Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own.
Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.
The [August 9] crisis was thus an accident waiting to happen. If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market. As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.
The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World.
So:
- there was a bubble and it had to burst at some point;
- I did warn about it
- it's all the commies' fault - by demonstrating the superiority of our model, it made us ... er, I'm stuck here..; it made us even more successful? Yeah that's it.
Or - it's not my fault, not my fault, not my fault. But it worked!
:: ::
The surge in competitive, low-priced exports from developing countries, especially those to Europe and the U.S., flattened labor compensation in developed countries, and reduced the rate of inflation expectations throughout the world, including those inflation expectations embedded in global long-term interest rates.
In addition, there has been a pronounced fall in global real interest rates since the early 1990s, which, of necessity, indicated that global saving intentions chronically had exceeded intentions to invest. In the developing world, consumption evidently could not keep up with the surge of income
Greenspan, like Bernanke, is pushing the theory of the "savings glut" (the excess of savings from the developing world that "forced" the West, and in particular Americans, to consume more and to go into debt to do so) as a way to avoid the responsibility that the origins of these imbalances were on the borrowing side.
Also, in a highlt significant sleight-of-hand, he presents the fact that consumption "could not keep up with income" as a fact of life, and not as a feature. Consumption did not keep up because incomes did not grow as fast as GDP did, and companies captured an increasing share of it in profits. The universal requirement for Return On Investment aplied over there too and helped keep wage increases lower than they might have been. That, in turn, kept wages in the West low, as Greenspan notices, and inflation similarly low. But what he fails to say is that (i) low inflation was the overriding goal of policy (because inflation eats into financial returns) and (ii) inflation became increasingly defined as increasing labor wages, the idea that higher wages caused higher cosnumer prices having been "proven" in the 70s. So stagnant wages was the goal, and the entry on world markets of a new group of emerging countries with low wages and fewer pesky regulations was a godsend and was taken massive advantage of. But that was a policy choice, not just something that happened to happen.
Yet the actual global saving rate in 2006, overall, was only modestly higher than in 1999, suggesting that the uptrend in developing-economy saving intentions overlapped with, and largely tempered, declining investment intentions in the developed world.
Yeah, declining investment just happened, and was not at all caused by the fact that companies could squeeze more profits in the short term by not investing, and boost their share prices by using their cash for share buybacks rather than investment...
Equity premiums and real-estate capitalization rates were inevitably arbitraged lower by the fall in global long-term interest rates. Asset prices accordingly moved dramatically higher. Not only did global share prices recover from the dot-com crash, they moved ever upward.
Translation: lower interest rates allowed people and companies to borrow more, and thus to pay more for assets. Thus asset prices increased. Again, that somehow "just happened."
(...) The Economist's surveys document the remarkable convergence of more than 20 individual nations' house price rises during the past decade. U.S. price gains, at their peak, were no more than average.
Translation: "see, it's not really the US's fault, we did the same as everybody else, don't blame us." Which glosses over the influence that US trends, in particular financial trends in dollar, the currency of the world, have on other economies...
After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.
This is the heart of it. His argument is that bubbles cannot be prevented (the other side being that monetary policy can be used to help to mop up after the fact). Beyond the belated acknowledgement that we are in a major, major bubble (I mean, he IS comparing it to centuries' old bubbles, presumably because there is no comparison in more recent history...) this is, how shall we say?, self-serving and, naturally, absurd. But given that the only voices that would be given credibility to destroy that theory are in the financial world (because this is where the serious people are - those that know how to make money and manage it) and that the financial world is not an interested party in this theory, there is very little criticism of this theory. The financial world is partial to it because it means that it is safe for them to take more risk to make more money, in the knowledge that they will be bailed out if things turn sour. That's what's been called the "Greenspan Put" by the lonely voices that have criticised it - the notion that financiers can have all the fun they want, make crazy bets with other people's money, keep their - large - gains for as long as it pays off (and this lasts quite a while, as it is initially self-sustaining), and do not need to take the losses when things turn sour, as thei invitably do eventually, because then the Fed comes to the rescue.
So the common wisdom that this is insane has not come through the noise yet, because each bubble of the past 25 years, when it burst, has been "solved" by a bigger bubble. Until the last one. But as the scale of the ongoing crash is not yet absorbed by the markets, the common wisdom has not changed yet.
But it will, Mr Greenspan, it will.
I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.
That's all the atonement we'll get from him. "May have." "Not major." Yeah right.
We will never know whether the temporary 1% federal-funds rate fended off a deflationary crisis, potentially much more daunting than the current one. But I did fret that maintaining rates too low for too long was problematic. The failure of either the growth of the monetary base, or of M2, to exceed 5% while the fed-funds rate was 1% assuaged my concern that we had added inflationary tinder to the economy.
Translation: "it solved a bigger problem, and, anyway, I did worry about it". So it's okay, I guess. But this argument actually undermines the rest: this paragraph reflects his acute awareness that what he did was insane. But the lack of wage growth gave him cover to say there was no "real" inflation.
Of course, not a word about the Bush tax cuts for the rich that took place at the same time, and the record deficits they caused.
He then muses about what he then called the "conundrum" - the fact that long term interest rates remained low as short term ones were increased by the Fed.
Of course, the very simple explanation that US consumers borrowing on a massive scale to consume, creating both the need for debt and a captive source to assuage it (the surpluses of the exporters, whether industrial producers in Asia or oil producers in the Middle East and elsewhere), ensured that prices for US securities remained low is ignored. Because that would mean acknowledging the underlying objective to favor profits at the expense of wages, and the diversion created to hide that fact by dingling cheap and plentiful debt in front of consumers which would otherwise need to curtail their spending.
No, better to blame that on outside forces, rather than on the underlying policy of moving money from the middle classes to the rich.
In retrospect, global economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities.
Translation: "it's not my fault, it's long term trends I have nothing to do with" (apart from being one of its chief ideologues, cheerleaders and enablers when in power).
Although central banks appear to have lost control of longer term interest rates, they continue to be dominant in the markets for assets with shorter maturities, where money and near monies are created. Thus central banks retain their ability to contain pressures on the prices of goods and services, that is, on the conventional measures of inflation.
Translation: we can't (or rather: won't) do anything against financial inflation, but we can - and will - act against labor inflation.
25 years of neoliberal policy in a nutshell.
So you ARE respnsible, Mr Greenspan.
