing and equities prices was a sign of uneven inflation. Now that the bubble has popped, inflation is spreading like mad through the entire economy. Greenspan is a very sharp man. It is crazy to think he didn't know what was going on. This is basic economic theory. Of course he knew why stocks and housing prices were skyrocketing. He was the one who put the dominoes in motion with the help of his printing press. But Greenspan's low interest credit is only part of the equation. The other part has to do with way that the markets have been transformed by "structured finance". (Derivatives) What's so destructive about structured finance is that it allows the banks to create credit "out of thin air", stripping the Fed of its role as controller of the money supply. David Roache explains how this works in an excerpt from his book "New Monetarism" which appeared in the Wall Street Journal: The reason for the exponential growth in credit, but not in broad money, was simply that banks didn't keep their loans on their books any more-and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they "securitized" it and moved it off their balance sheet. There were two ways of doing this. One was to sell the securitized loan as a bond. The other was "synthetic" securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been "securitized." So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks' balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt. (Wall Street Journal) The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed there was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.
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note to self-—read when more awake, goodnight friends.
Let them print their own money, already.
Oh wait.
ping
Bush warned thirteen times of the pending doom, starting back in 2003. Bwawney “Elmer Fudd” Fwank, Chris “Sweetheart Loan” Dodd, and Maxine “I’m All For Socialism” Waters said there was nothing to be worried about. And THEY got re-elected.
How many bills did Bush submit to Congress? How many times did he ask for media time and address the public on the topic? How many Executive Orders did he draft knowing Congress would have to over ride them to cancel them out?
Bush is as guilty as anyone when it comes to this mess.
As for the Republicans in Congress, they had the majority from 2004 to 2006.
About all I can do is hang my head at the sorry excuse for leadership I have seen out of my party in the last 20 years.
Inside I’m furious at this bunch of jackasses.
bump4later
Imprinted in my mind for some reason was a sentence Bush uttered in a State of the Union address (2004 or 2005?)...”Home ownership has risen to historic or unprecedented levels”, essentially taking credit for it himself.
bump
I remember some of those types of comments, so this makes sense to me. It’s just sad to see folks herald something that in time will cause serious harm to our nation.
Couldn't agree more. Dubya and the GOP are as responsible for the current mess as Bwaney Frank, et al.
Should read, “THE COMING COLLAPSE OF THE COMMUNIST INFESTATION!
Essentially, according to this, he IS to be credited for it:
http://www.freerepublic.com/focus/news/2198532/posts?page=19#19
Bush warned thirteen times of the pending doom,
Freddie and Fannie were part of the problem, but the lion shares properly goes to Alan Greenspan and the Federal Reserve. Freddie and Fannie and Wall Street got drunk at the party, but who gave them the alcohol? The Fed
Neglects to mention M-A-N-I-P-U-L-A-T-I-O-N.
Ever find out where that $550,000,000,000 went on 9.11.2008?
I like Bush ... but you’re “spot-on” in your criticism ...
The Fed is not our friend.
My post wasn’t in support of Bush. I finally severed my fondness of him after the immigration nonsense. This was after several years of dismay ranging between indifference to outright anger. Same goes for our do-nothing Republican Congress!!
I don’t necessarily blame Americans for their anger toward Republicans. But they are morons for thinking Stretch Pelousy, Harry Reid, and Pres. Osama are a good alternative!
Why the Republican Congress and Republican President for SIX YEARS failed to pass any meaningful legislation .. fair taxes, fixing Fannie/Freddie, etc .. all the while playing patty-cake with the RATS and running their OWN earmark bonanza, I’ll never know.
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