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.

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