Greenspans Bubble Legacy ‘Now Playing Out’
Public Radio takes a look at the legacy of the former Fed chairman. “World financial markets have been on a wild ride recently. One group of fund managers and commentators is fingering a more surprising culprit: They accuse Alan Greenspan.”
“One economist called him ‘the greatest central banker who ever lived.’ But one London fund manager begs to differ. Tony Dye says Greenspan was a disaster.”
“‘The reason for it was the mistake about puffing the bubble up and not taking the punchbowl away, because that’s what I think central bankers should be doing, in the mid to late 1990’s,’ Dye said.”
“Dye argues that Greenspan inflated the stock market bubble of the 1990s by holding interest rates too low. He failed to take the punchbowl away when the party got started. And then when the stock market crashed in 2000 he had to slash rates to rock-bottom levels and keep them there for more than a year.”
“‘Cutting rates to one percent was basically to try and paper over the cracks of all the problems that would have arisen from the stock market bubble bursting. And it’s just created more problems,’ he said.”
“The ultra-cheap credit, say Greenspan’s critics, inflated another bubble, in US house prices. And fueled an American consumer boom that sucked in yet more imports and massively inflated the US trade deficit. And by making it cheaper to speculate he also set off a tidal wave of hot money sloshing around the globe.”
“Andrew Hilton of the CSFI think tank: ‘There have been grotesque, positively grotesque imbalances in the global economy. And perhaps the US ought to have bitten the bullet earlier.’”
“Greenspan could have exercised more restraint, says Gideon Rachman of the Economist Magazine. He could have pushed up interest rates a bit higher, a bit earlier. But hailed as ‘the Maestro’ at home, popularity may have gone to his head.”
“‘Rather than taking tough and unpopular measures, Mr. Greenspan preferred to keep putting more alcohol into the punch to keep the party going, to keep his popularity growing,’ Rachman said.”
“Greenspan’s supporters say he was a great central banker because kept the US economy humming, but says author Peter Hartcher, in the process, Greenspan sidestepped a major challenge.”
“‘His challenge was, what do you do when the economy is in the grip of a mania, a bubble? He didn’t deal with it. The historical legacy will record that as his failing.’”
“That legacy, say the critics, is now playing out, as interest rates return to more normal levels.”
Thanks to the reader who psoted this in the comments.
Greenspan’s legacy will be Hell.
It is my opinion that it is the system itself that is to blame for this mess and that Greenspan was merely the messenger (albeit a clumsy one). This missive from the venerable Richard Russell.
June 19, 2006 — The papers are full of articles regarding what the Fed might do or not do with short rates. But how is it that nobody ever questions the very worth or non-worth of the Federal Reserve itself. The Fed has never been audited. It’s legitimacy, it’s worth, is NEVER questioned — the Fed appears immune to questions. One problem is that nobody understands what a monstrous fraud the Fed is.
When the US government needs money, it doesn’t just issue United States Federal Notes (dollars), which it certainly could do. In other words, incredibly, the US government does not issue its own money. Instead, the government issues bonds, thereby loading itself with ever-increasing interest-bearing debt. Here’s how this disgrace works –
The US government issues a billion dollars of interest-bearing US government bonds. It takes the bonds to the Federal Reserve — the Fed accepts the bonds and places one billion dollars in a checking account.The government then writes checks to the total of a billion dollars against the checking account — a billion dollars that has been created “out of thin air.”
Meanwhile, the debts of the US grow and grow. And the government pays interest on the bonds. Yet that isn’t enough for the US government. It taxes its citizens, taking away a percentage of their passive and active earnings. And as if that isn’t enough, it robs its citizens via inflation, so that as their living costs rise, simultaneously their savings are whittled away.
The Fed has been in existence for 93 years. In those 93 years the Federal Reserve Notes that the Fed issues have lost 98% of their purchasing power. To cover up this monumental scam, we hear the Fed blather and bluster about how worried they are about the current inflation rate. The current inflation rate, is the cover-up, what kills us is the systematic year-after-year loss of purchasing power of those billions of fiat Federal Reserve Notes.
So the system allows this semi-private banking system to create money out of absolutely nothing (all of it a loan to our government) and charge interest on this debt forever. Thus, the Fed collects interest on the government’s own money. It’s a system that is beyond belief, but one that runs the life blood of the nation — the life blood of a nation is its money.
A communique sent from the Rothschild investment house in England to its associates in New York noted, “The few who understand the system. . . will either be so interested in its profits or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending . . will bear its burdens without complaint.”
..those damn Rothschild’s!!!….
When Greenspan was first appointed, many thought him a political hack. Following Voelker, he made a point of making choices to bolster his credibility. Seems that changed under Clinton, when he responded to one debt crisis by turning on the liquidity nozzel. He did the same thing in advance of Y2K, then again when the stock market tanked. In between, he pimped for tax cuts for the wealthy.
History will not be kind to Mr. Greenspan.
Suzzane says, depends on who writes the history books. Since most economist want a job as a Fed governor, they don’t make good critics.
By the time a “good” history book is written, these economists you’re talking about will be long dead.
Your spot on with the “political hack” - during the last three years of Greenspan’s tenure every Fed decsion was based on maintaining his legacy - not on what was best for the economy. You can only live on a credit card and cheap money for so long - eventually the bar tab needs to be paid. Again, history will not be kind to Mr. Greenspan or his philosophy of letting “bubbles” run their course and the Fed cleaning up the mess afterwords. - The Fed and Greenspan firmely believed they the are not at all responsible for stupid people’s financial decisions or lack of understanding of macroeconomic principles. First quarter of next year things are going to start getting very, very ugly.
T
keep dreaming. those who benefitted most will be writting the history books. you can pretty much predict the outcome.
dataquick is own by a canadian company, not that it matters except they appear to be paid by a awful lot of governmental agencies.
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greenspan was a disaster,and it is nice to see comments about him in the msm that are not hagiographic,for a change.my great grandchildren will be paying for this creeps actions.i’d like to see him tarred and feathered for a start.
Here, here. I totally agree.
You know, you had me until ‘hagiographic’. It’s not that I don’t know the word, or can’t look it up. It’s that the debate on any topic, in any venue, in the US, requires more muscular, more straightforward language. Rhetoric is a neglected art, and it’s why more smart points of view don’t make it into the mainstream, which, for all its idiocy, is where the action is. Talk plain.
STFU. Plain enough?
I appreciate discovering a word I’ve never seen used before…
Read a Lincoln-Douglass debate. Then read a Gore-Bush debate. It will show you how much our nation’s vocabulary (and attention span) has withered.
Not only that, it’s “hear, hear”, not: “here, here”.
Creep is a good word. But don’t forget the crazy Japaneese Bankers with their ZERO interest rates during 10 years! The creation of a “carry trade” bubbble is also responsible for the mess. You should put a few kind words for the total and absolutes asssholes of the BOJ.
This about sums it up:
http://moneycentral.msn.com/content/P131155.asp
I have to respectfully disagree with pinning the asset bubbles on AG. Just as the US Federal reserve presently cannot stop L/T rates from rising, even if they wanted to, the Federal Reserve could not have stopped the near zero L/T interest rates of the past four years. It was largely a global thing.
Not true - Go to the Fed reports! Read the source - don’t believe the spin doctors.
Absolutely. And you can find the answer in Asia.
First the morons from Japan with their 10 year ZERO interests rates and to a lesser extent the stupid manipulations by the Chineese to maintain an artificially low Yuan exchange rate. (exchange rate sterilisation)
The net effect of these two measures was a huge liquidity bubble everywhere but specially in real estate. You can blame also Asia for the coming mess.
The federal government was complicit in this. They could have raised tariffs against Japanese and Chinese imports to thwart this. Just more proof that global corporations rule the USA and the individual citizen has largely been neutered (politically speaking). Let’s face it, electoral politics in the USA is rigged.
Nice try. Greenspan had the hammer for 17 years and he used it as he saw fit. The fed isn’t all-powerful but the position of the fed chairman (particularly one who scrupulously works to consolidate his power as AG did) is the most powerful perch in the global economy. Japan was at 0 for a decade. We went to 1 percent because AG wanted to and the other Fed govs bought in. He wasn’t the only runner in the race to the bottom on interest rates, but without him there isn’t a race at all.
Bernanke is no dummy. He will look at the legacy of Volcker and Greenspan and conclude that it is better to be too tough as a central banker, than to be not tough enough. I predict that Big Ben will forge ahead with the rate hikes until the last speculator is busted.
I would like to speculate that Bernanke will be the last central banker in the U.S.
Dare to dream, eh?
Only if the US goes on a Gold Standard. Your lips to gods ears
Yes: “I have a dream?”
But for Alan Greenspan, he fullfilled his mission -”boot licking Wall Street bankers and Euopean royalty” He did what he was told.
His mission that “he chose to accept”
1) good economic times (i.e. era of good feeling”) and 2) low inflation. He gets an A.
When he couldn’t deliver, the Government gave him a powerplay assist by recalculating, renaming , recomputing, jaw boning, telephoning non low income areas, discontinuance of data collection, started 2 or 3 wars, substituting, invented -productivity, in short bastardized every economic methodology pre US gold standard (Nixon). In fact my B.school and economics degrees are irrelevent today, except for me knowing the difference between money and the US dollar.
Yep A.G. meistro is the Trifecta Knight:
See no inflation (while the dollar’s purchasing value lost more than 75% with reported 2.3% annual CPI)
Hear no bubble pop (while he daily & electronically incerted $5-20 billion into M3 check that M2.{oops another discontinuance you won’t soon notice}
Speak no truth (when asked, just about anything?)
Sorry, but history will be kind to Trifecta Knight, it is his employers, benefactors, royalty brethern, that will write the diaries of the last 25 glorious years of fiat currency destruction.
Three cheers for A.G. when do we get to spend the newly, yet unpublicized, electronic Amero’s $$s that our chief exec recently agreed to??
Mind you we would also like to get rid our central moron banker in Ottawa. David Dodge is as stupid as Bernanké. Pray that all of them dissapear. To dream is cheap. Strange I never prayed and asked to a higher power, to God, to get rid of someone. Maybe I should start?
I disagree with Greenspan being a disaster. He took the risk that technology was indeed allowing increased production without inflation. Then, I recall the absolute hollar everyone made when he did start increasing rates and steadily. Was he perfect? No. Good? Yes.
People talk as if Greenspan caused the deficit, trade imbalance, etc. Sorry, but congress and two Presidents get most of the blame. Greenspan did an incredible job with the poor hand he was delt.
But hey, we’re a people who always points the finger at others…
Neil
He pushed for tax cuts when we should not have had them. This ballooned the deficit in the last 6 years and we are going to have a serious problem when the economy goes south — lead by the housing bubble. Do you really think Bush would have gotten his tax cuts if Greenspan said they were a bad idea? Yes the presidents and Congress deserve much of the blame, but bubbles Greenspan did nothing to prevent it.
The tax cuts were and are good economic policy with our current spendthrifts in congress, if for no reason than to restrain the federal governments wasteful spending.
If government uses the taxes for long term benefits (roads, infrastructure, etc.), then there is a long term economic return on the tax dollars invested. If they waste the dollars on welfare payments and boondoggles, then no it is an economic drain. Tax cuts are the only restraint on the waste - starve the beast to force it to focus on the important stuff (granted congres has not been successful at this, but think of the waste if they had more dollars to spend.)
The homeowner analogy to tax cuts is rising interest rates. Gov’t gets starved by cutting its revenue while homeowners get stung by higher interest rates making it more expensive to waste away their home equity.
Civil,
The gov’t upped it’s debt ceiling by almost a trillion dollars in March.
Nothing in life is free. Someone is getting taxed to death. It is the perfect scheme. Elected officials stay in power by giving tax cuts to the populus. The gov’t is running severely in the red, but as long as foreigners keep buying our debt, we are taxing them indirectly, but taxing them nonetheless (they hold our dollars/buy more dollars, but we keep creating them…their purchasing power is decreasing…essentially no different than the gov’t taking a portion of your paycheck…you can’t buy as much anymore).
The gov’t not having the revenue doesn’t matter one bit. We go further in debt every day. The trick is that we have to keep foreigners buying our dollars. One way is the interest rate differential. Another way is keeping oil priced in dollars. The latter is rapidly coming unglued with Russia selling petro products in Rubles and Iran about to do the same, but in Euros. We’ll see how well the deficit spending works when the dollars aren’t getting absorbed worldwide and start flooding back here. It ought to be interesting.
If you analyze the federal budget some interesting things jump out at you. The spending you talk about, highways, welfare etc., only accounts for about 35% of the budget. Another 25% or so is defense spending. The rest is medicare, medicaid and interest payments on the debt. In the last few years if you eliminated all discretionary spending (excluding defense) you would still end up with debt. We are not bringing in enough revenue to cover expenses. It is stupid and irresponsible to not cover expenses, unless of course you want to eliminate health care for old people. If you do, I hope you never get old.
No, no. no. We are spending more than we bring in revenue. It is stupid and irresponsible to spend more than you bring in.
The tax cuts were and are good economic policy with our current spendthrifts in congress, if for no reason than to restrain the federal governments wasteful spending.
LOL! Some restraint!
Tax deferrals. Not tax cuts. You can’t have a tax cut without a spending cut. (Per Chris Thorten and even if you deagree with him about much this is a great quote.)
Personally if I had a salary cut and went on a spending spree there would eventually be hell to pay. BK, sleepless nights, and employers who check credit NOT hiring me. But nothing for Congress and Bush. They will leave wealthy and happy at our expense.
Hmmm, employers don’t hire people with bad credit. Maybe we should start hiring Congress members who can maintain a budget?!
(Oh, I’m sorry. I forgot we live in the USA where everyone deserves it now, shouldn’t have to work for it, and will elect anyone who keeps the gravy train rolling.)
bad analogy. although tax RATES have come down under Bush, tax receipts have increased in absolute terms. In fact, the US Treasury’s tax receipts in 2005 were an all time record. I’m not defending our government’s spending habits, which are clearly out of control. I’m just saying that when you cut taxes, it inevitably stimulates the economy and that can lead to higher tax revenue, despite the lower tax rate.
I don’t blame the man so much as the job. May the job of central banker go the way of the slave trader into the annals of bad ideas for making a living.
“poor hand” ??
Alan Greenspan inherited stewardship the world’s largest and healthiest economy in 1987, at the end of an unprecendented post-war economic boom, during which most households saw their wealth and standard of living increase. Even the working/lower-middle class and minority households shared some of the pie. He didn’t even have the 1970s “stagflation” to deal with –Volker took care of that for him (and took all the heat for raising rates & triggering the early 80s recession).
And what has happened since then? Two massive credit-fueled asset bubbles, first in stocks, now in housing. Consumer debt vs. incomes & GDP at an all-time historic high. Disappearing middle class and most UN-equal distribution of wealth since the 1920s.
Greenspan did an incredibly poor job with the fantastically good hand he was dealt. Most irresponsible Fed Chairman. Ever.
remember the greenspan of old? the gold and economic freedom one? he’s gone. he’s been replaced by the loser who said that central bankers had acted as if they were on the gold standard!
this is the man who created the most gigantic credit bubble ever seen. he said the low savings rate wasn’t bad because it was counterbalanced by the rise in home prices. he’s a fraud. he’s the worst central banker ever.
In deference to you John-Law …Per your moniker ,I have got quite the educaton.
“Those who don’t learn from history are doomed to repeat it”
The real John Law.
Economist from the 18th century who basically was the father of finace who created his own fiat system.
Started selling stock in the Mississippi Co.
Shares became so inflated people waited for days, caused accidents to see him, to buy shares.
Gold/Silver was devalued by the bank to induce faith in the new paper.At the peak RE,rentals, even a hunchback made money renting out his hump for street deals to use to write on.
Once the insiders got wind ,and tried getting metals for their shares it was made illegal to own more than 20# silver.
People starting buying jewelry ,and silver plate to get out.
New script was issued ,and rejected.
The collapse caused lost fortunes….
It so mirrors the current state of affairs I think it a important read…..
http://www.litrix.com/madraven/madne002.htm
Same play book.
Same families coaching the game.
good point EastofWest
Thanks for the link
“Greenspan did an incredibly poor job with the fantastically good hand he was dealt. Most irresponsible Fed Chairman. Ever.”
I totally agree. I get pissed everytime I see his face in print. Occasionally you even see “them” call him a Maestro. I stop reading right there. ugh! Mabey if I were one of his rich cronies (them), I would feel differently.
I don’t agree with the assessment that Greenspan was dealt a good hand. The Reagan spending binge (1981-1989) was the equivalent of heroin for the economy which, prior to that time, had been doing very poorly. The termination of that spending contributed heavily to the 1990-91 recession. In fact, almost every modern recession has occurred a few years after big government (i.e. wartime or equivalent) spending halted: WWII ended 1945, recession 1948-49. Korean War halted 1953, recession 1953-54. Withdrawal of ground forces from Vietnam 1973, recession 1973-75. The cessation of large-scale government spending will almost invariably cause at least a minor recession. If it is huge spending as at present, combined with colossal war spending, as at present, there is a real question about how severe the recession will be, BTW.
Back on track, I believe what we are seeing are greater and greater swings as the economy grows more dysfunctonal. Bernake is already in a no-win position. Unless new technology comes along to save him, as the Internet did for Greenspan, Bernake will be unable to contain the situation.
“two presidents”? Clinton left us with a balanced budget and surplus.
Congress and THIS president.
But setting us up for a NASDAQ collapse set the post 9/11 Fed response. I still think Greenspan did a great job. But as to “both Presidents” I mean it. Where has the traditional investment in infrastructure been? Now is when the Clinton Admin’s infrastructure spending should be kicking in for good long term economic growth.
The quality of spending by Congress during Greenspan’s tenure has been… poor. I put the blame on their doorstep due to the tiny amount spent for the middle class. Education, transportation, etc. were neglected. Name one runway started by Clinton. (Hint: zero) Subway lines? Ok, a few, but not enough. etc. etc. etc. Neither president had a long term energy policy, etc.
Not to mention both sold us out to China. Without that, we might have been able to continue with a balanced budget…
and talk of disolving a central banker?!? Even if we go back on the gold standard, you still need a lender of last resort. Do you really want to go back to that system? Remember the bank of the United States?
Neil
Nixon goes to China. Real Wages in U.S. begin declining.
Either a democrat or naive to oversimplify.
a big ship doesn’t spin on a dime - - it is way too complex and there are lags between cause and effect.
I think s?he was talking about the two bushs.
Sorry IMHO A. Greenspan allowed the liquidity crisis to develop. The Fed Meeting in 1994 that advocated loosening of standards even caused other Fed bank members to question whether it would cause asset bubbles. BB is the fall guy for the 50% devaluation of the dollar, the 20% inflation and the depression of 2007 to 2013.
I apologize if this is a repost. I blame A. Greenspan. He vwas made aware at the 1994 Fed meeting that allowed this il-conceived policy. He was made aware and pointed to the problem of asset inflation and creating “bubble Markets”. Mr. Greenspans comments and subsequent Fed meeting rejoinders - let the world know that “The bank was in the easy credit mode”. BB is left holding the Bag! And now with another mope from Wall Streets Goldman Sux firm entering government, you should expect the same open vault policy to continue. Whooppeeee Lets see if we can pass Zimbabwe’s inflation rate. It won’t take much for …
Deficits under Clinton went down every year since he took office.
Uncle Alan is neither good, nor dumb, nor a disaster.
This is a guy who once (and publicly) believed in Constitutional money (gold) and the evils of asset confiscation through monetary inflation (”gold stands in the way of this insidious process” he said in the 60’s).
At some point he sold his soul to the biggest banker of them all, in return for the power and prestige of central banking, not to mention filthy lucre beyond imagination.
At this level of power there is no such thing as a “mistake” or a “miscalculation” or a “misjudgement”. No such thing as “poor policy” or “making the wrong move”. Everything is coldly calculated and executed.
The powers that be know of the realities of the Austrian “crack-up” boom, the Kondratieff winter, fiat currencies, etc., as well as (or probably better) than the most die hard gold bug ever will. They just happen to be in a position to take wild advantage of it by knowing “when to hold them, and when to fold them” before the sheeple do.
Will the housing bust, on top of the stock busts, on top of possible hyperinflation, on top of rising commodity prices, on top of war in Iraq/n be the process by which the American people are brought to their collective knees and will beg to be included in the new economic world order?
Maybe just a conspiracy theory, but sometimes theories prove true. We talk about it over and over again, how housing is going to take such a massive crap all over the place. Do we really realize what the potential is here for a total meltdown and cascading defaults?
I am haunted by that old saying “be careful what you wish for” - but then I check the local RE market stats and laugh like Dr. Evil!
Seriously, we do need to keep in mind how bad this could get, and be hedging accordingly, not just with RE.
Spot on! Thank you for that. The problem is the system, not the man. Fiat currency is always inflated, all through history. You would think we learn from the past, but we keep repeating mistakes. Why has no currency ever lasted and gold remains the king? Because of our tendency to take the easy way out.
Seriously, we do need to keep in mind how bad this could get, and be hedging accordingly, not just with RE.
Indeed. Most people think the stock market is risky, and real estate and their dollars safe.
It’s going to get bad and many of our closest relations are going to be hurt. Yes there will be opportunity for those who have hedged and prepared, but many good Americans are going to be hit hard. We’ll come out the better for it, much like we did after the Great Depression. But what’s diabolical is that those in the positions of power, the ones who contemplated and appreciated the recklessness of our fiat currency system and had a chance to inject sanity yet chose to stand by and do nothing - those are the ones who have unclean souls. They won’t pay for it in this life time, but perhaps they will elsewhere.
I agree that there is a strong possibility of a “perfect storm” for the US and world economy. I’m really not convinced that there is any hedge against a meltdown of such proportions. Is there any shelter from such a storm?
I have a feeling that when this is all said and done, people, especially family members, will be having to learn how to live together and actually help each other - kind of like those “old days”, if you know what I mean.
Gold, guns, grain, a cabin in the mountains - all of these could become extremely valuable, but in the absence of a viable society (i.e. chaos), and a future for our children, it would be a hollow victory.
There is wisdom in having some of these types of survival “supplies” laid up for the worst case scenario. Short of an all-out meltdown, at the least we should see massive devaluation of the dollar, for the politicians have only two choices to deal with this mess: inflate, or repudiate. They always pick inflation.
Gold and silver are excellent hedges, especially coming off of a 20 year bear market during which everyone has become completely freaked out towards their role as a store of value. They will reassert themselves in a big way.
Ultimately, faith and family are the only real shelters worth anything.
An AR-15 and a box of gold eagles doesn’t hurt either, at least as a “hole card” up your sleeve!
When the world’s emerging markets wake up they will believe they have been scammed by the US Fed. Is it possible that the powers- that-be might have colluded with the global hedge funds and carry trade players? Ultimately, the money that was used to develop and prop-up emerging market economies is now being pulled out from under them, and they’ve just received their first dose of fast money running for the exits as a result of belt tightening by the CB’s and the coming end to the BOJ zero interest rate policy or ZIRP. Investors in those markets are just now realizing what hit them. I keep saying that the Fed has no options other than trying to slow the bus as it careens downhill, out of control, but the big curve is fast approaching and they can’t stop in time unless they hit the brakes now. Otherwise, the US real estate crash will result in a drop of 60%-80% from peak 2005 levels, there will be massive numbers of bankruptcies, foreclosures, rising unemployment and a recession beginning late 2006 or early 2007. People that purchased real estate prior to 2001, and didn’t overpay or take out HELOC’s during the intervening years will have a chance of surviving the crash. Those that bought during 2002-2005 are toast. This is the Fed’s way of taking the froth out of the market. Hoz, TxChick: I also believed that real estate was overpriced in 1997-1998 and that a bubble was starting. Bigtime wrong.
“Is it possible that the powers- that-be might have colluded with the global hedge funds and carry trade players?”
Thanks for voicing my worst fear. Now excuse me, while I go throw up…
i would say you give them too much credit. Rumsfeld and Dick Cheney and all of them actually seem to have believed the Iraqis would be glad to see us. Seems unbelievable that any national leader could be so naive but but but… ??
Uh, they were. And they’ve voted, and now they have a constitution and a government. Nuf said.
“Uh, they were.” — Partially true.
“And they’ve voted, and now they have a constitution and a government.”– True
“Nuf said.”– Very untrue, and your poor logic and judgment here deflates what seemed to be an eloquently written statement up above.
Actually, come to think of it, that they even have a government that could function without the U.S. military there is pretty iffy, so I have to withdraw even that concession.
But back to the topic of Easy Al.
Hmmm… I write sometimes without thinking. It just occurred to me that maybe you were sarcastic, but it’s hard to say, there’s nothing in your statement that gives it away, so anyway… Back to Easy Al everyone!
Ugh. Make room for me.
well we know they are in with the banking system, which are in bed with a lot of hedge funds for loans and trading fees…
where is my tinfoil hat, it’s cold in here?
Yea, I’m very cold, with a ridiculous allocation in Au.
Fred, it’s already happening. My brother lives and works in Argentina and right now there’s a lot of nervousness down there. The Argentine CB has been accumulating gold and much of the professionals my brother associates with are very nervous about the dollar. Their stock market got whacked the last few weeks thanks to Bernanke’s chirping. My brother says that people are only in dollars for now because they’re not sure where they want to be next. But there is a prevalent feeling that the dollar is about to go through what the Argentine peso whent through a few years back and Argentenians don’t want to be caught twice. So that’s why they are looking for another way to preserve wealth. I suspect what’s happening in Argentina is also happening in many “second world” economies right now.
you mean, stuff like this?
Argentines barter to survive
Argentine pensioners turn to prostitution
I had about US $30,000 in my account and I can not have access to that money.
wasn’t it argentina who just recently had a collapsed economy? paper money will probably be the last asset that they will try to keep.
That kind of thing is what the writer of his memoirs “Confessions of an economic hitman” wrote of in his book.
They have other nasty tricks they can play to take down nations or corporations down.
“Otherwise, the US real estate crash will result in a drop of 60%-80% from peak 2005 levels, there will be massive numbers of bankruptcies, foreclosures, rising unemployment and a recession beginning late 2006 or early 2007.”
There is no otherwise in the equation; a $50k income simply can’t afford a $600k California tract home, and it will end badly for many families.
“I also believed that real estate was overpriced in 1997-1998 and that a bubble was starting.”
That’s right, and it was fueled by the stock options.
Great comment Fred Hooper.
Japan’s policies were as bad as Greenspan’s policies . I would even say that Japan started the ball with their ZERO interest rate policy. And what you say a couple of weeks ago in the markets, is just preambule of what awaits all markets but specially illiquid and “gooooey” assets like real estate, difficult to sell. It would be real interesting to know who in the financial institutions, is on the hook the most with these carry trade speculation.
phoenix
50,179
YES! YES! YES!
and I mean that in a good but bad way.
Gold and Economic Freedom
by Alan Greenspan
(1966)
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society’s divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (”paper reserves”) could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. 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 braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
###
Alan Greenspan
Power tends to corrupt; absolute power corrupts absolutely.
–Lord Acton
John,
That article summarizes exactly what is happening today. I’ve said before that folks keep licking their chops with respect to getting great deals on homes in the future, but don’t realize how things will be when those prices drop 50%. Everything he said in the ’60s is happening today, without exception. Unfortunately, there is no peaceful way to go back on a gold standard in a democracy. No politician would ever get elected running on a platform that would call for such financial pain, although needed for the long term prosperity of the country. I think, as history has shown, something is going to give, and the pain will come with it. Once the ball starts rolling in a pure fiat scheme, the only way to keep it afloat is to keep creating money. It will break down, but not because folks saw the error in their ways. It’ll break down because tens of millions of people don’t make enough to keep up. Has happened repeatedly throughout history, and I don’t see any reason why it is going to be different this time. If more folks read that article and understood what was going on around them, maybe, just maybe, it could be stopped before the financial pain. Unfortunately, not likely. I feel like the CBs of the world view the globe as one big classroom. They are testing their economic theories to see if they are right. Only problem is that when they’re wrong, a tremendous number of people are going to get hurt financially.
let me make ask some questions here. (remember, i am no economist). if an economy’s credit is based only on gold, the total credit available will be limited by the amount of gold available and being extracted. will there be enough to support economic growth necessary for an increasing population? if not, what will be its effect in the overall economy?
That’s exactly why we have fiat money. There is not enough extracted gold in the world to run our economy. Fiat money solves this problem by being backed by “gold”, but when the “gold” backing was removed in 1970, it was a true fiat commodity. The dollar is not “money”. It is a federal reserve note, backed only by the Federal Reserve banks promise to pay.
There is also a conversion difficulty with gold (imagine carrying gold ingots to Home Depot to buy a garden tractor). Plus the quality would have to be verified, etc.
The good news is that the FRB will not refuse to pay hence this country split at the seams.
No, there is plenty of gold. The issue is that there is not enough gold to extend credit to all potential borrowers. This puts a leash upon a banks ability to “make” money. A gold standard lends itself to a lower rate of interest, stricter lending standards, decreased influence of lending institutions, and hence a much lower level of inflation even tending towards deflation in times of high productivity. There is plenty of gold, but just not enough for the folks that like to “make” money without working.
a tremendous number of people sometimes get hurt more than financially. what happened with the weimar republic?
he probably doesn’t even remember writting it. worse, if he knows what he said. he is very at saying what you want to hear.
I agree. When the economy was going sour after the tech bubble, there was no reason to drop rates to ridiculously low levels. Big deal, a lot of high-school dropout kids lost their jobs because .com’s went under.
I’ve been in the field since 93, and managed to stay employed, as with most of my other friends who are in the field as well. All the tech bubble burst did was help weed out the useless talent.
-Richie
Absolutely. That useless talent then went to work as realtors, mortgage brokers, appraisers, etc. What will they do next?
Good thing WalMart is expanding……need lots of overnight stockers for minimum wage.
I though this was a good article from Bloomberg News (with a nod to jersey shore real estate bubble.)
Money quote “Excess liquidity leads to mispricing of risk,” says Nick Parsons, head of the macro research group at Commerzbank AG in London. “Repricing of risk involves deleveraging, and deleveraging is brutal and indiscriminate.”
http://tinyurl.com/jnj5v
Clarify “AG”.
Thanks.
Bill Fleckenstein put together a piece on AG in January on MSN Money’s Contrarian Chronicles - “Greenspan: The worst Fed chief ever”
Umm… yeah, I know. I posted the link for it (see my 2006-06-21 15:30:30 post above). Easy to miss while skimming I suppose.
OT - That $400 million Daimler Chrysler testing ground that Toll, et al. bought, did they buy it or just an option to buy? Is that facility NE of Wittmann AZ? I don’t see any developement on the satelite images. Can someone give me any up-to-date information?
Oh yeah - Easy Al = worst fed chairman ever.
It was purchased for $312M by a LLC controlled by Toll, Meritage, and Simon Property Group. And yes, they did purchase it. No development yet, it will take quite a few years of planning for a site that big (assuming the housing market doesn’t crash first, LOL).
Is it a few miles north of Wittmann? Isn’t Wittmann a town of only 3000 people? Seems like they may have been a little overly ambitious with this project.
Bubbledomus –
Quatrain 11
At the dawn of the new millenium, greed will scurry from one market place to another.
This folly will befall the Wealthy Nation by the hand of Greenspin.
The voracious pack will not heed the warnings of the few among them.
And in the eighth year of the new century, their dwellings will be torn asunder by the man-made flood.
You are no doubt driven by a “prophet motive”.
LOL
Bubbledomus, please, Bubbledomus:
Can you give me the perfect entry and exit points for the next two years to short the DJUSHB and go long the HUI?
Which quatrain is that in?!?!?
A little bit of NOSTRADAMUS ?
Here’s John Mauldins take on it..
http://www.investorsinsight.com/otb_print.aspx
OT, but this is an interesting read:
http://bigpicture.typepad.com/comments/2006/06/why_the_real_es.html#comments
Barry, the owner of the blog is on CNBC from time to time.
That is a good read, thanks.
I’m glad Greenspan is gone. When he talked, everyone listened. It took days to decipher what the hell he said. At least with Ben, it’s not like listening to a riddle.
…..Also maybe someone can answer this. With the trend to piggyback the PMI onto the loan ,and the buyer defauts, dosn’t this really leave the bank exposed? Not sure what PMI totally covers, and is this yet another factor to cause further damage.
Read about Housing “on the rebound”.
“It’s not to say there is another housing boom under way but the housing side of things will not be a huge drag on the economy in the next year,” he said”
Read about Strong economy boosts sales of luxury homes.
“He dismissed claims that the housing market is a bubble close to bursting.
“I’ve seen three booms and I’ve seen two crashes. This does not feel like a boom, just a natural price appreciation,” said Cohen.”
Do you think they’re trying to use too much lipstick?
Isn’t it possible that all this accelerating productivity is creating deflationary pressures and The Fed is simply trying to avert the D word at any cost? If so a reversion to mean is going to be different this time. And by different I mean a lot worse.
The only possible outcome is massive inflation. As individuals we can file bankruptcy (sort of) as a govt, the bills will get paid. As far as I can gather, our govt is infusing hundreds of billions of dollars into the economic system (printing of old) not in order to make us all rich, but to pay for a war gone badly and ever increasing federal obligations and interest on the national debt.
Yeah well I would say that it is already happening. Why do you think that the FED threw in the garbadge the measurment of the M3 ?
Good, grounded article on Housing stox
http://articles.moneycentral.msn.com/Investing/StreetPatrol/MoreHousingGloomAhead.aspx
Check out this link-the money paragraphs are below:
“As unbelievable as this may seem, housing companies are just coming to the realization that the good days are over. Streamlining efforts like those announced by KB Home, which will cut 7% of its workforce, are just beginning to be put into effect. Investors should expect more such announcements in the weeks and months to come, as the industry adjusts to the deteriorating environment.
In short, the news cycle will continue to be negative for at least another six months or probably longer. And don’t be fooled into thinking that the group is now undervalued.While the average multiple to earnings is a modest 5.4-times fiscal-year 2007, it should be noted that future estimates will be coming down hard. Traditionally, the group bottoms when it sells for closer to 4-times earnings.Considering the potential erosion in earnings, the stocks are still overpriced by at least 25%. On a short-term basis, the sector is oversold and a technical rebound of 10% or so can’t be discounted. But given the lousy economic backdrop, deteriorating earnings picture and overtly bearish technical tone, investors should sell into any near-term rallies.”