Friday, August 26, 2005

Greenspan’s “Strongest Warning in Years”?

Resorting to Jawboning When Policy is Impotent
The Perfect Storm

Reports coming out of the Greenspan Love Fest in Jackson Hole–the conference is titled "Greenspan Era: Lessons for the future"–are consistently interpreting the Fed Head’s comments as a strong warning about asset prices and the economy. To read Greenspan’s text: .

Consider the words of Joseph Rebello of Dow Jones as reported in the Wall Street Journal, ‘Greenspan Warns on Danger of Growing Acceptance of Risk’ , August 26, 2005:

"Federal Reserve Chairman Alan Greenspan, saying the recent rise of stock
and house prices reflects an increased willingness by investors to accept risk,
warned Friday that this inclination could end badly for financial
"What they perceive as newly abundant liquidity can readily
disappear," Mr. Greenspan said in a speech at an annual conference of central
bankers. "Any onset of increased investor caution" could cause those prices to
drop and force investors to liquidate assets to repay debts. "This is the reason
that history has not dealt kindly with the aftermath of protracted periods of
low-risk premiums"
"The comments amounted to one of the strongest warnings
Mr. Greenspan has delivered about financial market risks in years. Ever since
his speech about "irrational exuberance" among investors caused markets to swoon
in 1996, Greenspan has been cautious about the way he has phrased such warnings.
In 1999, at the same central bankers' conference, he warned that the rise in
stock prices up to that point was both inexplicable and "extraordinary." The Dow
Jones Industrial Average peaked a few months later."

Whether Greenspan’s warning is his strongest in years is open to debate. What is not open to debate is the fact that Greenspan has taken it upon himself to buttress his rate rises with jawboning and increased rhetoric. For someone known for obfuscating he is certainly being direct.

It is abundantly clear that the Fed Head wants to cool things down–whether it be housing bubble or inflation.

As I have noted on several occasions–most notably with my June 9th posting–it is the FedHead himself that has created his own problems with his policy of loose money and bailouts.

A Perfect Storm
A perfect storm, one that goes well beyond the FedHead’s ability to temper, is brewing and helps explain why the Fed Head has resorted to increased jaw-boning.

Two days ago on August 24th the Wall Street Journal reported that foreign interest in derivative securities (GNMA’s,etc) linked to the housing market continues to grow in spite of rate rises and increased rhetoric about a housing bubble.

Ruth Simon, James Hagerty and James Areddy in ‘Housing-Bubble Talk Doesn’t Scare Off Foreigners’, August 24, 2005 write:

"Strong demand for mortgage-backed securities from investors world-wide is
allowing American lenders to make more loans -- and riskier ones -- in a way
that is helping prolong the boom in U.S. house prices."
"The cash pouring in
-- not only from U.S. investors but increasingly from Europe and Asia -- keeps
stoking the housing market even as the Federal Reserve Board continues to raise
interest rates, normally something that damps home prices. The market has shown
a few signs of slowing recently, and talk of a bubble has grown louder, but
prices continue to rise or remain at lofty levels as investors continue to
gobble up mortgage-backed securities and banks keep lending."

Home buyers have similarly resorted to creative financing schemes such as zero percent financing to buy homes.

Derivative securities, which Greenspan has consistently promoted and defended, whether they be new loan packages or creative instruments with teaser rates for buyers are diminishing the ability of the Fed to influence markets . They have until recently been impervious to rate rises.

The idea of global money influencing the USA economy because of exogenous factors can be directly related to our policy of open markets and free borders, something that Greenspan has promoted and defended. As the Journal notes foreigners don’t care about the bubble or Greenspan’s policy of rate rises.

Add a dash of easy money from the Fed that has lead to speculation and lower risk parameters that Greenspan has complained about. Throw in a massive deficit that came about because of President Bush’s large tax cut that Greenspan blessed and helped pass. Top it all off with a lot of hubris, unflinching faith in free markets, a moral hazard in investor’s psyche born from the Fed Head’s bailouts and you have a perfect storm.

A perfect storm that does not respond to conventional policies such as higher interest rates.

It is no wonder that Greenspan has begun to ratchet up his rhetoric. He like the rest of us is at the mercy of the market.


Thursday, August 04, 2005

Fed's Move to prevent fraud/defalcations is Good--But Why is the Fed doing this?

The Fed's announcement today 'Agencies Propose Rules on Post-Employment Restrictions for Senior Examiners' is a good internal control measure to prevent bank examiners from being bribed with a lucrative employment contract to look the other way when doing bank examinations.

But why is the Fed and other agencies implementing such procedures at this moment? This and other measures should have been implemented a long time ago. Has an examiner been caught who fudged the numbers and subsequently joined the bank he was examining? Has an insidious process of what the Japanese call "amakudari" (descending from heaven) where career bureaucrats retire to lucrative jobs in the private sector taken hold between bank examiners and banks.

Perhaps I am wrong and this measure is a more stringent application of internal controls that operates in the public or private sector. After all people leave accounting firms to work for their clients all the time.

What lays suspicion on the whole matter is that the Fed is the umbrella supervisor to the financial services industry. It is also an organization that defies the checks and balances that our government is build upon--IT IS SELF SUPERVISING!!

Monday, August 01, 2005

Fed’s Recent Educational Effort Deficient

Ignores --40.6% of Americans
Ignores--Financial Slums Built by Greenspan

The Federal Reserve’s recent announcement ( ) that is was setting up an educational program with USA Today to teach middle/high school students about economics and personal finance by having them create a front page of a newspaper is glaringly deficient.

The Federal Reserve continues to ignore all those ‘financial derivatives’, or miracles of "innovation’ as Greenspan calls them in fringe banking that bilk a vast number of Americans.
Payday loans, rent to own, Auto title loans, Anticipatory Refund loans, Pawn shops, check cashing, wire transfer etc. are not mentioned on the Fed’s educational web page All charge exorbitant fees and are lumped together under the term fringe banking.

As we have pointed out, most of these supposed ‘innovations’ were not around before the onslaught of financial deregulation and the rise of Alan Greenspan to Fed Head. ( )

How can the Fed with a straight face claim to be educating children about economics and finance when it ignores the financial "innovations(?)", spawned during the Greenspan era, that a vast portion of Americans are forced to use because they have no other alternative?

The Stephens company finds that the area of fringe banking is growing at a breakneck pace that is far outstripping the growth in conventional financial markets:

"This is the first issue of the 3U Report. It is focused on the companies we
cover that offer financial products to the consumer. In general, most of these
products are not what most investors would consider mainstream. Basically, we
would include these types of companies in this category: pawnshops, payday loan
operators, check cashers, rent to own stores, small loan operators, used car
dealers catering to the sub prime market and sub prime mortgage providers.
Customers are generally in the $15,000 to $50,000 household income bracket and
lives from paycheck to paycheck. This income group makes up 40.6% of all
households, according to the latest census data. Many of these financial
products are not well understood by Wall Street or are considered suspect for a
variety of reasons. We think that this industry is growing faster than the
general financial services industry."
(The 3U consumer finance Monthly,
March 29, 2004)

The report goes on to say that it was forecasting revenue in the Payday loan market alone, to exceed $40 billion in 2004. The report drools over the financial opportunities present in fringe banking by pointing out the rapid growth of pay day stores from zero in 1993 to an excess of 22,000 stores across the USA. In a pictorial graph in conjures visions of the great gold rushing by calling the growth a "land grab" in a chart.

Imagine as many as 40.6 % of Americans may be resorting to fringe bank services and the Federal Reserve makes no mention of this in its educational page.

The Stephens report also mentioned that it is estimated that "18 to 22% of Americans do not have a bank account". I found the same. ( ). I also found that the Fed was both negligent and in error when it did report on Fringe banking.

The Fed could at least educate children about the dangers and exorbitant fees of financial innovations in fringe banking.

It could say that Pay Day loans are worse than a loan shark:

Or teach them how a $200 TV could end up costing $700.

The Federal Reserve will never do this especially under Fed Head Alan Greenspan, because he Greenspan, as an Ayn Rand acolyte firmly believes that he is aiding the greater good when he lets the less well-off suffer at the hands of the merciless.

With Greenspan set to retire historians will be keenly set about writing his legacy. Financial slum lord should be at the top of their list.

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