Alan Greenspan Loses His Mind

by: Paul Kedrosky March 21, 2008    
Paul Kedrosky

Paul Kedrosky

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Judging by a just-released Washington Post interview, ex-Fed chair Alan Greenspan has gone mad. There is an upside, of course, in that he has delivered the quote of the year so far.

Here is Alan, talking in an interview about how misguided his critics are for suggesting that the recently-ended real estate bubble had its roots in the post dot-com bubble low rates. Implicit in this, of course, is that he should have increased rates sooner to arrest the real estate bubble's expansion:

Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time.

Well, there's no denying you can't get any evidence on the matter from Greenspan's career: He avoided raising rates during both bubbles with which he was faced.

And Greenspan continues, offering the following:

"If it weren't the subprime crisis it would have been something else," he said. That is because an era was ending that had seen "disinflationary forces" from developing countries such as China and a "protracted period" in which there was an "underpricing of risk."

Really? Really? Greenspan's Fed didn't prick the real estate bubble because it was saving us from another bubble, whatever it was, that would have been worse? What was it? A lava dome under Los Angeles? Sewer gas under New York? Something else? Because it's really hard to imagine what would have been worse than the real estate bubble, but maybe I lack imagination.

But the tricksy Mr. Greenspan doesn't stop there. Having first said that raising rates doesn't prick asset bubbles, and then sneaking around the side of the issue by arguing that another bubble would have formed anyway, he then spun about and said the following:

Even after the Fed starting raising short-term rates, long-term rates did not rise. He said that at the time "it became apparent that we lost control" of long-term interest rates "as did the Bank of England and all the central banks. As a consequence, we had very little ability to put a brake on the rise in home prices."

Oooh, awesomely argued Alan. In short, even if you had raised rates -- which you wouldn't have, because the Fed can't prick bubbles, and because another worse (unnamed) bubble would have happened anyway -- nothing would have happened, because the Fed lost control of long-term rates. You were totally boxed, and anyone who criticizes you is a clueless nitwit for not seeing that.

Does anyone buy that? I know I don't. Greenspan ably demonstrated that he would cut rates in the face of falling asset prices, so why so skittish about raising them in the face of rapid asset price increases? Something doesn't work in that illogic.

Then again, what does Greenspan care. He has built a career out of this sort of thing, of dancing around clumsy questioners' questions, and this is easy stuff for a skilled obfuscator. Greenspan's minting money as a hedge fund advisor, speaker, and author, and likely giggling every day at the mess that he left on Ben Bernanke's desk.

[via Washington Post]

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This article has 42 comments:

  •  
    Mar 21 04:59 AM
    I certainly don't envy Greenspan's former position as Fed chair. Putting all of the blame on Greenspan for the housing bubble is like describing an iceberg by its tip. What about the millions of morons who got sold ARMs without being able to handle the adjusted payment? They are not children, and it is just as much their fault. What about the scumbag salesmen who unloaded that stuff on the market? Their fault, too. Yes, monetary policy got the ball rolling, but if you see everybody jumping off a bridge, does that mean you have to, as well?
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  •  
    Mar 21 05:00 AM
    Lamenting the past is like....not wanting to deal with reality. Let's look forward. The crisis is what it is.
    Reply | Link to Comment
  •  
    Mar 21 05:02 AM
    Credit derivatives.

    What the gov't needs now and in the future is an FDA-like regulatory staff to approve new financial products to enter the market. Without such a body, financial institutions lean themselves progressively to Russian roulette type bets.

    Let's imagine, for a moment, the pharmaceuticals industry without the FDA. Like so, new financial products entering the market with minimal regulation like MBS and the credit derivatives markets run rampant on reckless product innovation to bolster bank fees and commissions. That's what it's all about, isn't it? New revenue channels to engender more lucrative commissions?

    Investment bankers are just salespeople with a finance glossary. Their job was never to decide an investor's risk appetite, it is only to sell investors more stuff more often to book more profits in fees.

    The investor doesn't give them a commission, Goldman Sachs does.
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  •  
    Mar 21 05:23 AM
    Any more word lost on Mr Greenspan is a word too much. It's not worth the effort anymore. Hew ill never publicly admit his responsibilities as he acted absolutely irresponsible for years and years. And it is really of secondary importance whether he actually believed/believes the nonsense he said as fed chairman and keeps saying today.
    The fed has been created with a very clear cause and no chairman will be installed who runs against that. some may be more smart or less smart, more insightful, or plain incompetent - however it will never make a fundamental difference. At the end of the day it's a giant mechanism to enrich a few select (financial) circles while putting the burden on the working people and the entrepreneurs.
    Abolish the federal reserve system alltogether and the greenspans of this world will never again get a chance to ruin this country. keep the fed and rest assured that the next greenspan will wait just around the corner to rob the people blind
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  •  
    Mar 21 06:51 AM
    he is a great economist and a sensitive human being, but he was not in charge of the government budget and he did what any economist do in a country in war: printing more money and waiting for your troops bring the trophy (cheap oil, no way pals), it didnt work, not because of himself, but because of the defeat in the killing fields in the I-place, good for Texas and Venezuela, hard times for the next administration, leading with the deficit is the only way out of this hole now...
    Reply | Link to Comment
  •  
    Mar 21 07:45 AM
    Since there is so much angst directed toward the Fed and the US Government, I decided to listed some events, not all of them, that had dramatic ramifications on lives, cost and the psychology of our country. I started in 1906 because it’s just a little over a hundred years. As I compiled the list, I could not help but feel the great sacrifices that many American’s have made and what a resilient country, economy and government we have in American.

    The 1906 San Francisco Earthquake and fire, registered 8.25 on the Richter scale; estimates range from 700 to 3,000 dead or missing, approximately 225,000 injuries and $400,000,000 in 1906 dollars.

    Recession, May 1907-June 1908, 13 mo

    Recession Jan. 1910-Jan. 1912, 24 months

    Completion of the Panama Canal, 1914 – 27,500 workers are estimated to have died

    Recession Jan. 1913-Dec. 1914 23 months

    World War I -- 116,708 killed – 33 billion

    Spanish influenza, 1918, killed over 500,000 people in the worst single U.S. epidemic.

    Recession Aug. 1918-March 1919 7 months

    Recession Jan. 1920-July 1921, 18 months

    Recession May 1923-July 1924 14 months

    Recession Oct. 1926-Nov. 1927 13 months

    The Great Mississippi Flood of 1927, flooded 27,000 square miles, 246 killed

    The Great Depression, Black Tuesday, crop prices fell by 40 to 60 percent, after the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.

    The Dirty Thirties, longest drought of 20th century. Peak periods were 1930, 1934, 1936, 1939, and 1940. The dust bowl covered 50 million acres in the south-central plains during the winter of 1935-1936.

    Labor Day Hurricane of 1935, 400 killed

    Recession May 1937-June 1938 13 months

    World War II – 408,306 killed – 360 billion

    Wartime Controls: 1941-1945 rationed consumer items ranging from sugar to gasoline

    Recession Feb. 1945-Oct. 1945 8 months

    The Marshall Plan, July 1947 – 13 billion in economic and technical assistance were given to help the recovery of the European countries

    Recession Nov. 1948-Oct. 1949 11 months

    Korean War, July 1951 - July 1953 – 33,000 killed in action

    Recession July 1953-May 1954 10 months

    Recession Aug. 1957-April 1958 8 months

    Recession April 1960-Feb. 1961 10 months

    The Cold War, some estimates shows $8 trillion was spent, worldwide, on nuclear and other weapons between 1945 and 1996

    The Cuban Missile Crisis, Oct. 1962

    Good Friday Earthquake (1964) In Alaska, it was the fourth biggest earthquake recorded

    Vietnam War, 1963 – 47,378 killed in action

    The murder of JFK, 1963 Nov

    The Gulf of Tonkin Incident, Aug 1964

    The murder of Dr King, April 1968 and Bobby Kennedy, June 1968

    The city riots of April, 1968 – 30 cities affected

    Hurricane Camille, Aug 1969, 259 killed

    Recession Dec. 1969-Nov. 1970 11 months

    Stagflation of the 1970s began

    Nixon first imposed wage and price controls on August 15, 1971

    Oil Embargo, Oct 1973 long gas lines

    Recession Nov. 1973-March 1975 16 months

    Articles of Impeachment of Nixon started
    (Approved by a vote of 27-11 by the House Judiciary Committee on Saturday, July 27, 1974.)

    Deregulation: 1974-1992 this era began when Nixon left office

    Three Mile Island nuclear power plant crisis, March 1979

    Mount St. Helens eruption 1980

    Recession Jan. 1980-July 1980 6 months

    Prime reached unbelievable 20% in January 1981,

    AIDS was first reported June 5, 1981 by the government – It is thought that more than one million people are living with HIV in the USA and that more than half a million have died after developing AIDS.

    Recession July 1981-Nov. 1982 16 months

    California earthquake 1983

    The 87 market crash - Black Monday

    California earthquake, 1989

    Recession July 1990-March 1991 8 months

    Iraq invaded Kuwait on August 2, 1990

    The Persian Gulf War, 1991 or Desert Storm Jan 1991

    Hurricane Andrew 1992 very destructive United States hurricane

    The Great USA Flood of 1993

    Intervention in the Former Yugoslavia,

    Dot Com Bubble, climaxed on March 10th, 2000 with the NASDAQ peaking at 5132.52

    9/11 Attack, 2,974 people died

    Recession March 2001-Nov. 2001 8 months, Airline Industry Collapsed

    Enron bankruptcy in late 2001, employed 22,000

    WorldCom, July 21, 2002, filed for Chapter 11
    Iraq War, March 19, 2003 – 4,000 dead

    Hurricane Katrina, late August 2005, 1,836 people lost their lives

    Start of the Great Housing Recession or Sub-prime Recession 2006 or 07, 08? Date to be determined.
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  •  
    Mar 21 08:05 AM
    tony, nice list but you completely fail to look at the huge issues that keep building up not despite of the govt and the fed, but because of them. anything, including the great depression will look like a walk in the park in comparison, once the whole debt bubble unwinds. i do not klnow when it will happen. what i do know is that about 9trillion $ in official debt and about 40trillion $ more in the various unfunded or underfunded pension, medicare medicaid etc. plans have no chance of ever getting paid out - except in highly inflated $, i.e. basically worthless paper. Except for those in the know and for those who act decisively NOW everybody else is going to see his entire perceived "wealth" be erased completely.
    Hidden under manipulated government statistics, outright lies and a wall of silence lies the fact that the USA are in a steep and relentless decline. All those great IT frims, all the nuclear firepower and the best equipped and most powerful armed forces cannot do anything about the economic collapse that is inevitable to occur. courtesy of the ever expanding govt and the federal reserve.
    it#s a sad story that many and huge sacrifices for the american people will lay ahead which were not necessary at all but for the actions of those two.

    @phdinsuntanning: from where you get the notion of greenspan as a "great economist" is beyond me. he has been wrong on EACH and EVERY major economic trend of the past 10-15 years.
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  •  
    Mar 21 08:17 AM
    I don't think it's fair to attack or draw inferences on Greenspan based on a single interview. His core arguments for the topics above are fully explained in his book. You really need to cross reference his book if you want to attack him.
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  •  
    Mar 21 08:48 AM
    buy his book? give him more money for setting up this economy in the kill zone? let us reopen Nurenburg and try both greenspan and greenspan jr as criminals against what will be left of America.

    both lie as much as our beloved politicians. "I can say or do anything i want until i am proved wrong in court."

    and since no one can or will bring any one to court...you figure out the rest
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  •  
    Mar 21 08:54 AM
    fxtrader07:

    You are bang on!

    I have been sitting here all morning thinking about the implications of the Thursday upturn in the market.

    Good Friday gives me a breather before facing the big test coming Monday. Buy or sell, that is the question everyone will be asking.

    Dead cat bounce in a bear market? If so, how high and how long. No one knows. The truth is the problems will not go away. This is a world wide bear market as evidenced by ALL the major stock exchanges trading below their 200 day moving average. The markets anticipate the future, and what they are seeing and saying is not good.

    It is hard to imagine how much taxes will go up when I listen to liberal idiots in Congress trying to fix the Greenspan mess. Biggest tax increase in History is coming as long as the liberals rule Congress. I assume a liberal will win the White House because of the stupid actions my party has taken over the last 8 years. We claim to be conservative, but we allowed the securitization of the housing and commercial mortgage market to be inflated by lack of any true valuation standards and loan to value ratios that made sense like in the years leading up to this mess that followed the S & L Crisis in the 80's.

    For now, it seems the Commercial Real Estate Bubble is still just bubbling... no one wants to talk about the super crisis that awaits around the bend. We hear about all the job losses in our biggest banks and wall street firms, yet nothing is said about who will rent those huge expensive offices in NY and other financial centers. Just a matter of time till $100/sf rents start making the plunge back to $30/sf. Those super towers will plunge in value and from what I hear of the firepower remaining with the Fed, there is no way to stop the massacre.

    So what happens Monday? In my judgment, a bear trap awaits my good friends that will pour in the remains of their life savings because the stupid press has told them the crisis is over! So sad.
    I am one of those stuck with gold for now. Perhaps I will be right in the long run.
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  •  
    Mar 21 10:19 AM
    I'v said for three years that Greenspan was and always will be a educated idiot
    Reply | Link to Comment
  •  
    Mar 21 10:45 AM
    Hindsight is easy (to paraphrase sammyg123) - It is the future with which we should be concerned. The FED's intervention is solely to assist in maintaining CONFIDENCE in the system. As such, it is reactionary to the mood on the street. However, just like a hostage negotiator, there is no way to consistently defuse situations where emotions run high.
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  •  
    Mar 21 11:01 AM
    join the bear: once you realize that the economy is run by a handful of people that own the fed reserv bank corp., then you will stop talking about liberals/repubs etc. its all a charade
    Reply | Link to Comment
  •  
    Mar 21 11:15 AM
    Very funny, well written, well done! And to the folks who ONLY want to "look forward", I would ALSO like avoid repeating the mistakes of the past. That means studying history, assigning responsibility (a.k.a. blame), and providing counter-arguments to revisionists.
    Reply | Link to Comment
  •  
    Mar 21 11:17 AM
    to tony soprano ,you forgot the worst disaster ever for this country,the founding of the federal reserve in 1913,,,by the Rothschild banking consortium
    Reply | Link to Comment
  •  
    Mar 21 11:40 AM
    The Japanese have a point 5 bank lending rate. They have been and now are in a recession.
    How niave can you be to think that in the U.S. by lowering the Fed. rate you are going to stave off an economic slowdown. Too late guys. The people have and are losing homes and they will never recover. The U.S. economy is in the tank and unfortunately are dragging the rest of the world in with them.
    Reply | Link to Comment
  •  
    Mar 21 12:03 PM
    A partisan Republican hack who wrote his last book while in the bathtub said some crazy things?

    Who among us could have predicted that?
    Reply | Link to Comment
  •  
    Mar 21 12:03 PM
    One simple but overlooked FACT is that the late fed gov., Ed Gramlich, in 2005, suggested to Greenspan that they do something about all the funky mortgage lending practices that the supposedly regulated banks were at least processing, the "Maestro" told him to f--- off!
    Reply | Link to Comment
  •  
    Mar 21 12:06 PM
    The residential real estate bubble exemplified a banking system out of growth medium - good creditworthy loans. It was a desperate, last-ditch effort to sustain our "world-class"... standard of living. We have become utterly dependent on credit bubble growth fed by cheap loans. Promoting consumption by perpetually debasing the dollar has only whitewashed our systemic challenges. As other economies rise, our relative position will change from high-atop the world to slightly above most.
    Reply | Link to Comment
  •  
    Mar 21 12:10 PM
    Article gives glimpse of "Allin Greenspin" at his best and seems to have fostered far broader and cerebral dialogue here. Forgetting about how we got here, how do we fix it?

    Since the liberals are incapapable of a solution that does not rain money on a problem through traditional taxes and class war, here's my thoughts on the exit to all this calamity. Embrace the following as an underpinning to US economic policy: Make US Treasury Bonds tax frees. A concept not unlike War Bonds that helped fund US effort in WWII. The net effect will be: 1) resurrection of real saving in US where interest rates currently serve as a disincentive; 2) an immediate and dramatic resurrection of the dollar against all foreign currencies which, among other things, will undo the commodity bubble due to their pricing metric being the dollar and strip foreign control of the US and world ecomonies from the Chinese; and, last but not least, 3) save us from the impending disaster looming when the boomers all qualify for social security. The social security "trust fund" currently accounts for a bout $4T of the $9T US debt. Only 2 ways to fix that: tax more or borrow more. The net affect of making Treasuries Tax Frees will be creation of reasons/demand to own them by making them attractive, creating an user optional funding source for US debt (vs. a traditional income tax), and win/win gov't borrowing.

    Reply | Link to Comment
  •  
    Mar 21 12:26 PM
    Well after reading most of the comments here , you gentlemen have lifted my spirits. Its about time AMERICANS WOKE UP TO THE FACT THAT THE FEDERAL RESERVE IS UNCONSTITUTIONAL! SO IS THE IRS!
    We as Amercans and patriots must send a message to Washington that it is not business as usual anymore. Face the facts Democrats are no longer Democrats and Republicans have become liberal Democrats. the only way to send a mesaage is either stay away from voting which gives them more power and not reccomended OR stop sending them money to support their respective parties AND
    VOTE 3 RD PARTY CANDIDATES. Vote for anyone who comes to mind just do not give your vote to them either side because they are one and the same . They are a MONO CAPITOLISTIC cabal of rouge politicians who are controlled by.. " the invisible hands of globalism" to borrow a phrase from Mr. Greenspans book. A free market is a free market and this is not a FREE MARKET!
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  •  
    Mar 21 12:28 PM
    I read Greenspan's book. Conclusion he should have chosen to be a musician.
    Greenspan pored gasoline in the fire and it looked good but now there is no more wood to burn.
    Like big Governments the Fed major function is to fix what it breaks.

    They say they have been fighting inflation but since it's creation the dollar is down about 96%. Inflation is not a disease or a problem it's the consequence of the mismanagement of the money supply period .

    For all those years since 1913 If we had changed the word inflation to devaluation perhaps the media would have looked at ho is printing instead so call higher prices.
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  •  
    Mar 21 12:34 PM
    No matter how he tries to evade it this sub-prime problem has got to be aptly named "THE GREENSPAN FIASCO" . My wife's Bridge Club predicted what would happen if lending policies weren't changed. How come the so-called greatest economist of our time was not astute enough to see it coming?? Mr. Greenspan, no matter how many books you write and no matter how many lectures you give claiming that no- one could have forseen this coming, it happened on your watch and it is your fault and failure. Stop trying to blame it on mysterious factors
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  •  
    Mar 21 01:15 PM
    We must give up this fiat money system and then inflation and deflation would not be a problem. We must all refuse credit it feeds the system pay as you go should be the mantra. If the budget reform act was renewed at the end of the Clinton admisitration that may have kept George Bush and his war mongering in check,. At the very least we might have a balanced budget now. But our surpluses were stolen by Democrats and Republicans to help special interests groups, lobbiyists, and pork barrel ' bring home the bacon groups"
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  •  
    Mar 21 02:03 PM
    British Steel: Since you mentioned unconstitutional and Republican and Democratic parties in the same post, I submit to you that the institutionalization of these major parties is likewise unconstitutional and has been wrongfully and unconstitutionally achieved by activist appellate courts at the state and federal levels with the assistance of the legislators who benefit from them. Direct me to exactly where in the Constitution it references 2 or any number of permissible parties, major political parties, 3rd parties, etc.???
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  •  
    Mar 21 02:44 PM
    Why blame Greenspan and the Fed? When the twin Towers fell and economic activity went into freeze mode, the Fed came through and restarted the economy. That single action makes having the Fed worth while.

    If you are looking to blame anyone blame the 9/11 terrorists who hurt the economy (Bin Laden was an economics student ) and led us into the inflationary Iraq war. The Five deferment Dick and Dubya show shares a lot of the blame for prolonging the inflationary spiral. Greenspan's Fed did the patriotic thing and the right thing at the time.

    The Fed's problem is one of moral hazard. They can lend the money but cannot overcome the greed and other deadly sins of the borrowers. They cannot change human nature. That is not the business of the Fed.

    It is unfair of Kedrosky and others to blame one single individual. What pray did any of these critics do when the economy froze in 2001?
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  •  
    Mar 21 02:51 PM
    Weren't all you "conservatives&qu... in love with Greenspan a decade ago? Or was that just the fascists-conservatives that were in love with him, but the libertarian-conservati... weren't? Does "raining money" on the military count as gov’ment spending? Or is THAT monsoon ok just as long as we build cool-military-toys as opposed to giving "those people" HANDOUTS (and all true “conservatives” know who “those people” are. Look out, they’re gonna git yer daughter!) Just wondering what part of the gov'ment will be cut if 1/3rd is cool-military-toys, 1/3rd is social-security, and the other 3rd is waste like: freeways for the politician's developer buddies, free airports for the airlines, super-duper security systems for the rapid-growing police state, and all the rest of the "worthwhile" government crap we so desperately need.

    Last I recall, the most immoral president EVER (and a known fornicator) ran the last gov’ment surplus. Not that $4 billion is a drop-in-the-bucket on a $9 trillion deficit, but still – the rules (in our much worshipped but increasingly ignored constitution – remember that quant habeas-corpus “concept”, the rules) say the executive branch makes the budget and the Congress approves it. I don’t recall a “conservative president” sending a balanced budget to Congress for awhile. If you “conservatives” would elect real conservatives – instead of fascists (which is just a word meaning xenophobic, big gov`ment for the rich, socialist) perhaps we wouldn’t be here now, worried about the Democrats (who ARE socialists) getting elected. And just imaging how pissed off God will be when Americans don’t vote for His favorite party but – instead - elect a woman (can you imagine, a WUMAN!!!) to run the universe’s best country. How can He keep punishing the fornicating harlots without the help of his favorite party, HUH? Just wait until America faces the wrath of God AND the socialists over the next 4 years. You’re DOOMED!!!
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  •  
    Mar 21 04:30 PM
    Alan Greenspan is dumber than a bartender.

    Any bartender knows that the way to deal with an unruly drunk is to cut him off from liquidity, completely. Not raise the price of beer to everybody by 50 cents.

    The Fed didn't need to raise interest rates to deflate the obvious bubbles. It needed to 1) raise margin rates sharply in 1999-2000, 2) majorly crack down on bank underwriting & lending standards and increase capital ratios against mortgages.

    Both could have burst the bubbles, without harming the economy as a whole more than necessary.
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  •  
    Mar 21 04:37 PM
    greenspan has saved us in any crises he faced, but at the price that there will be later an ever bigger crises. this has now ben bernancke to face.
    i guess wll see all over lower prices for some time to come-
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  •  
    Mar 21 04:47 PM
    I've always felt the Fed grossly overreacted to the tech bubble, raising rates too much and too fast to try to stop something that was otherwise going to fail on its own merits. They then refused to step in when they should have to curtail the lending abuses and housing bubble when they could have still brought it in for a soft landing... probably out of fear of over reacting again.

    Hindsight is 20/20, but I knew the housing market was going to crash and burn just by reading Barrons in 2004 and looking at the disgusting prices people were paying for tract homes in my neighborhood. I believed it so much I sold my home in CA and rented, banking the profit and not looking back.

    I always laugh when these fed officials say no one saw it coming or that it happened so fast. They had at least 2 years to plan. I have always found it hard to believe Greenspan couldn't see that coming as well, but never figured out what the motive otherwise could be to just let it ride.
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