|
Francis
|
 |
« on: February 27, 2009, 05:29:26 AM » |
|
Most Americans are likely to be worse off for years to come because of the bubbles created when the former chairman ran the Federal Reserve. By Bill Fleckenstein
"Those who cannot remember the past are condemned to repeat it." -- George Santayana, "The Life of Reason"
A debate has emerged in this country regarding the legacy Alan Greenspan has left after his nearly 19 years as chairman of the Federal Reserve. Some have argued that Greenspan ushered in an era of prosperity. Others would counter that his decisions have nearly led to the decimation of the world's largest financial system. Who is correct?
If Wall Street had a chisel, Alan Greenspan's smiling face would today be carved on Mount Rushmore. From the late 1980s until just recently, the Maestro, as an admiring journalist styled him, could seemingly do no wrong. He set interest rates -- always, so his fans insisted, the right rates. He presided over an economy that only rarely stumbled into recession or crisis. And when it did lose its way, the Greenspan Fed could be counted on to ease the pain with freshly printed dollars and low interest rates.
The archetypical central banker is dour and fretful, but Greenspan broke the mold. Polite, self-effacing and pleasant, he gave no offense even when badgered by his critics in the endless congressional hearings to which every Fed chairman is subjected. He could scold and worry -- usually on matters over which the Fed had no control -- but his characteristic posture was one of sunny optimism. The computer revolution, financial innovation and the globalization of trade and investment were, for him, developments of immense promise. Don't worry, he assured the United States. Wall Street heartily agreed. The future glowed bright. Newly printed dollars and low interest rates were a fabulous stimulant for investment assets and real estate.
Bill Fleckenstein's new book is now available.
But consider how your own life has changed over the past few years. How have Greenspan's actions affected your stock portfolio, 401(k) or mortgage? Will you be better off for having lived through the Greenspan era, or will you be much poorer for having done so?
The truth is that the majority of Greenspan's decisions as Fed chairman from Aug. 11, 1987, to Jan. 31, 2006, were not beneficial to you, nor did they leave the country better off, despite Greenspan's glowing self-critique in his latest book, "The Age of Turbulence." In reality, the overwhelming majority of people in the United States will be worse off in the years ahead as a result of his stewardship.
Some might ask, "He was the Fed chairman -- how could he have been wrong?" My response is: Greenspan erred by continually picking an interest rate that was too low. Then he solved the turmoil that resulted from that decision with another period of interest rates that were again too low.
The result was that during his reign, the United States experienced a bubble in stocks and then in real estate. These two massive bubbles emerged within 10 years of each other. Prior to Greenspan's arrival at the Fed, excluding the brief mania for commodities and precious metals from late 1979 to early 1980, the country had been bubble-free for more than 50 years.
Central bankers like Greenspan aren't bankers at all. Anyone who thinks a central bank such as the Federal Reserve performs any function remotely similar to those they've experienced in their local branch banks would be wrong. Central bankers are actually like the bureaucratic leaders of centrally planned, or command, economies. They pick an interest rate to within two decimal places that they guess will be the correct one, and then they proceed to cram it down the throat of the banking system.
It is oddly ironic that a small group like the Federal Open Market Committee, similar to those found at all levels of any former communist regime, would be in charge of the world's largest and most successful capitalist country -- that is, the United States of America and its $13 trillion economy.
Continued: Prone to error
Given that human beings are not omniscient -- and historically, central planning committees have been notoriously prone to error -- it's easy to imagine that such a group would be far more likely to pick the wrong interest rate than it would be to choose exactly the right one to run an economy. Yet when these central planners decide they've chosen the wrong rate, for whatever reason, they use the very same process when selecting a new one. It's an impossible job, but they seem happy to do it.
The mission of the Federal Reserve is supposed to be mainly concerned with stability and prudence. The Fed's own Web site lists its three primary responsibilities to the public as follows:
• Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
• Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
• Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
That sounds straightforward enough, even if pursuing stable prices and full employment leads to conflicting agendas at times. The mission is clear, though the execution of it in real life is far more complex and difficult than it may seem at first.
That said, Greenspan's errors in judgment seemed so obvious they beg the questions: Why did he make them? Did he actually set out to redistribute wealth from the middle class to the rich while the country itself essentially burned the furniture for heat? After all, his bubbles made the sponsors of those bubbles fabulously wealthy, ultimately to the detriment of the average person and the United States as a whole. Or was he simply not up to the task?
Bill Fleckenstein's new book is now available.
With the benefit of hindsight, anyone can look infallible or rewrite his own history, as the former chairman has tried to do. However, just as we have a contemporaneous record of what Greenspan really said, I have a record of my own as well. I began writing an online column about the stock market in mid-1996 and continue to do so to this day. As any longtime reader of those columns can attest, I have certainly not been infallible. Far from it. I saw the stock market bubble building and concluded it would end in disaster -- about four years too soon! Then again, I never pretended to know what the right interest rate to run the country was.
Down through financial history, markets have intermittently gone to excess. Prices go to the sky and then fall through the floor. Human beings can't help themselves. But the bubbles in U.S. stocks and real estate didn't just happen. To a degree that the American public has not yet fully realized, these costly distortions were instigated and financed by the Federal Reserve -- Alan Greenspan's Federal Reserve.
This was excerpted from MSN Money columnist Bill Fleckenstein's new book, "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve."
Published Jan. 17, 2008
|
Recent posts
Dilber MC Theme by HarzeM