Alan Greenspan: Public Enemy Number One

In addition, the 2000 Commodity Futures Modernization Act (CFMA). At Gramm’s behest, it was tucked undebated into an appropriations bill near the end of Clinton’s tenure. It legitimized “swap agreements” and other “hybrid instruments” at the core of today’s problems. It prevented regulatory oversight of derivatives and leveraging and turned Wall Street sharks loose on unsuspecting investors. Including world sovereign ones.

It also contained the “Enron Loophole.” So the company could exploit its “Enron On-Line.” The first internet-based commodities transaction system. Freeing electronic energy trading from regulation by rescinding supervisory restrictions in place since 1922. It empowered Enron to do as it pleased. Ended up fleecing investors. Bankrupting the company, and costing its employees their jobs and savings in worthless Enron stock. All because CFMA sailed through the House and Senate (below the radar), and Clinton signed it into law a month before he left office.

Much to Greenspan’s approval. He sweet-talked Congress and said “There is a very fundamental trade-off of what type of economy you wish to have. You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either.” He added that Wall Street had tamed risk and “many of the larger (ones) are dramatically hedged.” Legislators bought it or at least didn’t object. The New York Times is less convinced. Better late than never but don’t expect it to become a trend.

As Greenspan championed derivatives as a way of sharing risks, The Times said: “Shared risk has evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn. In recent months, the financial crisis gathered momentum.” Mr. Greenspan stayed conspicuously out of sight. Until October 23.

With the crisis unfolding, he wrote an epilogue to the paperback version of his memoir. Said “Risk management can never achieve perfection. Governments and central banks could not have altered the course of the boom.” He has no regrets.

His critics do, and they’re coming out of the woodwork, if slowly. Economist Jeff Sachs said “To a large extent, the US crisis was actually made by the Fed, helped by the wishful thinking of the Bush administration. One main culprit was none other than Alan Greenspan.”

On October 24, the Seattle Times ran a piece on “Former hero Greenspan blamed for the credit crisis.” He “found himself likened to one of the great goats of baseball.” Called one of “three Bill Buckners.” Referring to the 1986 Red Sox first baseman who let an easy ground ball through his legs that cost Boston the World Series as it turned out.

The Financial Times ran critical responses to a Greenspan article titled “We will never have a perfect model of risk” in which he argued for the inability to anticipate “all discontinuities in financial markets.” Economics professor Paul de Grauwe called it “a smokescreen to hide his own responsibility in making the financial crisis possible.”

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Economist Michael Hudson challenged Greenspan’s logic and misuse of empirical real estate data. Specifically land values. By spring 2006, “bankers knew there was a bubble.” He wrote a Harpers cover story on it. But Fed officials compounded bad policy with more of it. Hudson added that “The financial system is now at a turning point. Bankers have shown that they can’t regulate themselves when they’re making so much money by feeding (off Fed created) bubble(s).”

Marx Was Right

According to David Cox before today’s crisis emerged. In the London Guardian on January 29, 2007. He referred to globalization “laying bare the contradictions of capitalism” but extended the argument to “unbridled economic activity.” Destroying “the world’s climate, water supplies, farmland, forests and fish stocks.” Additionally, “mountainous trading, governmental, corporate and personal debt threaten to precipitate world-wide economic collapse….Nothing but the re-engineering of global capitalism can head off the crisis that is beginning to confront it.”

Fast-forward to now and the Guardian’s “Maelstrom in the markets” article (September 16). Marx again featured. “It is a moment Karl Marx would have relished. From every angle financial capitalism is taking a battering….Two pillars of the modern economic system – greed and prosperity – are trembling in a manner unseen for a very long time.”

On October 15, the Guardian headlined “Booklovers turn to Karl Marx as financial crisis bites in Germany. Karl Marx is back.” According to German “publishers and bookshops who say that his works are flying off the shelves.” Because people “recognise that the neoliberal promises of happiness have not proved to be true,” according to publisher Karl-Dietz’s Jorn Schutrumpf. Even Germany’s finance minister, Peer Steinbruck, was chagrined enough to admit that “certain parts of Marx’s theory are really not so bad.”

He’s on a “winning streak” others admitted, so it’s worth noting what he wrote to Friedrich Engels: “The American Crash is a delight to behold and it’s far from over.” He referred to the Panic of 1857. An earlier banking crisis and recession that spread to Europe, South America and Asia.

Marx condemned “free-market” capitalism as “anarchic” and ungovernable. Because it alienates the masses. Prevents the creation of a humane society. Produces class struggle between the “haves” and “have-nots.” The bourgeoisie (capitalists) and proletariat (workers). The destructive contradictions of the system. Exploited masses so a few can profit.

He predicted what’s clear today. Competition over time produces a handful of winners. Powerful monopolies controlling nearly all production and commerce. Finance capitalism as well. Exploitation increases. Successive crises erupt, and ultimately fed up workers react. Recognizing their collective power and bringing down the system. Replacing it with a self-managed one. Ending exploitation and alienation. In his view, an inevitable socialist revolution.

His letter to Engels wasn’t wrong. Just early, and perhaps by how change will evolve. Not the outcome. Just the method. With a whimper, not a bang. Not by workers. From the system’s own corrosiveness. Internal contradictions. So unworkable. Crisis-prone. Fractured by inequities. So self-destructive it can’t endure. So it won’t. It will crumble on its own.

A Brief Update on Spreading Indigestion

Compared to other bouts, this one is scary and hitting everywhere. In his latest update, Nouriel Roubini states that:

“markets (are) in sheer panic and becoming literally dysfunctional and unhinged.” So much so that “policy makers may soon (have to) close financial markets as the panic selling accelerates. Indeed, we have now reached a point where fundamentals and long term valuation considerations do not matter any more for financial markets. (They’re in) free fall as most investors are rapidly deleveraging and we are on the verge of a capitulation collapse.” Flows are now everything and in one direction. For the exits in a very destabilizing game.

Just as bad, economic fundamentals “are awful as investors are finally realizing that a severe US and Eurozone and G7 and emerging markets and global recession is coming (not a full-blown depression he believes) and will be deep and protracted.” Before this ends, “equity prices may have to fall another 30% based on fundamentals alone….” Add the element of panic selling that may erase even more.

After Wall Street crashed in October 1929, the Dow lost 89% of its value by its low point in July 1932. No one today is predicting that. But given the current climate. Three decades of reckless excess. The greatest ever financial fraud. Multi-trillions of bad debt. Only the brave or foolish should imagine conditions won’t be painful and protracted before they stabilize and improve.

What’s sure is they’re already awful, worsening, spreading, affecting everyone, and when finally ended – the world no longer will be the same as when the crisis emerged. But what it will look like and where it will head is anyone’s guess.

For now, emerging economies are endangered. Iceland collapsed, and others, like Hungary, may have to default on their debt. More stable countries like India and Japan are also in trouble. For the first time in 26 years, Japan recorded a trade deficit as exports to the US dropped 21.8% from a year earlier. The steepest ever monthly decline. Recall also that at yearend 1989, Japan’s Nikkei peaked at 38,915. It then plunged to 7831 in April 2003. On October 27, 2008, it sunk to a shocking 7163. About 18% of its peak value nearly 19 years earlier and its lowest valuation since October 1982. In the world’s second largest economy. A hint of what may await the largest.

One money manager was so shaken he said we’re “going back to the stone age.” Across Asia it was bloody Friday. The same again on Monday and throughout the world. The worst on Friday was avoided. Armageddon was postponed until further notice. Beyond the timeline of this article, it may arrive sooner, not later.

Because markets are crashing. Equities, commodities, currencies, bonds considered risky. Anything investors can sell to raise cash. All signs are negative. In America, a key indicator is the Mortgage Bankers Association (MBA) figures on home loan applications. Its index tracking purchasing demand and for refinancing loans plunged 17% in its latest reading. Their lowest levels since October 2001 showing housing demand remains stubbornly weak and not likely to stabilize soon.

Other signs are just as worrisome. Fitch Ratings suggest that high-yield corporate debt defaults may end up the highest number on record. Hedge funds are hemorrhaging from forced liquidations and huge losses. US automakers are on their knees and may face bankruptcy. European ones are also wobbly. Credit is still frozen as who’ll lend to borrowers who can’t repay. And households are so over-indebted, they can’t borrow nor will lenders accommodate them.

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Global deleveraging is in play as well. According to Fitch Ratings, world credit growth peaked at almost 16% in 2007. By yearend, it will be 7% and lower still at 5% in 2009. Hardest hit will be “emerging Europe but (it) will spread to all regions.” World recession is setting in. Most likely to be deeper, longer and worse than most predict.

In America, credit market debt as a percent of GDP began rising in the early 1980s and peaked at 350% in 2008. Comparable to its 1930s level. Money manager Jeremy Grantham’s research shows that all markets revert to their means and generally way overshoot in the process. We’re currently well into a massive repricing of risk and asset values. It may take years to play out. It will affect all over-valued markets. Stocks, bonds, commodities and leveraged debt. The cost will be in the trillions. The wreckage unimaginable. The result of monetary and fiscal irresponsibility with Greenspan deserving more blame than anyone.

In 1987, he was chosen to serve financial community interests. Largely Wall and major banks. He bailed them out on October 1987′s black Monday. Again in 1998 after Long Term Capital Management’s collapse. He flooded the market with easy money. Kept interest rates low. He could do no wrong, and even now, says he has “no regrets on any of the Federal Reserve’s policies that we initiated.” An astonishing statement given the gravity of today’s crisis. The result of rampant speculation and fraud made possible by easy money. With Greenspan supplying it to all takers.

The Fed’s job (or what it should be) is to promote stability. Smooth out the business cycle. Maintain a steady, healthy sustainable growth rate. Create price stability. Control inflation, and grow opportunities for everyone. Instead Greenspan fueled bubbles, and all he could say was that “irrational exuberance” may have “unduly escalated asset values” in a December 1996 speech. He did nothing to curb it. Claimed bubbles are hard to identify in real time, and the Fed is unable to diffuse them. He infamously said that it’s “easier to clean up the mess after an asset bubble pops than to try and deflate (one) on the way up.”

In fact, the Fed’s job is to spot and moderate them. Not let them get out of hand. By raising interest rates. Margin requirements. Jawboning. Reducing the money supply to cool speculation and enhance stability. “Taking away the punch bowl,” as former Fed chairman William McChesney Martin put it. Available tools Greenspan eschewed that would have worked if used. They weren’t, and he denied all responsibility. The result is where we are today. Greenspan still avoiding a mea culpa and only expressing “shock” and “disbelief.” But no regrets, and why not. His job was to transfer wealth from the public to the rich. In that he succeeded mightily but look at the cost.

– markets crashing;

– the economy sinking; in secular decline;

– record budget and current account deficits;

– a soaring national debt and federal obligations; $5 trillion alone in one day for the Fannie and Freddie takeover; hundreds of billions more so far and trillions more to come; taxpayers on the hook for it all;

– rising personal and corporate bankruptcies;

– mortgage loan delinquencies and defaults in the millions before this ends; the latest Realty Trac foreclosure filings survey reported default notices up 71% from third quarter 2007 and said figures likely were underestimated;

– an unprecedented wealth gap;

– record household debt and debt service levels as a percent of disposable income; around 25% of annual income to credit card companies alone;

– the greatest housing crisis since the Great Depression;

– flat wages;

– high prices on basic items like food, fuel and health care;

– rising unemployment; a wave of corporate-announced layoffs; across the board in nearly all sectors; biotech as well as banking; aerospace as well as autos;

– conditions overall the worst in decades; maybe ever as things get more dire; how economist Paul Krugman (on October 26) described them in the words of a “guy who was told, ‘Cheer up – things could be worse!’ So he cheered up, and sure enough, things got worse.”

The result of reckless and irresponsible policy. With lots of blame to go around. But none more than to the “maestro” of misery. Now 82 and unapologetic to the end.

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