{"id":4485,"date":"2010-11-11T15:59:47","date_gmt":"2010-11-11T19:59:47","guid":{"rendered":"http:\/\/1boringoldman.com\/?p=4485"},"modified":"2010-11-12T00:48:41","modified_gmt":"2010-11-12T04:48:41","slug":"the-why-of-alan-greenspans-destruction-of-our-economy","status":"publish","type":"post","link":"https:\/\/1boringoldman.com\/index.php\/2010\/11\/11\/the-why-of-alan-greenspans-destruction-of-our-economy\/","title":{"rendered":"the Why<\/em> of Alan Greenspan’s destruction of our economy…"},"content":{"rendered":"
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What…<\/h1>\n

In 1995, Alan Greenspan did something dramatic. He kept Interest Rates low after a Recession for the next five years. The consequences have been covered endlessly here and elsewhere: A period of great prosperity that was illusory and came to an abrupt halt in September 2008 with The Great Recession.<\/p>\n

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The left chart shows the Interest Rates<\/font><\/strong>, Unemployment<\/font><\/strong>, and Inflation<\/font><\/strong>. The chart on the right shows the results – DOW<\/font><\/strong>, NASDAQ<\/font><\/strong>, Home Values<\/font><\/strong>, and Housing Starts<\/font><\/strong>. But the good times ended shortly thereafter. The question is, of course… <\/p>\n

Why…
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Why did  Alan Greenspan do that? There wasn’t anything in the data shown to explain his action [and I’ve fried my brain trying to understand it]. It’s like he was trying to fix something. In nosing around trying to figure it out, I got to looking into Inflation\/Deflation<\/font><\/strong>. While Core Inflation is usually estimated by the year-over-year CPI-U<\/font><\/strong> [minus food and energy], the strict definition<\/a><\/strong> is: "the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth<\/em>" and vice versa<\/u>. Since the CPI-U was not rising, Greenspan claimed there was no inflation. So I looked into the Money Supply<\/strong>. Such a can of worms. The Federal Reserve measures Money Supply in three parts: M1:<\/font><\/strong> readily available money M2:<\/font><\/strong> money accessible with penalty M3:<\/font><\/strong> sequestered money. <\/p>\n

Here are the three parts over time [M3 is only complete through 2006, when they stopped compiling it except for the Institutional contribution<\/em>]:<\/p>\n

<\/p>\n

As you can see, there’s a dramatic flattening of the Money Supply in 1988\/1989 that persists until around 1995 – the very time when Alan Greenspan opened the spigot with low interest rates. It didn’t show dramatically in the CPI-U [top left chart], but it’s striking in the Money Supply chart.<\/p>\n

What happened in the late 1980’s to explain that? It seems clear that Greenspan’s gift of easy money reversed that trend [as I suspect it was intended to]. I was clueless, so I looked at the breakdown of the M1, M2, and M3 into their individual components [note the differing scales]:<\/p>\n

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M1<\/strong> is just "ready cash" and doesn’t tell us much. But M2<\/strong> and M3<\/strong> are pretty clear, the flattening in the Money Supply has to do with the Thrifts<\/font><\/strong> [Savings and Loans]. "Of course!" thought 1boringoldman. What financial problem occurred in the end of the 1980’s? The Savings and Loan Crisis<\/u>!<\/font><\/strong><\/a> My previous guesses were off the mark. In case you’ve forgotten the S&L Crisis:<\/font><\/strong><\/a><\/p>\n\n\n\n
looking back – the Deregulation I…<\/font><\/strong><\/a><\/td>\n<\/tr>\n
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Depository Institutions Deregulation and Monetary Control Act<\/strong><\/font><\/a> of 1980: This legislation expanded the Federal Reserve’s rules to all Banks, and raised the level of FDIC coverage from $40,000 to $100,000. But it also began the Derugulation of Banking Institutions and the erosion of the Glass-Stegall Act<\/strong>:<\/div>\n