Greenspan: Shoocked Disbelief
Growth Report


Have You Seen This?

Have You Seen This?

 Alan Greenspan was in Congress yesterday. Congress is digging through Wall Street’s rubble to find out who was responsible for the financial crisis. Of course, the old “Orient Express” conclusion – that everybody, from borrowers, to lenders, to Congressmen, to Greenspan, “did it” – won’t satisfy the need to hang somebody up by their thumbs. 

While the culprits are many, I’ve been calling out Greenspan for his part in the debacle for years. Whether you believe that Greenspan should have been able to see into the future and change the course of history or not, there’s no question that he created the risk-ignorant environment that led to the crisis.


After all, interest rates are all about risk. If a loan is risky, you charge more for it. If the borrower is upstanding, you’ll charge less because you know your money’s coming back.


So when Greenspan left interest rates at an all-time low for a year, and then spent another year normalizing them in virtually unnoticeable quarter-point hikes, he was telling the market loud and clear to forget about risk.


And that’s exactly what the market did.


But now Greenspan is back-tracking. How could he have known the mortgage industry, borrowers and the debt-insurance industry would go nuts?


As Greenspan himself said yesterday “Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief…"


I don’t know about you, but when I read such a naïve statement coming from the man who was once the most powerful banker in the world, I’m the one who’s in a state of shock and disbelief.


Greenspan is saying he expected the lenders to police themselves. And now he’s “shocked” that they didn’t. You mean Wall Street will put profits and bonuses above the interest of faceless shareholders? No! Say it ain’t so!


Unfortunately, Greenspan’s wide-eyed disbelief at human nature in action isn’t that much of a surprise. I always thought his post-adolescent fascination with Ayn Rand’s objectivist philosophy had been tempered at least a little by the realities he most certainly witnessed in his years as an economist and Fed Chief.


After all, Greenspan witnessed first hand the “irrational exuberance” of the late-90s Internet bubble. He saw point blank how investment banks would outright lie in an analyst research reports to attract investment banking business. Guess not.


How he can say with a straight face that he seriously believed lending institutions would police themselves is absolutely beyond me.


Actually, I know quite well how he could make such a statement. In his youth, Alan Greenspan became infatuated with Ayn Rand’s Objectivist philosophy. In Rand’s view, unregulated capitalism was an ethical system because participants would act in their own best interest.


In other words, if you’re a banker, and depend on depositors to stay in business, then you’ll take good care of those deposits. It’s in your best interest to do so.


Of course, Rand’s utopian vision totally ignores a little thing called human nature. Unfortunately, some people are greedy, selfish and short-sighted. And there are enough of them to totally undermine unregulated capitalism.

If American capitalism went unchecked, we’d probably have a King Vanderbilt or Emperor Rockefeller running the country right now. No, it’s thanks to Teddy Roosevelt, the Trust Buster, that we have some semblance of a free market today.


Greenspan continues to say that there’s no way anyone could have seen the current financial problems coming. And maybe nobody really knew how much damage the credit-swap market could cause, but there were plenty of warnings that our economy was headed for trouble.


On July 19, 2005 chief economist for Standards & Poor's, David Wyss offered up some solutions to Greenspan. He said that the Fed could control mortgage rates by increasing interest rates, and could also place restrictions on banks to get them to stop providing mortgages with no money down.


Wyss said these types of loans place risks on the economy by providing owners with houses "that they can't afford." "What do you do when [the owner] mails the key back to the bank?"


Well, we’re finding that out right now. And it’s not good.


On August 29, 2005 Paul Krugman wrote in a New York Times editorial what Greenspan apparently couldn’t see “…we're going to have an economic slowdown, and possibly a recession.”


In 2004, Alan Greenspan gave his blessing to the sub-prime mortgage industry: ''American consumers might benefit if lenders provided greater mortgage product alternatives (read: no interest loans and adjustable rates) to the traditional fixed-rate mortgage.''


In 2005, Greenspan  said "There do appear to be, at a minimum, signs of froth in some local markets…the apparent froth in housing markets may have spilled over into the mortgage markets."


Also in 2005, he said “…history has not dealt kindly with the aftermath of protracted periods of low-risk premiums (interest rates).''


In these statements, it’s clear that Greenspan was ever the optimist. He never thought sub-prime lending would get predatory. He thought a warning that housing was “frothy” would halt the real estate bubble in its tracks.


Wrong. That’s what interest rates are for.


OK, enough about Greenspan. You can probably tell I don’t think he did a very good job at the Fed. Now let’s move on to the stock market. 


It’s pretty clear that people are buying stocks right now. Even though we’ve seen plenty of nasty sell-offs, we’ve also seen days like Monday’s 400-point advance for the Dow Industrials and yesterday’s impressive rally out of the hole.


What we’re seeing is two cross-currents: investors with cash are buying stocks because of the historically low valuations; and investors fearful about their cash are selling. Much of this selling is coming from mutual funds and hedge funds.


Now, I know things look bad. And they are. But I believe now is not the time to be cashing out your mutual funds. The idea with investing is to buy low and sell high. Right now, if you cash out, you’re selling low.


I can’t tell you that stock prices will be higher next month. But I do know there are some very low valuations that are almost certainly great investment opportunities out there right now.


Best Regards,


Ian Waytt

Chief Investment Strategist

Growth Report




Posted 10-24-2008 2:04 PM by Ian Wyatt
Related Articles and Posts