Wednesday, October 26, 2005

Bernanke--Learn more about him

Finanancial Markets Center has put together an excellent compendium on Ben Bernanke the recently nominated Fed Head. Click on:

Tuesday, October 25, 2005

On Bush’s Nomination of Bernanke to be the next Fed Head.

Why Bernanke is the Wrong Choice
President Bush’s selection of Ben Bernanke to the be next head of the Federal Reserve (Fed Head) will only exasperate the coming financial calamity. Mr. Bernanke is woefully unprepared for the job, has the wrong priorities and is vulnerable to being politically manipulated. He is about to become the fall guy, or at least they will try and make him the scapegoat, for the coming crisis.

"It’s the Market’s Stupid"–Not the Economy
Mr. Bernanke is praised for his economic research and is noted for this strong knowledge of the economy, but he has no hands on financial markets experience. While the majority of previous Fed Head’s lacked financial markets experience the world has changed dramatically since 1987 when the last Fed Head, Greenspan, was nominated. We live in the era of free markets where much of what we do has been privatized and decision making has been transferred to the market. The markets rule. In such a world it is critical that the Fed Head have a strong knowledge and connection to financial markets and derivatives. Mr. Bernanke does not.

Worse Mr. Bernanke is an academic–a noted ideologue revered for his intellectual acumen. Most traders and money managers would tell you that this is a handicap. Markets are about pragmatism and not ideology. If anyone has any doubts about this look at how progressivism and the left have been at the losing end for the last 30 years because they have wedded themselves to ideology and the rule of academics.
(Click to read Mr. Bernanke’s speech on the transition from academia to policy making: .
Anyone doubting his emphasis on research and acadmea should read: )

What Fed Head Greenspan lacked in market experience he more than made up with his political maneuvering. Consider some of his feats–he was able to talk Democratic President Bill Clinton into fiscal austerity and balanced budgets, he has been one of the longest serving Fed Heads, he has refused to comply with Congressional demands at times and he has freely commented about matters far outside his bailiwick. How will Mr. Bernanke deal with a financial market’s crisis precipitated by factors outside his line of authority?

Treasury Secretary Robert Rubin was a testament to the influence and success a highly regarded and knowledgeable financial market’s person can have on the job.

The Smart Money Gives Bernanke a Thumbs Down
On Wall Street it is said that people working in the bond market are smarter, but that people working in the stock market are more interesting. Well, the stock market rallied and the bond market sold off on Mr. Bernanke’s appointment. Clearly the inflation hawks don’t think that Mr. Bernanke will do such a good job of fighting inflation.

The sound money folks at places such as the Ludwig Von Mises Institute have been deriding Mr. Bernanke for his comments for some time.

Fighting the Last War
Economists are infamous for fighting the last war. Mr. Bernanke is expected to be an inflation hawk that sees the inflation fight as the Fed’s number one priority. But is inflation currently the USA’s most pressing problem? What about the Current Account and Trade Deficits? The Budget Deficits? The Housing Bubble? Private Debt Levels? Clearly many of these problems are outside of the scope of the Fed Head’s job. But they were not outside the scope of Fed Head Greenspan’s agenda. He had the knack for influencing lots of things. Mr. Bernanke has yet to exhibit such an ability.

Fed Head Bernanke is expected to apply Black Box Approach to inflation by establishing strict inflation guide lines or targets for inflation rates. For example, stating that the Fed’s goal was to keep inflation at or under 2%. Such a strategy won the German Bundesbank universal acclaim. It will not win the Fed neither acclaim or success. Times have changed.

The Bundesbank was created from the fallout of the hyperinflation of the Weimar Republic. At a time when it was critical for the German government to gain confidence for their money. The inflation surge of the 70's that lingered well into the 80's further edified the Bundesbank’s image.

Inflation targeting could become an albatross that locks the Fed into a corner at a time when a more dynamic and flexible approach is needed. Establishing a black box approach also reinforces the notion of Mr. Bernanke at a professorial ideologue. Greenspan would not commit or give anything to anyone as was seen with his infamous Greenspeak of mincing his words.

Trouble Ahead
While the stock market has rallied these past two years, given that none of the indexes have made new highs one must assume that this was a bear market bounce. After having peaked in early August markets have been steadily declining. Add to this that the triple deficits or current account/trade/budget are making record highs and pushing beyond limits that have brought about rapid rebalancing there is trouble ahead.

It appears that Mr. Bernanke sees it differently. Rather than worrying about the deficits the Fed Head Bernanke came up with a grand theory that the trade imbalances derived from the "global savings glut" as he noted this past spring Interesting theory. Perhaps credit glut, or foreign central banks making the US the buyer of last resort for their goods would be more appropriate. Instead of debating about what is going on it is important first for Mr. Bernanke to acknowledge that there is a big problem. Mr. Greenspan was slow to fess up, but he did.

I am sure Mr. Bernanke has several more theories. Unfortunately he will not have much time to consider them as the markets are in trouble. Lets not forget that market’s have traditionally had a bout of angst whenever a new Fed Head or Treasury Secretary took over. Mr. Bernanke will similarly be challenged.

No doubt Mr. Greenspan, the consummate politician, will be quick to comment. Watch out Mr. Bernanke.

Friday, October 21, 2005

Greider Sets the Record Straight on Greenspan

William Greider, who broke onto the national scene with his book 'The Education of David Stockman', recently joined the swelling ranks of those assessing Fed Head Alan Greenspan’s career. He has been a consistent, albeit often a lonely voice, crying out about the injustices being served up by the Fed and its chief puppet master Greenspan. His book 'Secrets of the Temple'
published in 1987 is a classic that today is still worth a read by anyone that is interested in learning how the Federal Reserve operates. Bill currently writes for The Nation, he was previously with the Washington Post.

The following are the first couple of paragraphs of ‘The One-Eyed King’ and a link to click on to read the rest.

The One-Eyed King


[from the September 19, 2005 issue]

When Alan Greenspan retires as Federal Reserve chairman early next year, we can expect waves of adulation for his extraordinary eighteen-year reign over the American economy. The financial press is already offering nostalgic retrospectives on the highlights: the crash of '87 and rapid rebound, the chairman's total victory over price inflation, his swift interventions to avoid financial panics and to reverse the stock market's massive meltdown of 2000-01. In tempestuous times, this Fed chairman acquired a godlike aura--the inscrutable wizard with a nerdish charisma, his wisdom cloaked in financial doubletalk. How will the nation get along without him?

A different assessment was expressed last winter by the Senate minority leader, Harry Reid. "I'm not a big Greenspan fan," the Nevada Democrat allowed. "I think he's one of the biggest political hacks we have in Washington." His harsh comment was poltely overlooked in governing circles, like an off-color joke told at a Washington dinner party.

When the adulation fades and people begin to understand the full weight of Greenspan's legacy, however, they should be able to see that Reid had it right. Indeed, the Senator's critique did not go far enough. The central banker is a hack, yes, but also a man of conviction.

Alan Greenspan is the most ideological Fed chairman since the 1930s. Without ever acknowledging his intentions, he enlisted himself and the awesome governing powers of the central bank in advancing the "reform" agenda of the Republican right. The chairman thus became an important actor in achieving the profound transformations that occurred during the last generation: the retreat of government, the rise of market ideology and the financialization of American economic life. The "money guys" gained hegemony over the "real economy" of production and work--the people and businesses who make things. The consequences imposed on society are often described as "the tyranny of the bottom line." In numerous ways, the Greenspan Fed helped make it happen. However, the chairman did not produce what conservative doctrine promises--stable and secure prosperity.

Greenspan crossed a line previous Fed chairmen had always gingerly honored: the appearance of political neutrality....
Click to continue reading.

Wednesday, October 12, 2005

Greenspan Steps up his Lies and Blame Game

Says Market Created "Speculative Excesses"
The End is Nigh

In his speech ‘Economic flexibility’ before the National Italian American Foundation, Washington, D.C., October 12, 2005 Alan Greenspan stepped up his blame game to circumvent the coming criticism over his policies when the many imbalances and bubbles-Housing, stocks, trade, budget-burst.

All the financial imbalances and excesses the world faces have Greenspan’s imprints all over them. Consider the Fed Head’s comments in the speech.

The Market Did it—Caused the Financial Excesses: "[Flexibility has made the economy more resilient to shocks and more stable overall during the past couple of decades. To be sure, that stability, by fostering speculative excesses, has created some new challenges for policymakers."

The flexibility and stability Mr. Greenspan is referring to is his ‘too big too fail policy’ under which he has bailed out institutions and speculators of all ilk. The bail outs encouraged a moral hazard, the term Wall Street uses to describe the behavior whereby investors abandon risk knowing full well that they will be bailed out. The Fed Head even notes some of his bailouts–the 1987 stock market crash, the credit crunch, Y 2k in his speech.

Think of flexibility and stability like a credit card. Strapped for cash and going down because you bet the ranch on Russian debt and need a few hundred billion to meet margin calls, don’t worry Al will be there to catch you.

It should not be forgotten that the Fed Head has consistently been a vocal and ardent supporter of free markets. Even at the height to the Enrol crisis he was singing the merits of free markets. But he has consistently avoided the harsh reality of the losses that come with failure when it comes to his beloved financial institutions and speculators.

For more see my "The Enron Way a Creation of the Federal Reserve",

Derivatives Helping Stability--Not Fostering Speculation: "These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago. After the bursting of the stock market bubble in 2000, unlike previous periods following large financial shocks, no major financial institution defaulted, and the economy held up far better than many had anticipated."

The fact is that derivatives, leveraged financial instruments were and are currently responsible for many of the financial excesses under the Greenspan era. Programmed trading exasperated the 1987 stock market crash. Long Term Capital Management (LTCM) a speculative hedge fund brought to the world to the brink of financial calamity in 1988 because of its leveraged derivative strategies. Then NY Fed Head Corrigan put together a bailout program that saved them and the many banks and investment banks that had lent to them.

Today it is no different. Take the housing market. Greenspan himself has even talked about the risks posed by new financial innovations in the mortgage market such as Interest Only (IO) loans. IO’s and other financial innovations have allowed people to buy larger homes and assume bigger mortgages than would have previously been possible. They have de facto leveraged home ownership.

Greenspan has always championed derivatives so it is not surprising that he is singing their merits.

Clearly Fed Head Greenspan is a hypocrit and full of it. His increasing comments about excesses, from one known for mincing his words, is a clear indication that he sees the inevitable calamity awaiting us.

Lets hope that the public will not be duped by his blame game when the bubbles burst.

Tuesday, October 11, 2005

FOMC minutes shows FED Erring

Minutes of the September 20th Fed meeting
released today showed that the Fed is still concerned about inflation and will most likely tighten at its next meeting. Members noted that Katrina would affect the economy but were "uncertain" about the consequences. They also downplayed the price of higher oil on the economy instead focusing on its inflationary consequences.

I disagree. The economy and the markets are under pressure and the Fed is adding to it. They erred on easing and now they are erring on tightening.

Thursday, October 06, 2005

Hedge Fund Manager Says Greenspan Worst Fed Head Ever

Greenspan: The worst Fed chief ever

The Fed chairman thinks the central bank has done a fabulous job during his tenure. I beg to differ. Let's set the record straight.

By Bill Fleckenstein

Alan Greenspan gave a speech last week titled "Economic Flexibility." It should have been called "Damn, I'm Good," because the world's biggest serial bubble blower -- and most incompetent, irresponsible Fed chairman of all time -- tried to rewrite history. My column today will endeavor to set the record straight.

At least he was nice enough to organize his speech so that the majority of objectionable material fell into seven or eight consecutive paragraphs, as he tried to set up Ben Bernanke (his likely successor) to be the fall guy for all of the problems that Greenspan and the rest of the yes-men at the Fed have precipitated.

He's got the dates but not the cause
I'll turn first to his brief 1990s synopsis, in which he claimed: "Yet the significant monetary tightening of 1994 did not prevent what must by then have been the beginnings of the bubble of the 1990s. And equity prices continued to rise during the tightening of policy between mid-1999 and May 2000."

His observation of when the mania really took hold and mine are exactly the same. It did start in late 1994. Of course, as with everything, he recognizes the end result but has absolutely no clue as to its cause. The reason for the continued rise in equity prices was that the Fed panicked in mid-1995 and reversed its tightening course after Orange County (and other leveraged entities) blew up. Next, the Fed bailed out the Asian crisis in 1997, Long-Term Capital Management in 1998 and fears of Y2K problems in late 1999.

Continuing on, he notes: "Indeed, the equity market's ability to withstand periods of tightening arguably reinforced the bull market's momentum." No, it was his endless bailouts that caused folks to believe in the notion of a "Greenspan put." Purely and simply, it was his practice of bailouts and market-cheerleading (which reached fevered pitch at the peak) that turned the boom to bubble.

Next, he follows up with this incredible statement: "The FOMC knew (my emphasis) that tools were available to choke off the stock-market boom, but those tools would only have been effective if they undermined market participants' confidence in future stability." To which I say: Correct, that is the idea. From time to time, you have to take away the punchbowl. But just remember that term "tools," because we'll see some examples shortly.

On to his summation of the aforementioned statements: "Market participants, however, read the resilience of the economy and stock prices in the face of monetary tightening as an indication of undiscounted market strength."

That's his lame excuse for why the market went up. Wrong.

High-tech is still the scapegoat

He then next turns to the dilemma the poor Fed was in: "By the late 1990s, it appeared to us that very aggressive action (my emphasis) would have been required to counteract the euphoria that developed in the wake of. …"

To finish that thought, Greenspan resorted to the cheerleading that he used at the height of the mania and then laid blame at the foot of "… extraordinary gains in productivity growth spawned by technological change," rather than his own bubble-blowing. As I read that, I am laughing, because it's just remarkable how he's still trying to insinuate that we were in a "new era." And that's what drove up stock prices, as opposed to his incompetence.

Highly allergic to accountability

His next comment: "In short, we would have needed to risk precipitating a significant recession, with unknown consequences. The alternative was to wait for the eventual exhaustion of the forces of boom." Got that? It was these unknown forces of boom -- not the Fed -- that precipitated the bubble. He followed up by saying: "We concluded that the latter course was by far the safer." What he means: We realized it was a bubble, but we didn't care because we assumed we could fix it.

So, the Fed understood the reality of the bubble while it was going on (though the Fed claimed not to at the time, a subject I discussed in my daily column last March). Nevertheless, Al said: "Relying on policymakers to perceive when speculative asset bubbles have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic."

You read that right. It can't be done. It's impossible. Now, of course, it wasn't impossible. I wrote about it until I was blue in the face. Most people with an ounce of common sense knew there was a bubble under way. And, by what I've already shown, the Fed knew too. And yet, Greenspan is still trying to say that it would be unrealistic to attempt to identify bubbles.

In addition, he's ready to hide behind another excuse: "It is difficult to suppress growing market exuberance when the economic environment is perceived as more stable…" See? It's just too hard, and, as he already said: "We would have needed to risk precipitating a significant recession, with unknown consequences."

Rusting tools in Greenspan's garage

Even if any of his protestations were true (which I don't believe) and the Fed was afraid of damaging the economy, it has been granted specific tools to deal with periods of speculation. Among them: Regulation T, whereby margin requirements can be raised to reduce risk and change market psychology. (While raising margin requirements to even 100% may or may not have been sufficient to break the stock bubble, the Fed could have at least tried. If that failed, the Fed could then have tightened.) However, for Greenspan to pretend that all he could have done was to raise rates shows that either he doesn't know what the Fed's tools are (i.e., he's clueless) -- or he's not being truthful.

The Fed could also ask Congress to resuscitate the old Regulation X. Part of the Defense Production Act, passed in September 1950), this regulation let the Fed set minimum downpayments and maximum mortgage-repayment periods for residential properties. The Fed gave up the authority a few years later.

Of course, when Greenspan wails about not wanting to hurt the economy with rate hikes, none of his lapdogs in the press ever seem to question why the Fed hasn't used the tools at its disposal.

In any case, part of my reason for re-titling Greenspan's speech is due to the following comment: "After the bursting of the stock market bubble in 2000, unlike previous periods following large financial shocks, no major financial institution defaulted, and the economy held up far better than many had anticipated (and we all lived happily ever after)."

Crowing belied by cutting

What I'd like to know is: If this was all so benign, why did he and helicopter copilot Ben Bernanke panic -- to the tune of 13 rate cuts, all the way down to 1% -- about the possibility of deflation in 2001 as the stock bubble unwound? Were it not for the even bigger, more dangerous housing bubble that Greenspan has in turn precipitated, which has only postponed the inevitable, the fallout would have been commensurate with the size of the boom.

He is right about no major financial institutions having defaulted -- though we did happen to lose Enron, WorldCom and Arthur Andersen in the process. But it was largely an equity-induced mania. And, as I've said many times, it did not leave behind a wave of bad debts. The housing bust will do just that.

Culpability, thy name is Greenspan

So, the fallout from the housing boom, the unfinished business from the stock boom and all the derivatives he's championed for his beloved deregulated financial system will combine to hit with full force somewhere down the road. By then, of course, Greenspan will be long gone. He, as well as everyone else who's incapable of understanding what really happened, will be blaming our problems on the next Fed chairman. I will have no sympathy for Ben Bernanke, assuming he moves from the White House Council of Economic Advisors to the Fed. But we must understand what actually took place and not let this arrogant buffoon get away with his attempt to rewrite history.

And that, ladies and gentlemen, is the last I'll have to say about Alan Greenspan, once and for all -- until he makes me really mad.

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