Wednesday, August 16, 2017

What is Wrong With Former Fed Head Alan Greenspan?

It is almost as if this stuff has been deliberate.

From Lars Syll:

That’s how it goes when you prefer to read Ayn Rand 
A couple of years ago the former chairman of the Fed, Alan Greenspan, wrote in an article in the Financial Times, speaking of the continually increasing demands for stronger regulation of banks and finance:
Alan Greenspan and Ayn Rand at the White House after Greenspan was sworn in as chairman of Gerald Ford’s Council of Economic Advisers, September 1974
Since the devastating Japanese earthquake and, earlier, the global financial tsunami, governments have been pressed to guarantee their populations against virtually all the risks exposed by those extremely low probability events. But should they? Guarantees require the building up of a buffer of idle resources that are not otherwise engaged in the production of goods and services. They are employed only if, and when, the crisis emerges.
The buffer may encompass expensive building materials whose earthquake flexibility is needed for only a minute or two every century, or an extensive stock of vaccines for a feared epidemic that may never occur. Any excess bank equity capital also would constitute a buffer that is not otherwise available to finance productivity-enhancing capital investment.
That is — to say the least — astonishing. Not wanting to take genuine uncertainty or ‘fat tails’ seriously is ominous enough. Is there anything the year 2008 taught us, it is that the ‘tail risks’ are genuinely real and must be included in all financial calculations. But even worse is how someone – who surely ought to have read at least an introductory course in economics – can get the idea that demand for higher capital requirements of banks would be equivalent to building buffers of ‘idle resources.’ The claim is from an economist’s point of view absolute nonsense.

Capital requirements are about how the mix between debt and equity of banks’ balance sheets should look like. It is not a question of something having to be set aside. It is not about liquidity or reserve requirements. Capital requirements are not about pea soup in a jar that we should put on stock to have in a crisis. It’s about how much leverage we should allow banks to have.

Higher capital requirements simply mean that we demand that banks finance a larger portion of their portfolios out of equity and less out of money deposited or loans. There is nothing here about resource use, but about how banks should manage risks. And how they are distributed in an economically efficient manner.

Of course, higher capital requirements mean that banks’ risk taking decrease....MORE
I wonder if  Professor Syll isn't actually being kind with the Randian explanation rather than implying something more nefarious.
So I will.

We first mentioned Greenspan's Feb. 23, 2004 speech at the National Credit Union Association back in April 2007—note the date, something economic was approaching—where, as Chairman of the Fed., Greenspan said:
"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. "
and
"Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages..."
Those 5/1 and other flavors of ARMs turned out to be landmines should the economy ever tank or interest rates rise near the time of the resets.

We reiterated the oddity in January 2008—and that something economic was much closer—with "Alan Greenspan: Competent Criminal or Criminally Incompetant?".

Finally in December 2015 we trotted out the speech story once again but this time with a new intro and set to music (all it takes is a little confidence**):

Climateer Line of the Day: Perils of Prognostication Edition (or was Greenspan just a straight up con man?)

Canada's Financial Post has a column, "Why oil forecasting is a crap shoot, and free oil for the world ain’t going to happen" that includes this tidbit:
“Today’s tight natural gas markets have been a long time in coming, and futures prices suggest that we are not apt to return to earlier periods of relative abundance and low prices anytime soon,”...
-Alan Greenspan, testimony to Congress, June 2003

At the time natural gas was at $6.31.
On December 18, 2015 it traded as low as $1.684 before starting this really fun run to $2.36 this morning.

I am reminded of another Greenspan pitch that we first wrote about back in April 2007 and expanded upon in January 2008.

Cue the soundtrack:


And now, a tale of how a lot of folks with adjustable rate mortgages got stung:


The Set-up
"...American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
-Alan Greenspan
Speech to the National Credit Union Association
February 23, 2004
The Score
The $3 Billon Payday In today’s Journal Gregory Zuckerman brings us news of the biggest one-year salary ever paid on Wall Street — that of hedge-funder John Paulson, who made somewhere between $3 billion and $4 billion last year. That’s right, between $3 billion and $4 billion. In one year. 
...Mr. Paulson made his pile by betting against the housing market at just the right time. Lots of people bet their money on a housing crash, but they were too early — his bets happened to coincide with a crash in the debt markets.
The Wall Street Journal's Wealth Report blog.
January 15, 2008
The Payoff
Greenspan joins hedge fund Paulson
Alan Greenspan, the 81 year-old former chairman of the Federal Reserve, is set to join the US hedge fund Paulson & C. as an adviser. 
Dr Greenspan will advise Paulson on the global financial markets, and under the terms of the agreement he will not advise any other hedge fund while he is working for Paulson.
Paulson manages $28bn of assets and last year earned billions of dollars when it called correctly the collapse in the sub-prime mortgage market, a collapse which was caused by Dr Greenspan who kept interest rates too low for long, according to some economic commentators....
The Telegraph
January 16, 2008
The Stinger
Anna Schwartz blames Fed for sub-prime crisis
..."There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says.

...She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.
Professor Anna Schwartz, co-author with Milton Friedman of
"A Monetary History of the United States"
The Telegraph
January 14, 2008

The End

*The Sting was based on a great sketch of human nature, The Big Con: The Story of the Confidence Man by David W. Maurer.
**tag-line from the movie poster.

There's a saying in the con world: "You can't con an honest man" but I'm thinking, if you do a little cui bono analysis of the last ten years of rates and QE, it sure looks like a case of not just a Rahmian
"You never want a serious crisis to go to waste. And what I mean by that it's an opportunity to do things you think you could not do before." 
but something a bit deeper.

I'm starting to 'entertain' the idea that creating a crisis is an even more efficient way to guarantee that "opportunity" to do things...