The Mess That Greenspan Made - Part 414

Sorry, but after downloading the transcript(.pdf) for the January 31st, 2006 FOMC meeting with the intention of looking at all the praise heaped on Alan Greenspan on his last day as Fed Chairman in order to relay selected misguided quotes in this post, the 78 page length of the document proved too daunting, especially after all the joking around in the beginning of the document at a time that the central bank could actually have done something to prevent or mitigate the financial market disaster that followed a few years later.

Instead, relying on the many poor souls in the financial media who had to slog through transcripts for all eight meeting that year, we find that Treasury Secretary Tim Geithner (New York Fed President at the time) appears to have been the most misguided as to the legacy of the outgoing Fed chief when he noted:

I’d like the record to show that I think you’re pretty terrific, too. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative. [Laughter]

Surely you can understand better now…

More confirmation of the Peter Principle and that economists are particularly ill-suited to run an economy were provided in this assessment of the Greenspan tenure at the Fed by San Francisco Fed President Janet Yellen who, since, has been promoted to Fed Vice Chair:

Needless to say, it’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. And if I might torture a simile, I would say, Mr. Chairman, that the situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot. [Laughter]

Again with the laughter.

(more…)

Federal Reserve Blissfully Unaware in 2006

The intertubes were abuzz yesterday after the release of the Federal Reserve’s 2006 policy committee meeting minutes in which it seems the central bank was blissfully unaware of the trouble ahead for housing and credit markets, a point nicely illustrated below from the Wall Street Journal’s Little Alarm Shown at Fed At Dawn of Housing Bust($).

“So far we are seeing, at worst, an orderly decline in the housing market,” he said.

Mr. Bernanke predicted a “soft landing” for the economy as 2006 ended, not a housing bust that would trigger the worst financial crisis since the Great Depression.

Timothy Geithner, then president of the New York Fed and now Treasury Secretary, playfully offered this forecast about Mr. Greenspan’s legacy: “I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.”

Amazing stuff (no, not really)… For those still playing catch-up on this, some more links:

FOMC: Transcripts and Other Historical Materials, 2006 – Federal Reserve
Inside the Fed in 2006: A Coming Crisis, and Banter – NY Times
Fed 2006 Transcript: Riding Housing Roller Coaster With Eyes Shut – WSJ
Fed’s image tarnished by newly released documents – Washington Post
Richard Fisher Compares the Housing Bubble to Brad Pitt’s Baby – WSJ
On bank self-regulation and other Greenspan fairy tales – Credit Writedowns
The Fed’s Undistinguished Macro Discussions Circa Jan 2006 – Capital Spectator
Comments from FOMC meetings which resulted in laughter – Economist
So This Central Banker Walks Into a Bar…. – Crossing Wall Street
The Federal Reserve Is…Gasp…Funny – NetNet

Friday (the 13th) Morning Links

MUST READS
Italy bond auction fails to match Spanish success – Reuters
Draghi: Crisis Strategy Working, ‘Armageddon’ Postponed – Bloomberg
ECB sees “substantial” effect from cheap money – Reuters
Obama requests $1.2T increase in debt ceiling – Fox News
Inside the Fed in 2006: A Coming Crisis, and Banter – NY Times
Fed 2006 Transcript: Riding Housing Roller Coaster With Eyes Shut – WSJ
Fed’s image tarnished by newly released documents – Washington Post
Bank of America mulls trimming ops in U.S.: WSJ – MarketWatch
Budget Cuts Hamper the IRS in Efforts to Collect Billions – NY Times
GOP Rivals: Drop “One Percent, Trumpet “Negative Four Percent” – aucontrarian
Is This What President Obama’s ‘Change’ Looks Like? – Sense on Cents
Election 2012: How rich are these guys? – CNN/Money

MARKETS/INVESTING
Crude slips below $99 on Iran embargo delays – AP
Gold eases as euro dips, heads for weekly gain – Reuters
Why, At 28, I’m Going With Dividends – Seeking Alpha
Goldman: Increasing Risk of Rising Oil Prices – BusinessWeek
China Gold Hoarding Turns Traders Most Bullish in Two Months – Bloomberg
Is it the People’s Bank of China that is doing all the gold buying? – Mineweb
Gold’s Recent Move Down And Up Displays Classic Technical Pattern – HAI
Are China’s gold imports reaching panic proportions? – Mineweb
Silver Coin Sales May Signal Bear-Market End – BusinessWeek
Why gold may be losing its glitter – MarketWatch

ECONOMY/WORLD/HOUSING/BANKING
Austrian Economics Hits the Headlines – The Freeman
An Upside-Down Recovery Goes Back to Square One – Bloomberg
The recovery and the election: That 2004 feeling – Economist
China reports unusual decline in foreign reserves – AP
China: Inflation and Exchange Rate Watch – EconBrowser
World from Berlin: German Economic Success ‘On Shaky Ground’ – Spiegel
Hungarian Bonds Drop as IMF Demands ‘Tangible Steps’ on Debt – Bloomberg
Greek Euro Exit Weighed By German Lawmakers, Seen as Manageable – BusinessWeek
Bulk Foreclosure Sales Could Cause Bigger Bank Write-Downs – CNBC
Ex-Doomsayer: ‘It’s a great time to buy a home’ – O.C. Register
On bank self-regulation and other Greenspan fairy tales – Credit Writedowns
The Fed’s Undistinguished Macro Discussions Circa Jan 2006 – Capital Spectator

 

Suki Cooper on Gold

Having come across the name Suki Cooper many times in the last year or so while reading what investment banks have to say about the gold price and, being a fan of HBO’s True Blood, it was kind of interesting to see what someone named “Suki” actually looked like.

The Barclay’s analyst makes the same points that gold market naysayers were ignoring last month – that none of the underlying factors that drove the gold price to its 2011 heights have gone away, most importantly strong physical demand from Asia and real short-term interest rates that will be negative for years to come.

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What Greenspan Should Have Done

In this story at Aljazeera(?), Dean Baker, co-director of the Center for Economic and Policy Research, looks back at the late, great housing boom that turned to bust and offers some suggestions for what Federal Reserve Chairman Alan Greenspan should have done.

First, the Fed has responsibility for maintaining the stability of the US economy. Alan Greenspan should have recognised the bubble and done everything in his power to burst it before it grew to such dangerous levels.

Step one in this process should have been to document its existence and show the harm its collapse would bring. This means using the Fed’s huge staff of economists to gather the overwhelming evidence of a bubble and to shoot down anyone who tried to argue otherwise.

Second, the Fed has enormous regulatory power beginning with setting guidelines for issuing mortgages. They first issued draft guidelines in December of 2007. It was not hard to find abusive and outright fraudulent practices in the mortgage industry, if anyone in a position of authority was looking for it.

Finally, the Fed could have used interest rate increases to rein in the bubble. This should have been a last resort, since higher rates would have slowed the economy at a time when it was still recovering from the collapse of the stock market bubble.

To maximise the impact of any rate increases, Greenspan could have announced that he was targeting the housing market. He could have said that he would continue to raise rates until house prices were brought back to a more normal level.

This surely would have gotten the attention of the mortgage industry and potential homebuyers. Would it have been an extraordinary action from a Fed chair? Sure, but so what? It might have prevented the devastation now ruining tens of millions of lives.

Well, if there’s one thing no one has ever accused Greenspan of it’s being a party-pooper.

All of these actions – though sensible – would have required the former Fed Chief to dramatically change his way of thinking that, at the time, saw markets as self-regulating, a view that he later, famously found a flaw in (see Greenspan finds a flaw from 2008).

© 2010-2011 The Mess That Greenspan Made