Good news, Alan Greenspan has finally admitted that it wasn’t low interest rates that caused the bubble, but the Asians. [The same Asians that were spooked by Geithner in the late '90s.]
I felt inspired and used icanhascheezburger to capture his honesty:
Note: Greenspan is in good company as both Paul Krugman and The Economist have jumped on that same bandwagon.
See also: When in Doubt, Blame the Asians
Did the Fed, or Asian Saving, Cause the Housing Bubble?
Did exchange rates cause the bubble?
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The question is this: if a flood of foreign savings into the U.S. did lower interest rates (which one would expect), would you get a housing bubble in the absence of government housing policy (GSEs, CRA, etc.)? No. So we can’t blame Asian savers. It’s still the government’s fault.
The “Asian savings glut” was really Asian central banks – mostly Japan with a big dose of China in the later years – trying to keep the dollar strong and their own currencies weak for mercantilist expoting puposes. The policy was carried out by taking dollars acquired from exporting in spuplus over their imports, trading them in to the Chinese or Japanese central banks for local currency, and then buying US Treasuries with the dollars. The buying of treasury bonds drove up their price and drove down the interest rate.
The astute will see this for what it was: The Asian central banks were inflating their money supplies at the same time that the US was inflating it’s money supply. This was an asymetrical game that ended up inflating EVERYBODY’S money supplies around the world. The Austrian Business cycle on a global scale.
But this process did not “happen” to the Fed, it was driven by the Fed. Of course they could have stopped it at any time by contracting (or dramatically slowing) the money supply, driving up interest rates.
I will concede one small point – the Fed is not the sole creator of money in the world, so technically a dramatic increase in world money supply and liquidity is not the Fed’s fault all by itself. But the Fed truly sits at the top of the giant pyramid and tiny chanes by the Fed are multiplied exponentially throughout the world financial system.
This is just one more reason to abolish the Fed. The Fed is not an engineer fine-tuning the economy on a second by second basis by optimizing the money supply and interest rates to find the optimum operating point. This would imply that IF the office were heald by a true benevolent genius that the power could be used for good.
The Fed is actually a mad scientist unleashing monsters of credit and liquidity on the world that it really has no idea what they will do. It’s actions are multiplied by such a degree (sometimes hundreds of times over) and with such uncertainty that it cannot control or even predict the results we have to live with.
BTW, I have 2 theories on Alan Greenspan:
Starting from the premise, based on his writings in the 60′s and his place in Ayn Rand’s inner circle, that at one point in his life he “knew better”. At some point in his life he seemed to understand that that the stable money supply produced by the gold standard lead to he best economic outcomes, and liberty by the way as well. He didn’t have the excuse of a Princeton education for his ignorance like Bernanke, who can almost be forgiven for being honestly, dramatically wrong.
My more conventional theory is that he was essentially the nerd who was invited to sit at the cool kids lunch table and sold out all his old nerdy friends in exchange for popularity. Kind of like a big John Hughes movie from the 80′s. The final knife in the back was to get up in front of everybody and confess that his downfall was caused not by selling out his old nerdy friends (which is how a John Hughes movie would end), but by not giving up all of his old nerdy ways. In other words, his great mea culpa was that free markets really don’t work and that he was foolish to ever have believed that.
The more sinister and interesting theory is that since the first day he got the job he knew exactly what he was doing: planting the seeds for demise of the world monetary system. He was essentially a mole sent to destroy the fiat money system once and for all by exposing it’s true nature. More interesting, probably less likely – but maybe the same result.
Is that why the Fed cut interest rates every time the market got a bellyache? That’s all that I recall. The Market would go down 200 points (back in those halcyon days of 12,000+) or 1% and the Fed would shlash interest rates and it would shoot back up. Was that the Asians?
Is that why the Fed cut interest rates every time the market got a bellyache? That’s all that I recall. The Market would go down 200 points (back in those halcyon days of 12,000+) or 1% and the Fed would shlash interest rates and it would shoot back up. Was that the Asians?
Is There a Savings Glut:
http://mises.org/daily/1882
China Does Not Determine US Interest Rates:
http://mises.org/daily/1837
and from Richard Duncan:
“Anyone who tries to persuade the public that the US Current Account deficit is caused by the desire of foreign investors to buy US assets should be laughed at if he actually believes that and ashamed of himself if he doesn’t.”
http://www.silverbearcafe.com/private/$crisis.html
“The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier — in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.”
Would those arbitraged global market opportunities have been the result of the IMF and World Bank encouraging inflationary policies for South America and East Asia after their banking crisis? On the bond market, it’s called a “carry trade” and yen to dollars was the favorite play. It worked until 2006 when the yield curve inverted.
Greenspan may be right from his perspective about decoupling of the US Federal Reserve setting monetary policy and interest rates in the US, but that’s because they don’t understand the beast they’ve created. There are many more intelligent people working on the floors of the respective bond markets than work in the Federal Reserve banks.
In Greenspans book, The Age of Turbulence, there’s a passage on page
297 where Greenspan describes his debate with Li Peng and Greenspan told
Li Peng that the US tried price controls (under Nixon) but learned that
they don’t work and learned not to do them.
This conversation was during the period when Greenspan was head of the
Fed and controlling US interest rates….
I find it hard to believe that Greenspan didn’t realize the disconnect
in this.
It’s like a mother who bakes a cake or cookies every night to go with dinner. Then blames her kids for being fat because they eat too many desserts.
“The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004.”
This is nonsense. Long term fixed rates may have decoupled, but adjustable rates responded strongly to the Fed funds rate all along.
http://mortgage-x.com/general/historical_rates.asp
At the same time, these adjustable rate mortgages dramatically gained in market share as a percent of originations.
http://www.mortgagedataweb.com/reports/$blog/armsdec08.png
So, not only did mortgage rates in fact respond to Fed policy, it was precisely those mortgages that were most responsive that boomed. Once again, a look at the actual data refutes Greenspan’s self serving obfuscation
Greenspan has an op-ed in today’s Wall Street Journal in case anyone is interested.
http://online.wsj.com/article/SB123672965066989281.html
Money and Ethics
Wednesday, March 11, 2009
The ‘Maestro’ Conducted A Funeral Dirge!
Why would the unConstitutional coup allow its ass ets (not a typo) to sit idle while a tourniquet (an audit of the Federal Reserve) is in place and about to be applied (H.R. 1207)?
Some how, some way, the blame needs to be shifted away from the Federal Reserve or the pawns of the unConstitutional coup will have no recourse but to listen to the disgust of the ones who cast their votes each election cycle. Members of Congress will not be able to tow the line for the unConstitutional coup if the Federal Reserve is undeniably perceived as the cause of the economic crisis.
Can a forked tongue maestro who has fallen from grace convince anyone? Certainly not alone. Expect a bombardment from all the guns at the disposal of the unConstitutional coup. Line up and be counted all you media minions, now is the time for you to deliver! These are extremely desperate times! A way of life is in danger – fascism as we know it may come to an end!
Pull the forked tongue back in. It’s too late!
Anyone read this article?:
http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html?_r=2&ref=todayspaper
I swear we are “this close” to people coming to an understanding of the Austrian theory, but alas calls for bailouts and more regulation abounds. The article cited above is very close to something of an Austrian insight. We have to push onward!
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