Thursday, May 26, 2005

More “Irrational Exhuberance(s)”

Litany of Woes Grows–Housing, Derivatives, Agencies...
Fed Head Arsonist Yells Fire

Recent comments by Fed Head Alan Greenspan are all too reminiscent of his infamous "irrational exuberance" comment about the stock market being overvalued in a December 5, 1996 speech ( )

Today the Fed Head sees several markets/agencies, not just one, that are over-inflated and pose a potential threat to the real economy should they undergo a sharp or protracted contraction. Such machinations from Chairman Greenspan who is noted for mincing his words are unusual and merit attention.

Greenspan who has consistently maintained that there is no housing bubble took an about face at the Economic Club luncheon in NYC on May 20th when he said:"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern," As the NY Times reported ( the Fed Head saw "Froth" in market with "lots of local bubbles".

Given the chairman’s penchant for obfuscation it is clear he is very concerned–"froth, local bubbles...." are not bland observations. The Fed’s press release of May 16, 2005 echoes similar concerns as it notes that for the first time regulator’s are issuing guidelines for the "red hot" home equity loan market:
( )
"The federal bank, thrift, and credit union regulatory agencies today issued guidance that promotes sound risk management practices for home equity lines of credit and loans. The agencies have found that in some cases credit risk management practices for home equity lending have not kept pace with the product's rapid growth and eased underwriting standards."

The fear is that the rise in housing prices is fueling a borrowing binge that is being pyramided back into the housing market. The Wall Street Journal reported (On the House-'As Prices Rise, Homeowners Go Deep in Debt to Buy Real Estate', May 23, 2005, By JAMES R. HAGERTY and RUTH SIMON) :
"A riskier and more aggressive way to use home equity is to plow it into investment property, as the Epsteins did. A survey by SRI Consulting Business Intelligence, a research firm in Menlo Park, Calif., found that nearly 2.2 million households used their home equity to buy additional real estate in 2004, up from roughly one million a decade earlier. "As long as there isn't a major change in the marketplace or a bubble burst, it will go up again," says Larry Cohen, director of the SRI division that does financial-services research and consulting."

Then there was the Fed Head’s oracle on the derivatives market. As Barrons reported (DC Current-"Greenspan’s Warning". May 23, 2005, Jim McTague)

"A RECENT SPEECH BY FEDERAL RESERVE CHAIRMAN Alan Greenspan, who is known in some circles as "Darth Vagueness," has left at least two money managers with nightmares of the Dark Side. So they've begun bailing out of stocks and bonds and getting into cash and Treasuries.
The two have carefully deconstructed nine pages of "remarks" that Greenspan made on May 5 about the growing risk to banks and investors posed by a possible liquidity crisis in the $220 trillion derivatives markets. Their conclusion: This was not the usual bland and indecipherable Greenspan fare, but rather a clear-cut warning of market dislocations to come.
"It was a seminal speech," says David Kotok, chairman and chief investment officer for Cumberland Advisors, Vineland, N.J., which has $745 million in assets under management. "His message is that 'We [the Fed] don't know what is going on in the derivatives markets, and we are concerned that we don't know.'" Kotok is responding by reducing his exposure to stocks

While some were dismissive of the chairman’s remarks, the idea of Greenspan not speaking in glowing terms about the derivatives markets was a shock let alone speaking ill or warning about a debacle. Greenspan has consistently championed the derivative markets.

Greenspan has also been continually warning about the risk posed by Fannie Mae and Freddie Mac to the economy and financial markets. As recently as May 19 to the Conference on Housing, Mortgage Finance, and the Macro economy at the Federal Reserve Bank of Atlanta the Fed Head said:
"Huge, highly leveraged GSEs subject to significant interest rate risk are not conducive to the long-term financial stability that a nation of homeowners requires."

It should be noted that the Government heeded Greenspan words and on May 25th. The House passed legislation to curb the portfolio’s of the two financial behemoths. The Senate is expected to follow.

To hear the Fed Head give the markets is a warning is good, but it is also hypocritical. It has been Greenspan’s policy of easy money and bailouts that have fueled the fires or speculation. We have a housing bubble because he kept interest at record lows for years to help the economy which was sufferring from the effects of the burst stock market bubble, that he created. If Fannie Mae is too big, the cause is his consistently championing free markets and his negligence in his position as ‘omnibus supervisor of the financial services industry'. As for risk in the derivatives market–he has been the derivatives market’s guardian angel, preaching the ‘good word’ to all that would listen. Hearing the Fed Head give his oracles of potential doom is like hearing the arsonist yelling fire.

When Greenspan gave his first oracle of warning in 1996 the market’s gave pause and his words reverberated around the globe. Today he issues several proclamations and there is no pause.

Wednesday, May 18, 2005

Extending the Fed Head’s Term?

The Washington Post reported today ("Administration Considers Delaying Fed Chief’s Exit; And Extra Few Months Would give Greenspan the Longest Tenure", Nell Henderson, May 18, 2005; that the Bush administration was considering extending Chairman Alan Greenspan’s term a few months so that they would have more time to find a better replacement in the corporate world. Surprising since the administration has known since it took office (2001) that Greenspan cannot serve past January 2006.

The idea that the Bush administration needs more time to cast a wider net in the search for a new Fed Head is a tacit acknowledgment that they are having trouble finding a replacement–or better they fear that Greenspan’s departure would send financial markets sharply lower. Particularly worrisome is that international investors could be frightened at a time when the USA is running massive trade deficits that need to be financed with foreign funds.

As we noted in "Be Prepared Don’t let the Upcoming Financial Crisis serve as 9-11 did to push the Bush Agenda" ( ) Fed Head Alan Greenspan’s departure would make the markets jittery and could lead to calamity. Others such as Paul Krugman of the NY Times "The Greenspan Succession", January 25, 2005 have voiced similar concerns. This runs counter to others such as Ravi Batra in his recent book, "The Greenspan Fraud–How Two Decades of His Policies Have Undermined the Economy", who feel that Greenspan has lost much of his luster on Wall Street since 2000 when stocks began declining. We disagree, Greenspan gives Wall Street its luster and vice versa.

By buying more time the Bush administration would avoid being cornered into a time line for choosing the next Fed Head. Arguably they could keep postponing making a decision. More time will allow them to float more trial balloon candidates. Call it gradualism.

Keeping the Fed Head beyond his term would also further politicize the Fed as Tom Schlesinger of Financial Markets Center said in the Washington Post article. The Federal Reserve is suppose to be an independent organization that serves the interest of all Americans. But this has not been the case with Fed Head Greenspan. As George Melloan of the Wall Street Journal’s Op-ed page ("Alan Greenspan–The Money Man Everyone Loves", May 25, 2004) noted, Greenspan is not only "a known Republican, but a disciple of libertarian Ayn Rand, whose ideas were anathema to the far left" (see our May 26, 2004 Press Release)

Chairman Greenspan as we have noted on several occasions has consistently over-stepped his position as Fed Head to help the Bush administration and push their radical agenda. As Professor Thomas of Wharton noted (Charleston Courier and Post, Barrons (Up and Down Wall Street) May 24, 2004) visits by Greenspan to the White House had surged under the Bush administration. Most recently Greenspan has been one of the few voices backing the Bush social security plan of private accounts. As we ( ) and others have noted Greenspan flip flopped on fiscal austerity in 2001 and endorsed the Bush tax cut. And much, much more

Postponing Greenspan’s retirment from the Fed is another example of the Bush administration’s brazen and open flouting of the rule of law. Should Greenspan agree to stay over it would be another example of his brazenly and openly flouting the law.

This could all be for not naught and the Washington Post article could be a trial balloon that fizzled. But given that the market was up 132 points, with contributing factors, the rumors could be true....But buy the rumors and sell the news......should we later learn that the Fed Head will stay a bit longer.

Monday, May 16, 2005

What’s up?–Greenspan speaks well of .....Sarbanes Oxley

Speaking at Wharton School’s commencement on May 15, 2005 Fed Head Greenspan reiterated his tirade against legislation designed to curtail the–"persecuted minority" (corporations). He pointed out that malfeasance has continued in the face of increased laws and that the market remains the best arbiter of justice:

"But recent corporate scandals in the United States and elsewhere have clearly shown that the plethora of laws and regulations of the past century have not eliminated the less-savory side of human behavior. We should not be surprised then to see a re-emergence of the value placed by markets on trust and personal reputation in business practice. After the revelations of recent corporate malfeasance, the market punished the stock and bond prices of those corporations whose behaviors had cast doubt on the reliability of their reputations. There may be no better antidote for business and financial transgression. But in the wake of the scandals, the Congress clearly signaled that more was needed."

Surprisingly the Fed Head did give an inkling of praise to the recently enacted Sarbanes-Oxley Act:

"The Sarbanes-Oxley Act of 2002 appropriately places the explicit responsibility for certification of the soundness of accounting and disclosure procedures on the chief executive officer, who holds most of the decisionmaking power in the modern corporation. Merely certifying that generally accepted accounting principles were being followed is no longer enough. Even full adherence to those principles, given some of the imaginative accounting of recent years, has proved inadequate. I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has. It will doubtless be fine-tuned as experience with the act's details points the way."

Although the chairmans comments were a tepid compliment, they were a compliment and stand in sharp contrast to his general view of legislation. They also contradict his strong statements against more legislation in the immediate aftermath of the Enron crisis.
The chairman also emphasized the need for character and trust in business dealings. Obviously this trust and character does not pertain to his relationship of the less well to do and poor in our country that have placed trust in institutions such as the Federal Reserve that are suppose to act in the interests of all Americans in mind.

To read the full speech:

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