Greenspan was more a rock star than a feared Fed sage (Ambrose Evans-Pritchard on the mark again)

We forget now, but Alan Greenspan first rose in Washington as a political aide to Richard Nixon - not as an economist.

Greenspan warns of UK house prices drop Comment: More rock star than feared Fed sage In depth: Alan Greenspan As domestic policy boss for Nixon's 1968 campaign, he wrote the speech calling for an end to the Vietnam draft - the mischievous pledge that clinched a tight race.

His mentor was Arthur Burns, the Fed chief who flooded the money supply to re-elect Nixon in 1972, and fathered the Great Inflation.

When Greenspan took over the Fed in 1987 critics doubted whether anybody coming from this stable would resist the inevitable demands for easy money from Washington and Wall Street, once push came to shove.

Twenty years on, their misgivings have proved justified, although not in quite the way they expected. Retail inflation has remained tame, thanks to cheap imports from China. Asset inflation has not. This virus is just as deadly.

As in the US in the 1920s and Japan in the 1980s, loose money has leaked into stocks, property and lately into every kind of exotica, from commodity funds to Argentine bonds. It is on a global scale this time, with greater debt leverage.

advertisementGreenspan knows the risks, since he blamed the Fed for the Great Depression in his 1966 pamphlet Gold and Economic Freedom.

"The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: by 1929 the speculative imbalances had become overwhelming," he wrote.

He has since changed his tune, arguing that the Fed's job is to clean up after the party - as he did by slashing rates to mitigate the dotcom debacle. "The human race has never found a way to confront bubbles," he now says.

Really? This is not a view shared by central banks in Europe or (now) Japan. Nor is it remotely compelling.

Greenspan talks as if the Fed were a bystander. In reality, the bank itself caused America's serial bubbles, and its debt addiction. By holding rates too low for too long, it mispriced credit and warped behaviour.

Exhibit I: Rates were 1pc until June 2004. By then growth was 4pc, and the Dow had surged 40pc in 15 months.

"It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low," he said.

Modestly low? For much of the stretch from 2002 to early 2006, "real" rates were negative (below inflation). You were punished for not taking on debt.

Greenspan now admits he was caught off guard by the sub-prime madness that ensued. "While I was aware a lot of these practices were going on, I really didn't get it until very late in 2005 and 2006," he said.

Exhibit II: The Fed cut rates a third time to 4.75pc at the end of the Russia/LTCM crisis in 1998, just to be sure. By then Wall Street was roaring back. Growth would reach 6.2pc that quarter. "It may have been a mistake," dead-panned Alice Rivlin, then the Fed's vice-chair.

Greenspan allowed bubbles to run their course but was always quick to put a floor under asset prices, a reflex dubbed the "Greenspan Put". He never allowed a liquidation purge to flush out the toxins. The day of pain was put off ever longer, and prosperity robbed ever more from the future.

The result of this asymmetry - and moral hazard - is a country living far beyond its means. America switched under his watch from top world creditor to top debtor, with net external liabilities of $3,000bn. The savings rate has fallen below zero for the first time since the Depression.

No doubt Greenspan had an uncanny instinct for catching tops and bottoms in the cycle. This was his party trick as partner of the New York forecasting firm Townsend-Greenspan, where he crunched data in one of the first computers on Wall Street.

The Fed transcripts from November 2000 offer a glimpse of his skill. While fellow governors fretted about inflation, he sensed that the economy had begun to nosedive. He rubbished the Fed's "linear" staff model, deeming it useless at the onset of recessions - always non-linear, ie, a surprise. Within weeks he was proved right. The Fed slashed rates at an emergency session.

A tactical maestro, yes. But wise? That the Fed should even try to micro-time the cycle - a speculators' game - shows how far the institution has lost its way. It takes a year or two for monetary policy to percolate, and no banker can see that far ahead.

Is it really sensible for the Fed to cut rates to 1pc, then yank them up again 17 times to 5.25pc in a frantic effort to undo the effects of its own policies, lurching from over-stimulus to overkill? Surely it should hold a steadier course, and attend to deeper matters.

Greenspan has his alibi for the latest bubbles: Asia's "savings glut". The vast reserves of China, Japan, Korea, et al, have flooded the capital markets, driving down the cost of credit.

But this is the flip side of America's disorder. If the US had not run a current account deficit of 6.5pc of GDP for year after year, and if the Fed not smiled so benignly on America's shopping malls, Asia would not have accumulated these reserves.

A central banker should be feared, like a judge. Greenspan was too eager to please. By the end he had become a rock star, so enthralled by media attention that he was unwilling to retire quietly and leave his successor in peace.

America will probably work off this legacy of debt, deficit and tumbling house prices - with a salutary stint of hard labour, or "sub-trend" growth in the argot.

But there is a school of thought that he has made such a hash of capitalism that it will take a strong dose of socialism to contain the consequences. For an apostle of Ayn Rand's ultra-libertarian creed, that is the cruellest charge.

Republicans should be calling for hearings to investigate Greenspan’s urging Americans in April 2004 to take out ARM mortgages, and for lenders to create “alternative” criteria to consumers (ie. sub-prime). He then assaulted those consumers with 18 straight rate hikes. Why isn’t this old bastard being dragged before Congress to answer for his hypocritical incompetence? Blogs and conservative commentators should be screaming for his head every single day. He should be shouted down and pelted with tomatoes at every single book signing and speech.

hanks to these too easy to attain mortgages, housing cost has been inflated far beyond it's actual value for housing. Housing has been turned into a vehicle for speculation. But housing as investments are illiquid; they trade infrequently and they are not listed in stock exchanges. So we have no real-time measurements of fair market value. Instead the asset — that is, the investment interest (not the property itself) is in a ‘value tunnel’ — a long interval where its value is not externally observable, only inferable. In cash terms, we know the asset’s value for certain at only two points: When we buy, it is worth what we paid for it, because that is indeed the definition of fair market value. “ Right now it’s worth what I’m paying for it!”and When we sell, usually after the recapture period, it’s worth what the next buyer pays for it .

Isn't it interesting, synchronically, that Greenspan was calling for for these loans and then raising the rate hikes at the same time that Fannie Mae was about to cave because of it being feasted on, by the likes of Jamie Gorlick, from the inside out.

Including revelations of artificial earnings smoothing (02-24-06,WASHINGTON, Feb. 23 — An internal investigation has uncovered new evidence that senior executives,( of Fannie Mae, the largest buyer of American home mortgages, manipulated its accounting in the 1990’s to meet earnings projections so that top executives could receive more than $27 million in bonuses.

http://www.washingtonpost.com/wp-dyn/articles/A52625-2004Sep26.html
" There are signs the gilt-edged resumes, and political futures, of three former Fannie executives have already been tarnished, because of findings they profited from manipulation of financial results in 1998. Former Fannie Mae chief James A. Johnson, who holds a top post in the Democratic presidential campaign and headed the Kennedy Center and the Brookings Institution; Smithsonian Institution Secretary Lawrence M. Small, who was Fannie Mae's chief operating officer; and Washington lawyer Jamie Gorelick, a former Fannie vice chairman, who has served as deputy attorney general, the Pentagon's top lawyer and a member of the 9-11 commission, joined Raines and Howard in receiving sizable bonuses that year. Regulators allege they were paid after the company improperly deferred other expenses."

8-10-2007 Gov't Won't Ease Limits on Loan Giants Mortgage finance giants Fannie Mae and Freddie Mac will not be allowed to take on more debt, the government said Friday, denying requests to relax the companies' investment caps as a way to pump cash into the struggling mortgage market.

The decision by the Office of Federal Housing Enterprise Oversight capped a week of speculation that buoyed the stock prices of the government-sponsored companies. Investors drove Fannie's share price 17 percent above last Friday's close, and pushed up Freddie's stock by 11 percent.

Meanwhile, with the U.S. home-loan markets in turmoil and credit drying up as a result, a mild panic has spread across the globe, knocking down key stock market indexes.

Democratic lawmakers and others made the case for federal regulators to ease the investment limits on Fannie and Freddie in order to provide much-needed liquidity in the market for mortgage-backed securities. The Bush administration, though, opposed the idea: President Bush insisted that a higher priority should be placed on tightening the oversight of Fannie and Freddie, which only a few years ago suffered multibillion-dollar accounting scandals.continued

Foreclosures Jump 115% in August

Excerpt:

"The number of foreclosure filings reported in the U.S. last month more than doubled versus August 2006 and jumped 36 percent from July, a trend that signals many homeowners are increasingly unable to make timely payments on their mortgages or sell their homes amid a national housing slump."

"A total of 243,947 foreclosure filings were reported in August, up 115 percent from 113,300 in the same month a year ago, Irvine, Calif.-based RealtyTrac Inc. said Tuesday."

"The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable rate loans are beginning to reset now," RealtyTrac Chief Executive James J. Saccacio said.

"The latest figures also reflect an increase in the number of homes going into foreclosure that are not being picked up in estate sales and are ending up going back to lenders."

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