Everyone with an interest in economics and the present global subprime
meltdown should read Julian Delasantellis book review closely. I have
picked out the paragraphs I though particulary im****tant and placed
them in reverse order (the later paragraphs first.) I find that it is
a better way to get the reviewer's *****sment understood from the
beginning than to leave it to the last. Its a three page review and
one's mind tends to wander. It is a damning indictment of American
greed - that you can get rich witout working for it.
The Fed's king of bubbles
Greenspan's Bubbles - The Age of Ignorance at the Federal Reserve
by William Fleckenstein
Reviewed by Julian Delasantellis
APRIL 26, 2008
HTTP://WWW.ATIMES.COM/ATIMES/GLOBAL_ECONOMY/JD26DJ05.HTML
1. I look at Greenspan's legacy somewhat differently. For almost 70
years, from the crash of 1929 to the dot-com blowout of 2000, the
United States suffered no significant speculative bubbles. Now, in
less than a decade, two have burst open, both of them, according to
Fleckenstein, the fault of Alan Greenspan.
But could it be that Greenspan simply had the misfortune to rule over
a nation now peculiarly vulnerable to bubbles? A bubble is, at its
core, nothing more than a nation, a people, desiring to enjoy wealth
it did not earn, to consume more than it produced, to wake up one day
and for no real reason have an asset previously valued at x now worth
2x or 3x or more, certainly through no effort exerted by its owners.
2. Of course, a natural limit to a housing bubble was always the
inability of many borrowers to get mortgage financing. Not to worry,
said Greenspan, there's this great new thing called a subprime
mortgage! In an April 2005 address to the Federal Reserve System's
Community Affairs Research Conference, he spread the good news for
modern mortgages.
Information processing technology has enabled creditors to achieve
significant efficiencies in collecting and assimilating the data
necessary to evaluate risk and make corresponding decisions about
credit pricing. With these advances in technology, lenders have taken
advantage of credit-scoring models and other techniques for
efficiently extending credit to a broader spectrum of consumers. The
widespread adoption of these models has reduced the costs of
evaluating the creditworthiness of borrowers, and in competitive
markets cost reductions tend to be passed through to borrowers.
3. At their core, speculative bubbles are always caused by excessive
utilization of credit. Fleckenstein expounds on just how pervasive
stock margin speculation had become.
As of February 2000, total margin debt stood at $265 billion. It had
grown 45 percent since the previous October, and had been more than
tripled since the end of 1995. Relative to GDP, margin debt was the
highest it had been since 1929, and over three times as high as it was
in October, 1987.
4, As the stock bubble raced towards its final denouement,
Fleckenstein noted that Greenspan found a new way to rationalize the
madness. In a May, 1999 speech, Greenspan reasoned that if the
professional stock analysts employed by the brokerage houses thought
everything was OK, that must make everything all right.
This veritable army of technicians has been projecting increasingly
higher earnings growth, on average, since early 1995. There appears
little reason to doubt that analysts' continuous upward revisions
reflect what companies are re****ting to them about improved cost
control, which, on a consolidated basis for the economy overall, adds
up to accelerating labor productivity."Little reason to doubt", except
for the fact that we now know that most of the frenzied histrionics to
buy the bubble stocks were lies, generated by analysts who knew their
brokerage houses' bottom lines grew fatter when gullible investors
believed their nonsense and bought into the bubble. The most notorious
of these was famed Merrill Lynch senior Internet analyst Henry
Blodgett, who, in a 2003 complaint filed by the US Securities and
Exchange Commission, was alleged to have, while publicly remaining
bullish on the stock, privately described Internet bubble cavalier
24/7 Media as a "pos", generally accepted as an American slang acronym
for "piece of (obscenity for excrement)."
5. But the Greenspan analysis, believing that high technology
investment should be accounted as an asset rather than expense, meant
that the rising price/earnings numbers did not exist; they were much
lower in reality than what the companies were re****ting. Low p/e
numbers automatically implied no bubble, no matter what the nominal
stock prices were doing.
As smooth defense lawyers in the American South say to witnesses who
claim they saw the lawyer's client committing a crime, "Who are you
going to believe, me, or your own lying eyes?" In essence, Greenspan
argued that a productivity miracle occurred just by putting a computer
on a worker's desk, even if the machines were not even networked, as
they are now.
6. For what a decade the 1990s was. The S&P 500 index rose from 304
in 1990 to over 1500 in 2000, a fivefold gain; the NASDAQ did even
better, with a 15-fold gain. Even by the standards of what we've seen
recently with Southern California and Southern Florida condominium
prices, this was a very impressive speculative bubble.
You should not have had to tell an economic historian such as
Greenspan that bubbles are bad for an economy; the 17th century tulip
craze in Holland and the French Mississippi bubble of the 18th century
damaged both these countries' economies for almost a century
afterward. But, according to Fleckenstein, Greenspan not only refused
to do anything to fight the bubbles, he was, in fact, their cause.
Ron Insana of CNBC and Insana Capital Partners wisely observes that
the most dangerous sound any investor can ever here is the phrase
"this time it's different". Bubbles come and go; they flourish when
the human instinct of greed decisively trumps its mirror image of
fear. Still, with every bubble, somebody comes along and says this
time it's different, this time it's not a speculative blowoff, but
some new technological or societal feature has arisen that justifies
the madness. By 1995, Greenspan looked at the rise of information
technology and said this time it's different.
7.
But every earthbound paradise has its serpent. Here, in essence, and
for the rest of his term, Greenspan seemed to feel and act as if the
health and prosperity of his stock market flock was a concern of
equal, or more im****tance, to the health of the general economy. As
Fleckenstein put it, "he had herded all the little fish into the stock
market pool, and he appeared to be leery of suffocating them if he
drained out liquidity too rapidly".
Here commenced the famed "Greenspan put", the feeling that the US
Federal Reserve would always sup****t the stock markets, would always
cut rates to backstop selloffs and re-ignite rallies. Thus, according
to Fleckenstein, the conditions were set for the largest speculative
bubble in American history.
8.
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