The evil that men do lives after them, the good is oft interred with their bones - Mark Anthony in Julius Caesar, by William Shakespeare
Alan Greenspan must be a very disturbed man these days. From being called a maestro to now being labelled as the main villain responsible for the current financial crisis.
"Until he presided over the great bull market, Greenspan did not give many outward sings of genius. But the higher the stock prices went, the smarter he seemed to become. By late in 1990s, he was heralded as a miracle worker," writes James Grant in Mr Market Miscalculates - The Bubble Years and Beyond.
Greenspan was the 13th (unlucky, as it turned out) chairman of the Federal Reserve, the replica bag wholesale central bank of the US, holding office from August 11, 1987 to January 31, 2006. His tenure saw two big bubbles build up: a) The huge telecom and dotcom bubble in the US which ran from the early 90s to the start of the new century b) The housing and real estate bubble, which ran from around 2002 to late 2007.
Both these investment bubbles eventually burst, creating havoc to economies around the world. Greenspan let these bubbles run till they became too big and burst on their own, and then washed his hands of them. "On August 30, 2002... Alan Greenspan washed his hands of responsibility for the bubble he said he could not have pricked even if he had noticed it floating above his desk on a string..." writes Grant.
In fact, as the bubble grew bigger and bigger, Greenspan let it run by maintaining low interest rates, and whenever things looked like going bad, he cut interest rates. This led to a belief among investors, that comes what may, Greenspan would come to their rescue. As Grant writes, "Repeated and predictable acts of intervention can't help postcard printing but change behaviour. The more dependable the Fed fends off disaster, the bolder and more leveraged investors become. The bolder investors become, the higher the markets. And the higher the prices and the greater the leverage, the more likely does a financial accident become. In response to which, of course, the Fed would intervene."
The dotcom bubble burst in late 2000. Greenspan resorted by starting to cut the federal funds rate (the interest rate at which the Fed lends to banks) from 6.5% to 3.5%. This was rather surprising, given that he did not raise interest rates while the bubble was building up, to ensure that people have lesser incentive to borrow and speculate, but cut them as soon as the bubble burst.
The same was the case after the 9/11 disaster. Greenspan started to cut rates bringing them down all the way to 1% by 2003, the lowest rate the US had seen in 50 years. The rate stayed at 1% for a year, till Greenspan started to raise them again. But by then, the damage had been done with the man on the street using the low interest rate scenario to speculate in real estate. And this led to what is now known as the subprime bubble. Greenspan, of course, continued in his state of denial as the bubble grew bigger. "Not once... did Greenspan concede that his repeated interventions to prolong the up cycle had misdirected capital and hurt the owners of it."
Like all bubbles, the subprime bubble also burst. Of course by then Greenspan had retired and Ben Bernanke had taken over from his as chairman of the Fed. And like his predecessor, his main step was to cut interest rates in the hope that all would be well again. But that did not happen. As Grant writes "One of the trouble with bubbles is that, after they pop, Clip on charms ultra-low inter
Other articles:
http://www.geezerjock.com/blog/view/id_439/title_forget-debt-and-bag-that-polka/
http://www.8mchina.com/Letter-Shortpoints.html
http://mywatches.allmyblog.com/39-help-band-to-make-more-music.html
