greenspan’s folly…

Posted on Monday 7 September 2009

Alan Greenspan took over the Fed in August 1987 during Reagan’s waning days. He had a belief. He thought, as many have thought, that the free market economy is self correcting – that it will upright itself under any circumstance. He felt he could deal with setbacks by adjustments in the Interest Rates at the Federal Reserve Bank. Economy sags, lower the rate. Credit improves, money is more available, the economy picks up. He fought against people who wanted to exert more control over the markets. When Brooksley Born took over the CTFC in 1994, she quickly perceived that the Derivitive trading unleashed by her predecessor, Wendy Gramm, could turn into a nightmare. Greenspan and others blocked her attempts to bring this dark market into the light. After 17 trips to Congress in an attempt to make her point, she gave up – largely due to Greenspan’s efforts. That was a terrible mistake.

 

When Greenspan took over in 1987, the Federal Reserve Rate was low for the time [first red mark] in response to the Recession during Reagan’s tenure. As the economy improved, Greenspan raised the Federal Reserve’s Rate [first green mark]. Towards the end of George H.W. Bush’s term, we had another recession. His first rate drop didn’t work, so he lowered it even further [second red mark], and then brought it back up as things improved [second green mark]. Note that he had to go lower that time, and never got the rate back up to its previous value. In 2001, the dotcom "bubble" burst and he had to lower rates dramatically [down to approximately 1%].  We didn’t really know it then, but there was a new malignant bubble forming – the "housing bubble." Certainly, Dr. Robert Shiller began to warn us about the "housing bubble." At first Greenspan denied it, but then felt the economy could "handle" the "housing bubble." In January 2006, he retired. Recall how his retirement was timed with the "housing bubble:"

 

Looking at the stairstep downward as Greenspan manipulated the Federal Reserve Interest Rates, it’s clear that each time, he has to go lower than the last. And he never gets it back up to its previous level. It was just a matter of time. Here’s what happened after his retirement:

 

His replacement, Ben Bernanke,  had nowhere to go – no reserve. He took interest rates to zero, but that just wasn’t enough. Looking at that graph, it’s completely clear that Greenspan was simply wrong. His method "worked," but each application got closer to the inevitable – a time when lowering the rate was a non-option.

So Alan Greenspan’s belief in the resiliency of the American Market was wrong. He was wrong in his active efforts to thwart Brooksley Born’s regulation of the Derivitives Market. Derivatives were little more than a Casino, exploited to build the credit default swaps that fueled the "housing bubble." And he was wrong that manipulating the Federal Interest Rate was a powerful enough tool to prevent a Recession/Depression. What’s worse, this graph shows that he should’ve known that this stairstep[ down was headed for disaster. And Brooksley Born made it very clear where the Derivative Market [unregulated] would take us.

It is sadly much like the subject of the last post. Ronald Reagan, George H.W. Bush, and George W. Bush used tax-cuts much as Greenspan used lowering the Federal Interest Rate. These methods brought short term success without much pain, but set things up for a big fall, the fall we’re in right now. Both methods also destroyed the buffer we had for something disastrous. So here we sit with Federal Reserve Interest Rates of zero and a staggering National Debt, and the only way to get us headed in the right direction is government spending, regulation, and involvement in the economy. And the Republican Party that brought us here is raising holy hell and obstructing progress, instead of saying "mea culpa" and helping out…

UPDATE [full data]:

  1.  
    March 26, 2010 | 6:28 PM
     

    […] on Friday 26 March 2010 What I had to say about Alan Greenspan in September 2009: Alan Greenspan took over the Fed in August 1987 during Reagan’s waning days. He had a […]

  2.  
    May 4, 2010 | 12:49 AM
     

    […] – meaning that his leeway slowly eroded – leaving Bernake no place to go after Greenspan retired [greenspan’s folly…]. • We didn’t notice that Alan Greenspan mounted a campaign to stop Brooksley Born, […]

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