Former Federal Reserve Chairman Alan Greenspan – the uncredited, uncharged villain with much culpability.
It is with a near visceral reaction that I write this piece (luckily, lunch has been postponed until this is done). Why, because it angers the hell out of me when I think of all the needless suffering worldwide and all the people’s savings and investments lost because of this man’s actions.
The world economic collapse of 2008 was made from 80 percent to 120 percent worse than it would have been by Greenspan. Yes, those are my estimates (but hey, what can I know with a mere 30 years in the business world working for Fortune 500 companies?!)
Let’s quickly review the historic facts here. From the time of his ascent to power as Federal Reserve Chairman in 1987, this man, Greenspan, could not stop tinkering with interest rates always with adverse consequences for working Americans and consumers. He kept interest rates high in the early1990s thereby prolonging the recession that had started in 1989 – 1990 (always with the justification that we had to fight inflation). These high interest rates and consequent poor economic performance cost President Bush re-election in 1992. (No great loss there, but it is puzzling why his son, George W. Bush, kept Greenspan on through 2006.)
In early 1994, Greenspan was at it again with enthusiasm. Raising interest rates by one half percent at every Fed meeting until the rapid rise in rates caused Anaheim (or was it the entire Orange County) California to nearly go bankrupt as its financing costs soared so high so rapidly that Anaheim could not service its debt. And other municipalities were hurt as well. Then Greenspan reluctantly backed off. Close the barn doors after the horses have bolted was always his modus operandi.
Fast forward to the year 2000. Greenspan unhappy with the stock markets’ (both the Dow Jones Industrials and the NASDAQ) meteoric rise to new all-time highs, felt compelled to act. Those markets just had to be brought down in order to avoid a crash. But, he was using his inflation canard again at the time. There was no significant inflationary pressure in the economy in the spring of 2000. Again, raising interest rates by one half percentage point as often as he could (he did this twice in one month I seem to recall in May or June, 2000), Greenspan would not stop until the NASDAQ finally gave up and began to fall and fall hard. Yes, the dot.com bubble was bursting, but the rapid increase in interest rates made the bursting worse and brought the economy and most other non tech stocks down hard as well. After the dust settled, the NASDAQ was down to around 1,500 from a high of 5,000. To avoid a crash, Greenspan consciously pursued a policy that gave us a crash. As we shall presently see, he did this again and brought down the whole world’s economy.
After the terrible events of September 11, 2001, George W. Bush and Greenspan embarked upon a major reduction in interest rates that saw historically low rates by the summer of 2002. Interest rates stayed at these low levels until the spring of 2004 when Greenspan became restless, antsy, yet again.
Here is where we must pause and bring to light other facts of importance. Most of the home loans that later went bad were made during this 3 year window (2002 – 2005). Greenspan seems finally to have learned a little from his past mistakes – so costly to the economy – and he only raised rates by 25 basis points (one quarter of one percent) at each Fed meeting. But, he persisted through about 14 such increases until he left power in early, 2006. (Bernanke, successor to Greenspan, added a couple of more of these rate increases in 2006 which did not help the then rapidly developing catastrophe. From personal experience, I saw my variable rate home equity loan monthly payment double in that 2 year period, 2004 to 2006, as the rate I was charged went from 4 percent to 8 percent in that time. One can only imagine how hard this hit the people who had variable rate mortgages with an outstanding principle balance of $200,000 or more!)
Greenspan‘s continuous rate increases for 2 years (2004 – 2006) were needed to burst the housing bubble that he himself was largely responsible for creating by keeping rates historically low from 2002 through early 2004. Rates were still relatively low in mid 2005 after several 25 basis point increases, and reckless banks were still making big loans on the bet that housing prices would keep going up as they had dramatically done since 2002.
The excesses of this man’s policies introduced severe distortions to the capital markets through these years. First rates are kept artificially low and then they are raised repeatedly until the desired effect is seen, namely, housing prices falling sharply. If rates had not been so artificially low in the period of 2002 -2005, many of these riskier loans would not have been made as the loan applicants would not have qualified even under the very lax standards used by the banks during those reckless years. That is why I say that Greenspan made the mess of 2008 much worse than it otherwise would have been.
(As an aside, I cannot help but to wonder that rates were kept so low in 2002, 2003, and 2004 partly to mask the true cost of George W. Bush’s expensive foreign wars while he was seeking re-election.)
Never stopping the rate increases until he saw hard evidence the economy was slowing, or that market valuations were declining, or that housing prices were weakening and then falling precipitously, was a real serious failing in this man’s character and behavior. Greenspan‘s behavior was analogous to the man who always over eats at dinner time. Instead of realizing that it takes his stomach a little while to tell his brain that it has enough food in it, the man continues to eat until he begins to fill full and satisfied. Of course, then it is too late as a little while later his stomach will tell him that it is overly full! And, yet, the man is stubborn and persists in this needless behavior.
So, there is a lot of culpability for the mess of 2008. Major culprits are the US government (for its ill-conceived interference into the housing market, its ill-advised repeal under Clinton of various regulations that prevented banks from engaging in reckless activities, etc.) and the major banks (that made risky loans, for the loan origination fees, that they then quickly sold to other financial institutions) and the Wall Street firms (for marketing these “mortgage-backed securities” to the rest of the world). But, Greenspan amplified the size of the problem by 80 to 120 percent.
A couple of questions arise here. 1. Is it prudent to allow any man to be in such a powerful position for so many years? Greenspan was Fed chairman for 19 years (1987 – 2006). 2. Is the Federal Reserve part of the problem and not part of the solution for a stable, healthy economy? This question is beyond the scope of this essay as it leads to addressing the problem that both Europe and the USA are facing of having monetary authorities work their ledger de main so that the politicians’ unceasing fiscal irresponsibility is allowed to continue unabated.
If there were justice in this world, Greenspan would have been in an orange jumpsuit, put on trial for gross negligence or worse crimes, found guilty, then sentenced to life imprisonment say in Antarctica or some other harsh environment. No Club Med for him and his ilk.
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