We mentioned the Greenspan op-ed piece in our last post and Tuesday the WSJ printed an article centering on his chagrin about how people were starting to think of his "work". The former chairman had such glowing reviews when he was in office that he was called Maestro. Now, he is being relegated to the position of scapegoat for Causing the mortgage mess. How was he supposed to know what to do? It wasn't like he was Chairman of the World, just Chairman of the Fed...
Seriously, we think he really doesn't know that he was sort of at the financial wheel. His comments reflect that he didn't seem to think he had anything to do with either the tech bubble back in 1999 to 2000 or the real estate bubble that formed after that until 2005. What can the Chairman of the Federal Reserve Board do, anyway? That, unbelievably, seems to sum it up.
We have often cited here in these posts that the Fed watches the short T-bill rates to get its global positioning for the fed funds rates that it sets. This is the way Greenspan set rates, by letting the market decide for him what to do. This is not the way his predecessor, Paul Volcker went about business. Today Volcker is back to his inflation fighting tough talk from the early 80's and meanwhile, Greenspan says that the central banks of the world really don't have the ability to create bubbles. These two personalities are near opposites.
Without permission but with many thanks, we give you the WSJ's summary of Greenspan comments for your review (you can find them on page one of Tuesday's paper):
"Monetary policy is process based on probabilities. I don't remember a case when the process by which the decision making at the Federal Reserve failed. Events often did not proceed as we anticipated, but that resulted from a lack of foresight, not from a flawed decision-making process."
Low interest rates:
"I'm an old 19th-century liberal who is uncomfortable with low interest rates. My inner soul didn't feel comfortable."
"Omniscience is not given to us. There is no way to predict how innovative markets will develop. All you can do is set a general strategy. The choice is between a lightly or tightly regulated economy. The former is highly competitive, innovative, and dynamic -- but periodically visited by wrenching crises. The latter is more stable, but slower growing."
The housing bubble:
"I'm surprised it went as far as it did. I am having the same problem now with surging prices of oil and food. Are they bubbles?"
The role of adjustable-rate mortgages in the housing crisis:
"Adjustable-rate mortgages were the cheapest way they could finance home purchases. But if they were not available, home purchases arguably would have been financed with fixed-rate mortgages. There's no evidence of which I'm aware that says that price would be importantly less if adjustable-rate mortgages had been less."
Failure of market self-regulation:
"There were far more failures here than I expected. I've been chagrined at how badly some of the judgments of very sophisticated investors have been with respect to risks...It's all human psychology with which we're dealing, not institutions. The argument, therefore, is not to discard counterparty surveillance, but, essentially, to patch it back together."
His early disbelief at the surge in subprime lending:
"When in 2005 I first ran across the sharp spike in subprime-mortgage originations estimated by a private vendor, which was later confirmed, I said, "This makes no sense." Markets don't move that fast."
Can we add anything to this? Probably not...he has said it all. We see that his successor thinks a little more aggressively in that he actually thinks he can do something...we say "Bear-ly". We probably need to explain that we mean "Bear Stearnly" not barely.
FSI: 79.52 (the speculators had a tough day, too)
And then there was Jackson with his mom...the last time we saw him.