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Source link: http://archive.mises.org/9636/the-fed-did-it-and-greenspan-should-admit-it/

The Fed Did It, and Greenspan Should Admit It

March 19, 2009 by

According to Greenspan, the culprit is the savings glut from emerging economies, such as China. This glut of savings was channeled to long-term US Treasuries and other US financial assets thereby depressing their yields. In fact, the so-called savings glut in emerging economies had nothing to do with the last economic boom or the current economic crisis. The only institution that can set in motion the expansion of money and a false boom is the Fed. FULL ARTICLE

{ 23 comments }

Abhilash Nambiar March 19, 2009 at 10:14 am

Frank Shostak in this article seems to have covered lot of the steps that Central Banks usually take to cool down economies that have super heated.

Steve Hogan March 19, 2009 at 10:37 am

Have you ever noticed that when the economy is booming and everyone seems prosperous, everyone hails the Fed for its wise and prudent handling of the economy, but when the bust occurs, it’s due to frugal Asians or animal spirits or mass psychology? Why is that?

Fess up, Alan. You blew it. You created a bunch of money, started two unsustainable booms, and destroyed trillions in wealth. Congratulations.

Ronald March 19, 2009 at 11:47 am

I am no economist but suspect that the current crisis is that lending security wasn’t ample enough to protect the banks risks across the board, a direct result of low interest rates and a fervent push by government laws to loan money to high risk clients beyond reasonable amounts of risk. Risks that were not sufficiently backed with assets derived from interest or down payments. Two results of poor government intentions setting up the economics to fail.
I agree in that Greenspan and Congress are the two corner stones of this glitch in the latest attempt at inventing perpetual motion designed around fishing for suckers, excuse me, investors to their social agendas.

Having no conservative cushion to fall back on and the fed inducing spending put a lot of people out on a limb, which there was no economic safety net in play for.

I do suspect Greenspan had thought he invented a successful perpetual motion machine.

I don’t see how this can be blamed on the investors/homeowners owners when the government induced the laws and the fed created the rate structure.

As usual the government and the fed are playing at politics to obscure the reality of their deeds to insure politics saves the day and not common sense. Something they are allergic to.

Sandor Balogh March 19, 2009 at 12:53 pm

Excellent article, but I would go further.

The FED was created, and equipped with adequate powers, to maintain a stable economy.

They didn’t. Question: they couldn’t, or wouldn’t?

If couldn’t, is it because of objective (break down of the system) or subjective (shortsigtedness) factors.

If wouldn’t, why?

The situation is similar to the beginning the Great Depression, and the 1979 attempt by the then new Chairman, Paul Volcker’s to “decapitate the Americaneconomy,” as it was stated in a 1979 article in Foreign Affairs. Then the new president, Ronald Reagan prevented a full scale collapse. (see Andrew Shonfield “THE WORLD ECONOMY 1979,” in FOREIGN AFFAIRS: AMERICA AND THE WORLD 1979 (vol. 58, #3, Student edition).

Whatever the true cause, the crisis has ruined millions of lives already, and will ruin countless others.

I think Congress (and perhaps a federal prosecutor) should find answers to these questions.

Sandor Balogh, Ph. D., prof emeritus

Greg Feirman March 19, 2009 at 12:54 pm

Greenspan is so full of it. I put up a post refuting his editorial on my blog: The Fallacy In Greenspan’s Self Defense (http://www.topgunfp.com/the-fallacy-in-greenspans-self-defense/).

AV March 19, 2009 at 12:57 pm

“I don’t see how this can be blamed on the investors/homeowners … when the government induced the laws and the fed created the rate structure.”

From a macro perspective, yes, I appreciate your point. But what can be blamed on investors/homeowner is a lack of common sense — believing that the gravy train would continue, liquid savings considered low on the priorty list, and unchecked hubris that employment would always be available.

Living beyond one’s means (in the personal space as well as investment space) is the fault of the individual alone. I know it is in my case and I’m embarrassed by it.

This has encouraged the statist politicians within the oligarchy, and justifies their belief that most individuals cannot think for themselves; therefore, the socialist safety net requires enlarging.
Shame on me.

Tim Kern March 19, 2009 at 1:31 pm

Someone should tell poor Mr Greenspan that the original financing is not held long-term, but is bundled with other instruments and sold over and over. Thus the actual quoted mortgage rates (maybe 500 basis points above the Fed’s price of funds) have many lives before they finally get paid off.

Therefore, his argument is based on an extremely limited portion of actuality. In plain terms, that outlook is either ignorant, devious, or delusional; regardless the level of understanding held by of our mass media and the majority of our population, Mr. Greenspan, at least, isn’t ignorant.

Enjoy Every Sandwich March 19, 2009 at 1:44 pm

Greenspan et al should admit it; but they won’t. They’ve got a good Two Minute Hate going against AIG employees which is doing a nice job of distracting everybody from everything else.

joebhed March 19, 2009 at 3:11 pm

central government planner here

This is one of the best articles to appear on this blog.
It’s focus on the monetary SYSTEM of this country and the relationship between our system and other systems is what lays bare the lies of Mssrs. Greenspan and Bernanke.

The truth is there was tremendous growth in the money supply, or the Q. This is naturally inflationary, although that inflation was continuously hidden in the asset growth of the housing market and other financial exotica that was piled on by the investment banks, leaving wages and prices intact.

Most importantly, the article identifies ALL of the foreign investment in both Treasuries and other American assets as a “recycling” of US money growth, making the accountable party and actions the irresponsible money management by the FED.

This of course begs the matter that the FED is not part of the federal government, and that its largesse represents a private monopoly run amok.

What is not evident in this article nor the comments of emeritii is the basic flaw in the debt-money system.

Ours is a system of money creation where ALL money is created as a debt that is repayable with interest that is never created. This simple fact explains the horrendous pace and scale by which Bernanke attempts to close the gap(shock-and-awe $$) on the truism that debt-money has created, and explained by Volcker as “we do not have the money to make our debt-service payments”.

It’s the debt-money system that IS the problem.
We need a new money system, I am sure y’all agree.

It’s what comes next that the discussion should be had.
Shall we?

Frank March 19, 2009 at 3:56 pm

The only plausible rationale he might make was that he had to gun the money supply to “offset” the ever increasing burden of government from the back of the real economy, but he never uttered a discouraging word in that area either

Ned Netterville March 19, 2009 at 5:02 pm

Mr. Shostak, “We can also conclude that the so-called savings glut in emerging economies had nothing to do with the last economic boom or the current economic crisis.”

No argument regarding past and current events, but what of the future? The premier of the 800lb gorilla among emerging economies recently expressed concern with the safety of China’s $1 trillion investment in the US. I suspect the cause of the premier’s concern is the inevitable devaluation of the dollar mandated by the huge increase in the federal government’s debt and deficit spending. Of course government officials were quick to assure the premier, and through him the world, that US government securities remain the safest investments in the world. Yeah, right. The potentially self-fulfilling doubt expressed by China’s premier may prove to be a fateful crack in the faith half of the “full faith and credit” foundation which alone upholds the dollar’s value. Government deficit spending cannot stop the economy’s slide into depression because its entire line of credit has been used up and even exceeded. All that remains is faith–faith not in God but in government. When that faith waivers, the Keynesian miracle of “turning a stone into bread” will turn to ashes instead.

banker March 19, 2009 at 6:54 pm

So this means everyone should learn Chinese, being that they are the biggest creditors now. The anglo-american “empire” with the pound first, then dollar as the world currency, is finished.

China will start an organization like the IMF and start bullying the rest of the world now. The Reminbi will become the world currency. So, will it be a peaceful transfer of power from the West to the East, or will it be violent?……

greg March 19, 2009 at 7:00 pm

This downturn was not all the Fed’s fault! It just is not that simple and those people that pin it on the Fed lack the business insight of the markets operation.

One example of a cause to the problem is the development of ETFs in the financial markets. The volume of trades in these funds have a huge impact on the price of commodities, stocks and bonds. Treasury ETFs open the trading to everyone that wants to trade with the keystroke of their computer at home. The increased demand for Treasuries caused the price to increase and the interest rates to fall.

The same thing is happening in the gold market. Even the gold producers say the main demand for gold in the amount that is needed to meet the ETF demand. Not the people buying gold coins or jewlery, it is the gold required in reserve to fill the ETF purchases in funds like the GLD.

Bubbles are caused by too many sheep following a path. Then they burst when a few sheep turn around and leave the majority left holding the bag. The problem is not with the sheep herder, the problem is with the stupid sheep!

Anyway, I have about 10 other causes of the housing downturn but will not go through them all because most people outside the trade really don’t understand the business. But as a builder, I never based a single decision to build a spec on the current interest rate!

Curtis Zwick March 19, 2009 at 11:52 pm

Greg
I’m one of those people “outside the business” that probably doesn’t really understand it. However, the housing bubble was by no means the first and probably won’t be the last bubble. You are correct of course that saying it was “all the FED’s fault” is overly simplistic. Just as blaming it on ETF’s and other financial “innovations” is overly simplistic. The fact is (as I see it) that the other factors that contributed to the crisis; from “greedy bankers” to “greedy consumers”, and everthing in between could never have caused such systemic harm without the FED’s manipulations. Market force WOULD check that greed had maket forces been allowed to operate. What prevented those market forces from operating? The FED and government central planning thats what.
So, when all is said and done I can only conclude that it was indeed mostly a “government failure” as opposed to a “market failure.”
Systemic crisis’ are caused by systemic flaws, not ETF’s or poor lending standards.

SailDog March 20, 2009 at 2:17 am

The real fun will start when the Chinese, Saudis and other stop investing in US treasuries. Maybe they already have slowed down. Is that why the Fed has jumped in?

If so, the US economy is about to crash.

Nathan Mayer March 20, 2009 at 8:28 am

greg,

unfortunately you didn’t say anything that was true.

It WAS all the Fed’s fault.

How can ETFs cause a bubble? Shostak even points out how yield will fall if too much money is invested in a specific sector which will make other, more high yielding investments more attractive, causing a shift from the overvalued to the undervalued.

Just irrelevant I’m afraid.

It wasn’t “stupid sheep” – there’s no such thing. Entrepreneurs will capitalise on the Fed by “teeing off” on their policies.

Shostak has a lot of to say about all this, it’s a shame you didn’t bother to even tackle this particular article.

It’s also a shame that Shostak has not addressed the the only credible case against Austrian economics – ie. Mike Sproul’s RBD:

http://www.csun.edu/~hceco008/realbills.htm

stefan March 20, 2009 at 10:44 am

Nathan,

Is there is an Austrian critique of the RBD? I’m assuming there isn’t, based on your comments. I will not default to the “if there isn’t a rebuttal already, it must be a worthless theory” argument, but a novice like me needs some help digesting rival ideas. I believe all ideas deserve a litmus test.

stefan March 20, 2009 at 10:52 am

Following my previous post, a cursory search of Rothbard’s “An Austrian Perspective on the History of Economic Thought Vol.2″ finds that he address this topic. As I have yet to read it, I cannot comment further.

stefan March 20, 2009 at 10:52 am

Following my previous post, a cursory search of Rothbard’s “An Austrian Perspective on the History of Economic Thought Vol.2″ finds that he address this topic. As I have yet to read it, I cannot comment further.

stefan March 20, 2009 at 10:55 am

Following my previous post, a cursory search of Rothbard’s “An Austrian Perspective on the History of Economic Thought Vol.2″ finds that he address this topic. As I have yet to read it, I cannot comment further.

Inquisitor March 20, 2009 at 12:32 pm

Nathan (or someone else), could you explain concisely how the yields work? It’d make Shostak’s article easier to comprehend. BTW as for Sproul he is unclear on how RBD relates to the ABCT. I wish he’d write up a piece on how his on theory relates to it. He is against Austrian monetary prescriptions (well, those that most Austrians advocate anyway) but unclear on the ABCT itself.

HM March 20, 2009 at 1:16 pm

This cracks me up.
Its all those Asians with their high savings rate. How dare they!
Blame the victim, anyone?
Here are millions of poor (in the financial sense) Chinese, toiling in sweatshop conditions, managing to save a dollar a day.
At the same time, Americans are borrowing like mad to buy RV’s, big screen TV’s, SUVs, swimming pools, vacations and on and on.
With a staggeringly high per capita income the US was unable to save, on average, a dollar a day per person.
All this money available from around the world and the US borrows it not to invest in manufacturing, or high tech, or pharma (stem cell research, anyone?)…It is simply squandered.
In Alberta there is a running joke to the effect of “Lord, give us $150 barrel oil again. I promise not to piss it all away this time.”
I think the US needs a similar saying. “Lord, give us $2 trillion in foreign investment again. I promise not to piss it all away this time”.

ben March 29, 2009 at 10:50 am

To the author I would say this( if you can send Al an e-mail):

Alan is full of s****. If the Fed’s fund rate would not effect long term rates such as mortgagees, why then in the world is Fed trying whatever is doing today to bring this mortgage rates down? If conundrum was actually real why in the world is Fed wasting time to manipulate the fund’s rate now. Alan knew and knows very well that the actual correlation may be lagging as the author mentions. What it mean is that it may not work right way like it is not working now, but will eventually work and the Fed knows this very well. I think Alan should go to jail because he brought this country to it’s knees.Somebody might have told him to do it but he should have not done it.This was his making.

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