Posted on 02/12/2009 4:43:58 AM PST by ikeonic
Pop goes Easy Al's bubble
By Ikeonic
...and now consumers are beginning to switch from irrationally exuberant speculators to savers and debt payers.
What does this have to do with Alan Greenspan? Allow me to explain.
From CnnMoney.com:
The savings rate, as calculated by the Commerce Department, hit 3.6% in December. ... Until the economic upheaval of the past year, the savings rate was at historic lows, averaging only 0.5% from the start of 2005 through April 2008. The savings rate occasionally even fell below zero, indicating that Americans were dipping into savings to keep spending at a high level.
Quick note: the only other time the savings rate has been negative was in 1932 and 1933, the last time this country suffered the effects of massive speculation fueled by overleveraging of debt
Keith Hembre, chief economist for First American Funds, said the low savings rate earlier this decade was due to consumers spending beyond their means for years.
And they could afford to do so as long as the stock market was rising and surging real estate prices allowed people to turn their homes into an ATM machine that consumers thought had a limitless supply of money.
But once the stock market and housing market bubbles burst, Hembre said consumers had no choice but to spend more modestly.
All this means, in the short term, the economy will continue to tank because consumers are pulling back from an unsustainable rate of spending. Unsustainable because it was fueled by overleveraging of debt based on speculation. Irrational exuberance fueled by "Easy Al" Greenspan's policies of cheap credit and papering the world with dollar confetti.
Speaking of "Easy Al", his term as Fed Chairman was from 1987 to 2006. This may help explain this statistic:
From the mid-1950's through the mid-1980's, the savings rate was in the 8% to 11% range.
Check out this graph... the drop in the savings rate nicely correlates to Greenspan's term as Fed chairman. Now check out this graph of the federal funds rate from 1952 to 2008. You can clearly see how the Fed funds rate dropped throughout Greenspan's reign as Fed chair. He manipulated the money supply and interest rates to flood banks and investors with cheap credit and easy money, which they then used to speculate wildly (as humans have always done).
Meanwhile, while there was great incentive to borrow there was little incentive to save as rates on savings accounts, CDs, etc. plummeted. Mortgage rates fell like a stone throughout Greenspan's reign as this chart shows. Why save when borrowing is so cheap? Should we be surprised when investors speculate using cheap credit? Did Greenspan learn anything from the 1920s and the causes of the Great Depression?
Fleckenstein was right all along... Easy Al Greenspan deserves much of the blame for this mess. Greenspan isn't responsible for the individual actions of speculators, but he certainly is responsible for being foolish and naive enough to think that his monetary policy (cheap credit, papering the world in dollar confetti) would not lead to massive debt fueled speculative bubbles.
In closing, I leave with this commentary from December 2005 by Stefan Karlsson at Mises.org:
Alan Greenspan has a record of repeated rescue operations during times of financial distress. From the stock market crash of 1987 to the S&L crisis of the early 1990s to the Asian crisis and the collapse of LTCM to the feared Y2K crisis to the bursting of the tech stock bubble, Greenspan has proven himself more than willing to bail out failed investors with additional doses of "liquidity" (the popular inflationist euphemism for inflation).
The result of this has been to increase the willingness of investors to participate in speculative bubbles because they know that if things go wrong and they are unable to get out before the bubble burst, their good friend Alan Greenspan will bail them out and limit their losses. Greenspan has thus been responsible for bubbles like the tech stock bubble and the housing bubble both by suppressing interest rates and providing the "liquidity" needed to create the bubbles, and also by reducing investors fear of losses after the bubble bursts by creating the expectations that the Fed will bail them out.
Read more at mises.org
Ikeonic, is a Dwight D. Eisenhower Republican, a Catholic conservative and has no tolerance for fair weather Susan Eisenhower Republicans. Read more at modernconservative.com
On this view of the import of the term republic, instead of saying, as has been said, "that it may mean anything or nothing," we may say with truth and meaning, that governments are more or less republican as they have more or less of the element of popular election and control in their composition; and believing, as I do, that the mass of the citizens is the safest depository of their own rights, and especially, that the evils flowing from the duperies of the people, are less injurious than those from the egoism of their agents, I am a friend to that composition of government which has in it the most of this ingredient. And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
ping
On Milton Friedman's ninetieth birthday, November 8, 2002, [Bernanke] stated: "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
AAAANNNNNHHHHHHH! Wrong!
Sorry, Ben. The Fed has done it... again. Thanks to Alan Greenspan, worst central planning banker of all time.
I agree with the idea that nothing is being done to encourage savings, and we are in a trap of borowing to cover unsecred credit.
That said, I canot hear the phrase “the chick-ennz are comin’ home [pause - wait for it] TO ROOST!” without hearing it in Reverend Wright’s voice anymore.
http://www.modernhistoryproject.org/mhp/EntityDisplay.php?Entity=GreenspanAJ&Start=1954
Bernanke wasn’t kidding.
http://www.modernhistoryproject.org/mhp/ArticleDisplay.php?Article=SecretsCh12
Yeah... I couldn't think of a better headline so I stole from Rev. Wrong. :) Figured it would get someone's attention...
History doesn't repeat itself, it rhymes...
Certainly, deregulation, Fannie Mae, Freddie Mac, etc. all played a role, but I would agree with Stefan at Mises that it was a minor role and compounded the problem.
Try this analogy and see if this holds water. The Fed flooding the economy with liquidity is akin to a dam upstream releasing a ton of water and sending it downstream. The levees downstream are the regulations meant to protect us. Poorly enforced and well intentioned regulations are like poorly built and designed levees. They function well when the water level is normal. However, when you have high water, you quickly find out where are the leaks and weak points in the levees. So the reason the Fed is at fault is because they created the high water. They're not at fault for allowing people to build in the flood plain and they didn't build the levees, but surely they knew that by keeping the water level too high for too long, that eventually the water would find its way through those cracks and flood millions of people. When we want to find the root cause, always look upstream. In the case of the economy, that would be the central bankers manipulating the interest rates and flooding the market with paper confetti, aka dollars. Okay, the analogy might suck (just pulled it out of thin air) but you get the idea...
I should add that I guess you could blame Clinton and Bush for keeping Greenspan on as long as they did but Presidents don’t like to play politics with the Fed and Greenspan was considered a god by everyone in DC for so long that he became untouchable. The stock markets probably would have plunged by 5000 pts. if either Bush or Clinton had announced they were booting Greenspan. Which in hindsight doesn’t sound like such a bad thing... :)
“History doesn’t repeat itself, it rhymes...”
Clever.
Using your analogy the dam your referring to was regulated by post depression regulation. It was compromised by the nullification of the Glass-Spiegel Act in 1998 then blown wide open by the Commodity Futures Modernization Act of 2000.
I agree with you that regulation is a necessary evil (as are all laws that regulate commerce, as authorized by the Constitution) but necessary nonetheless. I just disagree as to how much blame be assigned to Greenspan and the Fed. I think they bear most of the blame. I’ll just have to work on a better analogy when I have more time to think about it... :)
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