By Vivien Lou Chen and Dawn Kopecki

May 12 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said that the decline in the U.S. housing market may be bottoming and it’s “very easy to see” financial markets continuing to improve.

“We are finally beginning to see the seeds of a bottoming” in the housing industry, Greenspan said today during a conference of the National Association of Realtors in Washington. The U.S. is “at the edge of a major liquidation” in the stock of unsold properties, which may help to stabilize prices, Greenspan said.

Home-sales figures in recent weeks have shown a slower pace of decline, and the slide in property prices has eased, according to gauges including the S&P/Case-Shiller index.

The former Fed chief, who was among the first prominent economists to warn about the risk of a recession in 2007, said housing prices could fall another 5 percent without putting too much strain on the economy.

“We run into trouble if it’s very significantly more than that,” Greenspan said. Housing prices remain “the critical Achilles’ heel” of the economy.

While the housing bottom may not be obvious in prices, it is becoming clear in “significant regional differences,” where some of the hardest-hit areas are starting to show signs of improvement, he said.

Greenspan said in congressional testimony in October that “a flaw” in his free-market ideology contributed to the “once-in-a-century” credit crisis.

Less Trouble

Today, Greenspan said companies are having less trouble raising money. U.S. firms have sold bonds at a record pace so far this year, including a $3.75 billion offering today from Microsoft Corp., the world’s largest software maker.

Wells Fargo & Co. and Morgan Stanley raised $16.6 billion in stock and bond sales on May 8, just a day after the government ordered them to raise capital, becoming the first banks to respond to the government’s mandate.

“Company after company has been raising capital and they are getting far more than they expected,” said Greenspan, 83, who left the Fed in January 2006 after almost two decades at the helm and has returned to his former role as a private economic forecaster.

With the expansion in market liquidity, “you begin to see, as we are seeing today, a very significant rise in the availability of money,” Greenspan said. As markets improve, “it’s very easy to see that it’s going to continue for an indefinite period,” he said.

Prices Fell

U.S. home prices fell the most on record during the first quarter from the prior year as banks sold seized homes and foreclosures persisted at a high rate in California and Florida. The median U.S. housing price fell 14 percent during the quarter to $169,000 year-over-year, the National Association of Realtors said earlier today.

U.S. banks held $26.6 billion of repossessed real estate at the end of 2008, more than doubling from a year earlier, according to the Federal Deposit Insurance Corp. in Washington.

Greenspan’s decisions as a central banker have come under scrutiny in recent years after the fall in home prices triggered a collapse in mortgage financing and other credit.

Under Greenspan’s leadership, the Fed left the overnight lending rate between banks at 1 percent from June 2003 until June 2004. Regional Fed presidents such as Gary Stern of Minneapolis and Janet Yellen of San Francisco have publicly questioned the Fed’s hands-off approach toward asset bubbles like the one that emerged in house prices during Greenspan’s tenure.

Kept Rates Low

Former Fed Vice Chairman Alan Blinder, Stanford University professor John Taylor and other economists say Greenspan’s approach of keeping rates low for an extended period helped to foster the housing bubble.

“I’ve always argued going back many decades that you do not capitalize a piece of real estate with overnight interest rates,” the former chairman said today in response to an audience question.

The housing market is instead fueled by a decline in long- term interest rates, which started a full year before the Fed began cutting the federal funds rate, Greenspan said.

“I think there is a recalibration of financial history that I find very puzzling,” he said.

Referring to his critics, he said, “I can say that I respectfully disagree. They’re wrong.” NO SIR, YOU ARE WRONG & YOU ARE TO BLAME!!!!!

To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net

# posted by Jeff D @ 5/13/2009 05:41:00 AM 0 comments links to this post

By Oliver Biggadike

April 27 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said five years ago that predicting currencies is no better than tossing a coin. A growing number of traders are betting that heads or tails, the dollar wins.

Investors bullish on the U.S. economy say the dollar will strengthen as America recovers first from the global economic recession. Those who expect the longest contraction since the early 1980s to continue say the currency should appreciate as the haven from turmoil in world markets. Foreign investors bought a net $22 billion of U.S. financial assets in February, the Treasury Department said April 15.

The dollar is “the best-looking horse in the glue factory” among major currencies, said Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, which has $11.3 trillion in assets under custody.

America’s currency is rising even as the Treasury sells record amounts of bonds to finance a deficit the Congressional Budget Office estimated will swell to $1.85 trillion this fiscal year. Intercontinental Exchange Inc.’s Dollar Index, which measures the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, is up 4.7 percent this year, after falling 5.4 percent at this point in 2008.

Strategists increased their forecasts for the dollar this year against all those currencies, data compiled by Bloomberg show. Since January, the analysts have boosted their year-end dollar forecast 2.2 percent to $1.32 per euro from $1.35, and 5.2 percent to 101 yen from 96 in February, the median of more than 40 estimates compiled by Bloomberg show.

Boosting Forecasts

The U.S. currency has strengthened to $1.3141 versus the euro from the low this year of $1.4058 on Jan. 2, and Blake predicts it will rise to $1.28 in a month. Against the yen, the dollar appreciated to 96.60 from the low of 87.13 on Jan. 21, and is likely to climb to 102, he said.

The dollar rose against 15 of the 16 most-traded currencies today as demand for safer assets increased after an outbreak of swine flu spurred concern there may be a global pandemic.

Much of the dollar’s gains over the past year came as the deteriorating global economy caused investors to flee stocks and emerging market bonds and reinvest their money in Treasuries. Rates on three-month Treasury bills have averaged 0.19 percent this year, compared with 1.27 percent in 2008.

The 30-day correlation coefficient between the Dollar Index and Morgan Stanley’s MSCI World Index reached negative 0.72 on Feb. 19, the most since July 2006, as the greenback approached a three-year high against its trading partners and global stocks fell. A correlation of minus 1 would mean the dollar gains whenever stocks decline.

Seeking Signs

Now, the dollar is gaining as stocks rally, signaling investors see the economy bottoming and are putting their money in U.S. assets.

The Dollar Index rose as much as 5.1 percent since March 19 as the MSCI World Index rallied 11 percent. The 30-day correlation coefficient narrowed to minus 0.55 in that period.

“If there’re signs that the U.S. is the first out of the recession, it’s beneficial for the dollar,” said Samarjit Shankar, director of global strategy for the Global Markets group in Boston at Bank of New York Mellon, which administers more than $20 trillion in assets.

Purchases of new homes in the U.S. were higher than forecast in March and German business confidence rebounded from a 26-year low this month, data on April 24 showed. The same day, finance chiefs from the Group of Seven industrialized nations said in a joint statement they see “signs of stabilization.”

Recovery Forecast

“Economic activity should begin to recover later this year amid a continued weak outlook, and downside risks persist,” the G-7 finance ministers and central bankers said in the statement.

Greenspan, who stepped down as Fed chairman in 2006, compared the accuracy of currency predictions to tossing a coin in November 2004 at the European Banking Congress in Frankfurt.

“Forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss,” he said in a speech in which he warned that the U.S. current-account deficit would diminish the appeal of accumulating dollar assets.

Strength in the dollar may be tempered as the Fed prints money to purchase U.S. debt in an attempt to keep yields from rising, according to Jonathan Xiong, who helps manage $18 billion in foreign exchange as a senior portfolio manager at Mellon Capital Management Corp. in San Francisco. The U.S. central bank’s balance sheet rose to $2.2 trillion as of April 22 from $906 billion at the beginning of September.

“You’re issuing your own debt and buying it back in the marketplace; that definitely will have to devalue the currency,” he said. “The big powerhouses like China do have a little bit of concern.”

Rising Demand

So far, data show undiminished foreign demand for U.S. financial assets. Net purchases totaled $22 billion in February as China and Japan added to their holdings of U.S. government debt, the Treasury said. The Fed’s holdings of Treasuries on behalf of foreign central banks and other institutions rose 8.7 percent this year to $1.84 trillion.

More foreign money flowed into U.S. stock markets in the 20 business days ended April 15 than in 69 percent of the other 20- day periods going back to 1997, according to State Street data. The five-day flow was in the 77.6 percentile, compared with outflows in the last six months that were higher than 86.4 percent of past periods, the data showed.

“We’re at a loss to identify other major currencies that look more attractive” than the dollar, State Street’s Blake said. “The equity-flow data have been dollar supportive almost any way you look at it. When people flood into the equity market they’ve been buying the dollar as well.”

Shrinking Deficit

Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London, said a shrinking U.S. trade deficit will spur demand for the U.S. currency. He said in an April 21 interview that February’s 28 percent drop to $26 billion “means this massive commercial overhang of excessive supply of dollars coming from the trade deficit is basically being taken away.”

“What that tells you is that the funding problem has effectively been cut by a third already,” he said. “So I find myself these days difficult to be that bearish on the dollar, which is the base for me for the past 25 years. It’s really quite a big change.”

O’Neill predicts the dollar may rise as high as 110 yen in the next six months. He also reiterated his firm’s prediction that the U.S. will expand about 1 percent in the third quarter.

The Dollar Index largely followed the U.S. trade balance in the past nine years, rising to 117 in December 2001, the last time the gap was close to $26 billion, according to analysts at Citigroup Inc. in New York that use trading patterns to predict future price movements.

“Wow ... wow ... wow,” technical analysts Tom Fitzpatrick and Shyam Devani wrote in a report on April 9. “This dynamic could be extremely dollar positive.”

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net.

# posted by Jeff D @ 4/27/2009 12:13:00 PM 0 comments links to this post

April 1 (Bloomberg) -- William White’s tussle with Alan Greenspan is spilling into their retirements as world leaders meet in London to try to prevent the next financial meltdown.

White challenged the former Federal Reserve chairman’s mantra that central bankers can’t effectively slow the causes of asset bubbles when he was chief economist at the Bank for International Settlements.

As heads of state gather for tomorrow’s Group of 20 summit, several former central bankers and regulators are advising them to advance the same arguments White has made for more than a decade: raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times to use in lean years.

“We started worrying about this at the same time that Alan Greenspan started worrying about irrational exuberance” in 1996, said White, a Canadian who has remained in Basel, Switzerland, since retiring from the BIS in June. “The difference was he stopped worrying about it, or at least he stopped worrying about it publicly, and we didn’t.”

Chiefs of the world’s 20 biggest economies, including U.S. President Barack Obama and Chinese President Hu Jintao, will debate how the first contraction in the global economy since the Great Depression could have been avoided, and how to change systems for managing growth and regulating financial industries.

White, now 65, suddenly has company. His approach is reflected in position papers for the G-20 written by Jacques de Larosiere, former head of the International Monetary Fund and the Bank of France, and former Fed Chairman Paul Volcker.

Financial Stability

“Concerns for financial stability are relevant not just in times of financial crisis, but also in times of rapid credit expansion and increased use of leverage that may lead to crises,” a panel led by Volcker said in a January report for the coalition of former central bankers, finance ministers and academics known as the Group of Thirty.

Stability matters because today’s economic stress could quickly lead to social unrest, which is what happened in the 1930s, White said in an interview across from his old office in Basel. He described how his father was killed in 1944 fighting Adolf Hitler’s forces in France near the town of Caen in Normandy. White was born on May 17, 1943, in Kenora, Ontario, about 400 miles north of Minneapolis.

In this crisis, the U.S. government and the Fed alone have spent, lent or guaranteed $12.8 trillion to try to prop up the banking industry and overall economy to stem the longest recession since the 1930s. The World Bank said last month that the global economy will probably shrink this year for the first time since World War II.

15 Years

White’s warnings that credit risks were building up started while he was at the Bank of Canada, where he was deputy governor from 1988 to 1994. They were his constant refrain for more than 15 years, said Michael Mussa, senior fellow at the Peterson Institute in Washington and former IMF chief economist.

“I met Bill in 1991 or 1992, and we were already talking about this back then,” Mussa said.

In 1994, White joined the BIS, a counterparty for the world’s central banks and a forum for top policy makers and finance officials. He became head of the monetary and economic department in 1995. The BIS also houses the Basel Committee on Banking Supervision, which sets international bank capital requirements.

Jackson Hole

White took his argument directly to Greenspan on Aug. 28, 2003, at the Kansas City Fed’s annual meeting in Jackson Hole, Wyoming. Claudio Borio, head of research for White’s department, prepared for questions as White wrote his notes out in longhand at the Jackson Lake Lodge in Grand Teton National Park.

“Claudio said to me quite rightly, ‘We cannot miss this chance, everybody is going to be there,’” White said. Borio, still at the BIS, declined to comment.

Greenspan was unmoved by the presentation and said he pointed out that the Fed had tried and failed to stem a surge in stock prices by raising its target for the Federal Funds rate by 300 basis points in 1994. A basis point is 0.01 percentage point. He still isn’t convinced White’s monetary policy plan would work, he said.

“There has never been an instance, of which I’m aware, that leaning against the wind was successfully done,” Greenspan, 83, said in a Feb. 27 telephone interview. He added that spotting a bubble is easy. What’s hard is predicting when it will pop.

‘Out of Whack’

Greenspan, who retired as Fed chairman in 2006, did broadly agree with White’s position on safety margins for banks, he said.

“It has always bothered me that our capital requirements are so low,” he said. “We do not have an adequate cushion.”

Mark Gertler, a New York University economics professor who has collaborated on research with Fed Chairman Ben Bernanke, Greenspan’s successor, said that the U.S. housing boom and bust weren’t caused by low interest rates in 2003 and 2004. The problem stemmed from the decline in subprime mortgage lending standards and from leaving investment banks essentially unregulated even as they held mortgages and issued short-term liabilities like commercial banks, he said.

“The first-order cause of this crisis was the regulatory system was way out of whack,” Gertler said. “It’s not the case that you can get at this alone with interest-rate policy; it really requires smart regulatory policy.”

White’s policy plans recently have been endorsed through words and actions. Axel Weber, president of Germany’s central bank and a European Central Bank board member, said in a Feb. 10 speech in Malaysia that monetary authorities should consider raising rates if risk increases in financial markets, even if there is no short-term inflation-fighting reason to do so.

UBS, Credit Suisse

Bank capital regulation changes like the ones White promotes were adopted in December by Switzerland. The country set up new rules for UBS AG and Credit Suisse Group AG requiring them, by 2013, to hold between 50 percent and 100 percent more capital than the minimum 8 percent of risk-weighted assets under Basel rules. They could dip into the shock absorber in hard times. The regulator also instituted a leverage ratio, or a maximum amount of debt each bank could hold relative to its capital.

White will have influenced the discussion at the G-20 meeting, which he’s not attending, as part of a committee headed by the ECB’s former chief economist, Otmar Issing, which made recommendations to the German government. White also presented his views at a Feb. 18 conference in Toronto aimed at forming the Canadian government’s proposals.

Japan’s Example

White watched from the Bank of Canada as shares and real- estate prices soared in Japan in the 1980s. Asset prices then crashed, growth ground almost to a halt and unemployment climbed.

“It’s not rocket science in the sense that the fundamental insight is to watch the developments, what I would call the what, the why and the when of these crises,” White said. “When you’ve seen one of them and it’s made an impression on you, it’s easier for you to see the problems building up elsewhere.”

That led White to pen admonitions for a series of BIS annual reports.

“Some developments over the past year revealed disturbing laxities in internal governance, of both corporations and financial institutions, as well as in oversight and market discipline,” White wrote for the report published in June 2004.

No ‘New Era’

Two years later, he wrote, “The recent historical experiences of Japan, Germany and Southeast Asia all indicate that costly economic downturns are possible, even after long periods of exceptional performance.”

His darkest warning came on the eve of today’s financial turmoil.

“Virtually no one foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s,” he wrote for the June 2007 report. “Each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived.”

ECB President Jean-Claude Trichet praised the BIS as “obviously the most lucid institution in terms of its own research and publications” when asked about White after a Feb. 20 speech to the European American Press Club in Paris.

Social Costs

Beyond the current economic pain, White said the social costs of a severe economic crisis, in particular potential spikes in extremism, also propel him in his quest to find a way to limit boom-and-bust cycles.

“When you think about the big economic disruptions, what I always worry about is that you get into the fault lines on the political and social side of things pretty fast,” White said, citing the confluence of the Great Depression and Hitler’s rise to power in Germany.

White’s critics often mistake the symptom of asset bubbles for the cause, which is a rapid increase in credit, he said. While his policy wouldn’t stop asset appreciation, it might squeeze out some of the gains that didn’t stem from improved productivity or technology, he said.

Still, he is modest about whether his financial stability elixir is made up of exactly the right ingredients.

“I’d like to believe that having been right about one thing implies a greater probability of being right about the other,” White said, smiling. “But, of course, logically it’s not true. It doesn’t necessarily follow.”

To contact the reporter on this story: Alan Katz in Paris at akatz5@bloomberg.net.

# posted by Jeff D @ 4/01/2009 05:45:00 PM 0 comments links to this post

Greenspan: Systemic Regulator Not Needed

Posted by: Jane Sasseen on March 31

Catching up after a busy day. I heard Alan Greenspan speak on Tuesday morning at a Brookings conference on the “Too Big To Fail” problem now vexing bank regulators.

In his roughly 15 minute talk, the former Fed chairman argued that current proposals by Treasury Secretary Tim Geithner and others to empower a “systemic risk regulator” to ferret out and manage risk throughout the financial system will not work. “If we put a regulator out there who is supposed to fend off systemic risk, that system will fail,” he said.

The reason, Greenspan said, is that such a proposal would require predictive capabilities that regulators, being human, simply don’t have. He warned the crowd of around 150 that there are some things regulators can do, and some things they can’t.

Under the "can" category, he argues, regulators can readily tell when investors aren't getting enough of a pay-off for taking higher risks. That's a simple matter of looking at yield spreads. But what they can't do is anticipate what will happen as a result.

"None of us can forecast," he said. "You can forecast when a system is underpricing risk. But you can’t forecast when it will erupt in a crisis."

Instead, Greenspan argued, the solution lies in boosting risk-weighted capital standards and enforcing them better. One way to reduce the risks of Too Big To Fail institutions, he says "is to somehow impose costs on them."

He points out that 10% wasn't always considered an adequate level of capital for banks. Historically, some needed to have capitalization as high as 50%; by the early 1900s it fell to 20% because the financial system got more efficient.

"I would argue that 13% or 14% (is needed) in today's market," Greenspan said. "The way to attack the Too Big To Fail problem is through capital."

He suggests adding a capital charge for regulatory purposes that would increase as the size of a bank goes up. That would eliminate the competitive advantage that acrues to banks perceived to be too big to fail, because that perception lowers their cost of capital.

# posted by Jeff D @ 3/31/2009 10:24:00 PM 0 comments links to this post

• MARCH 11, 2009

The Fed Didn't Cause the Housing Bubble (WRONG: YOU DID!!)

Any new regulations should help direct savings toward productive investments.

By ALAN GREENSPAN

We are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s. It will eventually subside and pass into history. But how the interacting and reinforcing causes and effects of this severe contraction are interpreted will shape the reconfiguration of our currently disabled global financial system.

Chad Crowe

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

This should not come as a surprise. After all, the prices of long-lived assets have always been determined by discounting the flow of income (or imputed services) by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates -- such as the fed-funds rate -- to determine the capitalization rate of real estate, whether it be an office building or a single-family residence.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier -- in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

U.S. mortgage rates' linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.

As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble. (The U.S. price bubble was at, or below, the median according to the International Monetary Fund.) By 2006, long-term interest rates and the home mortgage rates driven by them, for all developed and the main developing economies, had declined to single digits -- I believe for the first time ever. I would have thought that the weight of such evidence would lead to wide support for this as a global explanation of the current crisis.

However, starting in mid-2007, history began to be rewritten, in large part by my good friend and former colleague, Stanford University Professor John Taylor, with whom I have rarely disagreed. Yet writing in these pages last month, Mr. Taylor unequivocally claimed that had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by his "Taylor Rule," "it would have prevented this housing boom and bust. "This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.

Aside from the inappropriate use of short-term rates to explain the value of long-term assets, his statistical indictment of Federal Reserve policy in the period 2003-2005 fails to address the aforementioned extraordinary structural developments in the global economy. His statistical analysis carries empirical relationships of earlier decades into the most recent period where they no longer apply.

Moreover, while I believe the "Taylor Rule" is a useful first approximation to the path of monetary policy, its parameters and predictions derive from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the sole basis for successful policy analysis or advice, with or without the benefit of hindsight.

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble. All things considered, I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.

Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical. And on rare occasions it can break down, with consequences such as those we are currently experiencing. It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently.

However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living. Remember, prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance. To achieve that with a modest level of combined domestic and borrowed foreign savings (our current account deficit) was a measure of our financial system's precrisis success. The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud -- not increased micromanagement by government entities.

Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions.

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

Mr. Greenspan, former chairman of the Federal Reserve, is president of Greenspan Associates LLC and author of "The Age of Turbulence: Adventures in a New World" (Penguin, 2007).

# posted by Jeff D @ 3/11/2009 11:53:00 AM 0 comments links to this post

There is now a "reduced possibility" of a deep recession, the former Fed oracle said, after telling the Financial Times late last month that a US recession remained a probability. Greenspan told the paper he believed "there is a greater than 50 percent probability of recession," noting, however, that "that probability has receded a little." (Alan Greenspan - Jun 13, 2008)

***Note: Data now shows the current recession started in December 2007***

"Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities." (Alan Greenspan, October 2004)

“There is a chance that housing prices could fall, but its effect on the economy will be limited.” (Alan Greenspan, 2005)

"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions .... Derivatives have permitted the unbundling of financial risks." (Alan Greenspan, May 2005)

“I suspect that we are coming to the end of the housing downturn, as applications for new mortgages, the most important series, have flattened out…I think that the worst of this may well be over.” (Alan Greenspan, October 1, 2006)

“The market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades.” (Henry Paulson, January 2007)

“All the signs I look at show the housing market is at or near the bottom. The U.S. economy is very healthy and robust.” (Henry Paulson, 4/20/07)

“I’m not interested in bailing out investors, lenders and speculators.” (Henry Paulson, 3/2/08)

“At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” (Ben Bernanke during Congressional Testimony 3/2007)

"We will follow developments in the subprime market closely. However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system." (Ben Bernanke, 6/5/07)

“It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions.” (Ben Bernanke, 10/15/07)

“Changes in financial markets, including those that are the subject of your conference, have improved the efficiency of financial intermediation and improved our confidence in the ability of markets to absorb stress. In financial systems around the world, the capital positions of banks have improved and capital markets are becoming deeper and playing a larger role in financial intermediation. Financial innovation has improved the capacity to measure and manage risk. Risk is spread more broadly across countries and institutions.” (Timothy Geithner, May 15, 2007)

# posted by Jeff D @ 1/06/2009 02:13:00 PM 0 comments links to this post

Greenspan sees 1st half 2009 U.S. housing recovery

NEW YORK (Reuters) - Former Federal Reserve chairman Alan Greenspan said the U.S. housing market will begin to recover in the first half of 2009, according to an article he wrote for Emerging Markets magazine published on Friday.

Greenspan wrote that the recent slowing in the rate of decline in U.S. home prices is the first positive note in the year-long trauma and that eventually, frozen credit markets will thaw "as frightened investors take tentative steps toward reengagement with risk."

"More conclusive signs of pending home price stability are likely to become visible in the first half of 2009," he wrote.

Once the housing market finds it footing, markets will be able to tackle the core issues of the credit crisis.

But a big question remains, he said: "How much overall deleveraging is going to be required to induce global investors to again become committed holders, at modest interest rates, of the liabilities of the world's financial intermediaries?"

Beyond that, the amount of additional bank capital required to stabilize the financial system remains in question as well.

Greenspan said one sign that the necessary level of bank capital had been reached will be when the U.S. dollar Libor/OIS spread is restored to its pre-crisis level of 15 basis points or less, down from its current level of around 300 basis points. The spread expresses the expected future three-month premium based on London interbank offered rates (Libor) over anticipated central bank rates, or Overnight Index Swap (OIS) rates -- a key measure of financial market stress.

(Editing by James Dalgleish)

# posted by Jeff D @ 10/10/2008 10:10:00 PM 0 comments links to this post

Economy on brink of recession, Greenspan says

JOHANNESBURG (Reuters) - Former Federal Reserve Chairman Alan Greenspan warned on Tuesday the U.S. economy was on the brink of a recession, with the chances of that happening at more than 50 percent.

The U.S. economy has been hit by a credit crisis which began in the sub-prime mortgage market, prompting a series of interest rate cuts to help boost the economy. But price pressures are growing, making more rate cuts unlikely.

Asked if the U.S. economy was in recession, Greenspan said: "We are on the brink."

A quick recovery was unlikely, he said via video link to a conference in Johannesburg. "A rebound at this stage is not something I think is in the immediate outlook," he said.

"There are still very considerable structural problems remaining in the financial system. They will remain for a while. It's going to be very difficult. There are a lot of unexpected adverse events out in front of us," Greenspan said.

Greenspan said he did not believe arguments that the housing problems in the U.S. were due to interest rates being too low during his tenure. "As far as I'm concerned, the data do not support it (that argument). The housing bubble is clearly an international phenomenon."

On South Africa, Greenspan said the country's Reserve Bank had been right to raise interest rates in the face of accelerating inflation.

"The problem that you have here is that ... significant pressures are coming from oil and food, but they are none the less real," he said. "The price increases are real and unless the central bank leans against them ... you will get a highly unstable inflation environment."

South Africa's central bank has raised its repo rate by 500 basis points to 12.0 percent since June 2006 to try tame inflationary pressures. But its targeted inflation gauge continues to accelerate, reaching 10.4 percent year-on-year in April.

(Reporting by Stella Mapenzauswa, writing by Gordon Bell; editing by David Stamp)

# posted by Jeff D @ 6/24/2008 08:35:00 AM 0 comments links to this post

Greenspan sees recession risk lessening

MEXICO CITY (AFP) - Former Federal Reserve chairman Alan Greenspan told the Latin American Economic Forum here Friday that he sees a reduced possibility of a deep recession in the United States.

There is now a "reduced possibility" of a deep recession, the former Fed oracle said, after telling the Financial Times late last month that a US recession remained a probability.

Greenspan told the paper he believed "there is a greater than 50 percent probability of recession," noting, however, that "that probability has receded a little."

He also told the paper that the likelihood of a severe recession had "come down markedly" but added it was too soon to tell whether the worst was already over.

The US economy grew at an annual 0.9 percent pace in the first quarter of the year, the government said in late May, in an upward revision that calmed the nerves of some economists.

The Commerce Department initially pegged first-quarter gross domestic product (GDP) growth at 0.6 percent, the same lackluster pace as the 2007 fourth quarter.

The revision, in line with expectations, bolsters the stance of some economists who believe the world's largest economy will avoid a recession despite a deep housing slump, a related credit crunch and soaring oil prices.

A recession, which last hit the US in 2001, is typically defined as two straight periods of negative economic activity. The Federal Reserve has been trying to avert an economic slump by aggressively slashing interest rates.

# posted by Jeff D @ 6/14/2008 10:02:00 AM 0 comments links to this post

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Home price stabilisation will restore much-needed clarity to the marketplace because losses will be realised rather than prospective. The major source of contagion will be removed. Financial institutions will then recapitalise or go out of business. Trust in the solvency of remaining counterparties will be gradually restored and issuance of loans and securities will slowly return to normal. Although inventories of vacant single-family homes - those belonging to builders and investors - have recently peaked, until liquidation of these inventories proceeds in earnest, the level at which home prices will stabilise remains problematic.

The American housing bubble peaked in early 2006, followed by an abrupt and rapid retreat over the past two years. Since summer 2006, hundreds of thousands of homeowners, many forced by foreclosure, have moved out of single-family homes into rental housing, creating an excess of approximately 600,000 vacant, largely investor-owned single-family units for sale. Homebuilders caught by the market's rapid contraction have involuntarily added an additional 200,000 newly built homes to the "empty-house-for-sale" market.

Home prices have been receding rapidly under the weight of this inventory overhang. Single-family housing starts have declined by 60 per cent since early 2006, but have only recently fallen below single-family home demand. Indeed, this sharply lower level of pending housing additions, together with the expected 1m increase in the number of US households this year as well as underlying demand for second homes and replacement homes, together imply a decline in the stock of vacant single-family homes for sale of approximately 400,000 over the course of 2008.

The pace of liquidation is likely to pick up even more as new-home construction falls further. The level of home prices will probably stabilise as soon as the rate of inventory liquidation reaches its maximum, well before the ultimate elimination of inventory excess. That point, however, is still an indeterminate number of months in the future.

The crisis will leave many casualties. Particularly hard hit will be much of today's financial risk-valuation system, significant parts of which failed under stress. Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief. But I hope that one of the casualties will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance.

The problems, at least in the early stages of this crisis, were most pronounced among banks whose regulatory oversight has been elaborate for years. To be sure, the systems of setting bank capital requirements, both economic and regulatory, which have developed over the past two decades will be overhauled substantially in light of recent experience. Indeed, private investors are already demanding larger capital buffers and collateral, and the mavens convened under the auspices of the Bank for International Settlements will surely amend the newly minted Basel II international regulatory accord. Also being questioned, tangentially, are the mathematically elegant economic forecasting models that once again have been unable to anticipate a financial crisis or the onset of recession.

Credit market systems and their degree of leverage and liquidity are rooted in trust in the solvency of counterparties. That trust was badly shaken on August 9 2007 when BNP Paribas revealed large unanticipated losses on US subprime securities. Risk management systems - and the models at their core - were supposed to guard against outsized losses. How did we go so wrong?

The essential problem is that our models - both risk models and econometric models - as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality. A model, of necessity, is an abstraction from the full detail of the real world. In line with the time-honoured observation that diversification lowers risk, computers crunched reams of historical data in quest of negative correlations between prices of tradeable assets; correlations that could help insulate investment portfolios from the broad swings in an economy. When such asset prices, rather than offsetting each other's movements, fell in unison on and following August 9 last year, huge losses across virtually all risk-asset classes ensued.

The most credible explanation of why risk management based on state-of-the-art statistical models can perform so poorly is that the underlying data used to estimate a model's structure are drawn generally from both periods of euphoria and periods of fear, that is, from regimes with importantly different dynamics.

The contraction phase of credit and business cycles, driven by fear, have historically been far shorter and far more abrupt than the expansion phase, which is driven by a slow but cumulative build-up of euphoria. Over the past half-century, the American economy was in contraction only one-seventh of the time. But it is the onset of that one-seventh for which risk management must be most prepared. Negative correlations among asset classes, so evident during an expansion, can collapse as all asset prices fall together, undermining the strategy of improving risk/reward trade-offs through diversification.

If we could adequately model each phase of the cycle separately and divine the signals that tell us when the shift in regimes is about to occur, risk management systems would be improved significantly. One difficult problem is that much of the dubious financial-market behaviour that chronically emerges during the expansion phase is the result not of ignorance of badly underpriced risk, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share.

Risk management seeks to maximise risk-adjusted rates of return on equity; often, in the process, underused capital is considered "waste". Gone are the days when banks prided themselves on triple-A ratings and sometimes hinted at hidden balance-sheet reserves (often true) that conveyed an aura of invulnerability. Today, or at least prior to August 9 2007, the assets and capital that define triple-A status, or seemed to, entailed too high a competitive cost.

I do not say that the current systems of risk management or econometric forecasting are not in large measure soundly rooted in the real world. The exploration of the benefits of diversification in risk-management models is unquestionably sound and the use of an elaborate macroeconometric model does enforce forecasting discipline. It requires, for example, that saving equal investment, that the marginal propensity to consume be positive, and that inventories be non-negative. These restraints, among others, eliminated most of the distressing inconsistencies of the unsophisticated forecasting world of a half century ago.

But these models do not fully capture what I believe has been, to date, only a peripheral addendum to business-cycle and financial modelling - the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve. Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved. To be sure, we tend to label such behavioural responses as non-rational. But forecasters' concerns should be not whether human response is rational or irrational, only that it is observable and systematic.

This, to me, is the large missing "explanatory variable" in both risk-management and macroeconometric models. Current practice is to introduce notions of "animal spirits", as John Maynard Keynes put it, through "add factors". That is, we arbitrarily change the outcome of our model's equations. Add-factoring, however, is an implicit recognition that models, as we currently employ them, are structurally deficient; it does not sufficiently address the problem of the missing variable.

We will never be able to anticipate all discontinuities in financial markets. Discontinuities are, of necessity, a surprise. Anticipated events are arbitraged away. But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own. Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria. But risk management can never reach perfection. It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response.

In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.

Alan Greenspan -

# posted by Jeff D @ 3/17/2008 11:04:00 AM 0 comments links to this post

Greenspan on the Defensive

VANCOUVER — The biggest barrier to stabilizing the chaotic U.S. housing market is the oversupply of homes that cash-strapped builders are flogging at rock-bottom prices, former Federal Reserve chairman Alan Greenspan says.

“If there were some kind of alchemy whereby we could pick up all these 300,000 units, that would stabilize the markets,” Mr. Greenspan told a Vancouver audience on Thursday. He was referring to the number of homes in the U.S. that were estimated to be under or near construction when the subprime mortgage market began to unravel.

With those homes subject to vandalism and requiring expensive upkeep, builders are desperate to clear out the inventory, he said, saying that the prolonged slump could be nearing its end.

“We may be close to a point where actual sales levels are starting to bottom,” he said. “We don't have to get rid of it all, we do have to get to maximum rate of liquidation.”

Mr. Greenspan also defended much-reviled subprime mortgages, which were typically extended to borrowers who wouldn't qualify for conventional loans. The loans included products such as interest-only mortgages that allow lenders to pay only the interest for a period of time and other products that start off with a low interest rate and later convert to higher rates.

The products were valuable because they made it easier for more people to buy homes, he said.

But what started out as a niche product took off, snowballing as financial players such hedge funds saw an opportunity in the products and created a bigger pool of products, he said.

“The hedge funds put pressure on the securitizers for more paper and the securitizers turned to lenders and said, ‘we need more paper – whatever you can get, we will take.' Underwriters' standards collapsed,” he said.

In his remarks, Mr. Greenspan admitted he was caught off guard by the rapid growth in subprime mortgages, saying there was a lengthy delay in data coming in on the products and that when he finally saw official tallies, “he couldn't quite believe it.”

Mr. Greenspan also denied being a booster for risky mortgage products, saying that while he noted advantages in some new mortgage products in an often-referenced 2004 speech, he spoke out in favour of conventional mortgages in an address a week later that has been ignored.

While Mr. Greenspan said there is at least a 50-per-cent chance of a recession in the U.S., he did said a recession would be short and shallow because consumer demand and global markets are strong.

Asked about the U.S. government's efforts to stimulate the economy with tax rebates and tax cuts, Mr. Greenspan said such steps are “not likely to significantly support home sales” but would likely increase consumption.

Mr. Greenspan, 81, was speaking to a business audience of about 1,450 in Vancouver. The address, a question-and-answer session with Sherry Cooper, chief economist at BMO Nesbitt Burns Inc., marked his first public appearance since last week's global market turmoil and Monday's historic rate cut by the U.S. Federal Reserve Board.

The drop of three-quarters of a percentage point in the Fed's key interest rate, to 3.5 per cent, was credited with calming markets that were concerned about a U.S. recession and its effects on the rest of the world.

Current Federal Reserve Board chairman Ben Bernanke is expected to follow up with another next week.

The Bank of Canada also cut its key rate a quarter-point to 4 per cent at its scheduled announcement Tuesday, although some analysts had expected a steeper half-point cut. Alan Greenspan was chairman of the board of governors of the U.S. Federal Reserve from 1987 to 2006. He currently works as a private consultant for firms through his company, Greenspan Associates LLC.

In recent months, Mr. Greenspan has been criticized for implementing policies during his term, including record low interest rates, that helped fuel the subprime crisis in the United States and arguably contributed to a wider, global financial crisis now sweeping world markets.

In recent op-ed piece, Mr. Greenspan said the current crisis was “an accident waiting to happen” and was largely the result of a decades-long economic boom in the developing world.

In late 1996, he famously said “irrational exuberance” was showing up in financial markets. He was subsequently criticized for not doing enough to cool overheated markets and stave off the technology market crash at the beginning of this decade.

# posted by Jeff D @ 1/25/2008 01:25:00 PM 0 comments links to this post

Alan Greenspan, the former chairman of the US Federal Reserve, is to become an adviser to Paulson & Co, the $28bn New York-based hedge fund company that achieved spectacular investment returns at the height of the credit squeeze last year.

Mr Greenspan will join the advisory board of the credit specialist investment house. Paulson will be the only hedge fund that Mr Greenspan will work with under the terms of the agreement.

Mr Greenspan already holds separate advisory roles with Deutsche Bank and Pimco, the asset management firm. The financial terms of the arrangement were not disclosed.

John Paulson, president of the hedge fund, said: “Few people, if any in the world, have the experience with, and depth of understanding of, global financial markets [of Mr] Greenspan.”

He said Mr Greenspan would share his perspectives with the Paulson investment management team on the direction of the economy, assessing the potential for and severity of a US recession.

Mr Greenspan served as chairman of the Fed for 18 years until 2006. His pronouncements on the economy through regular public appearances still have the power to move markets.

The Financial Times Limited 2008

# posted by Jeff D @ 1/15/2008 11:11:00 AM 0 comments links to this post

Fed Shrugged as Subprime Crisis Spread

# posted by Jeff D @ 12/18/2007 10:04:00 AM 0 comments links to this post

Ron Paul Says Funding Windfall Gives His Presidential Campaign Hope

DES MOINES, Iowa, Dec. 17, 2007

# posted by Jeff D @ 12/17/2007 09:33:00 AM 0 comments links to this post

Greenspan Favors Government Bailout for Homeowners

Dec. 17 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said he favors spending government money to rescue Americans who are at risk of losing their homes because they can't make mortgage payments.

Greenspan, speaking on ABC's ``This Week'' program that aired yesterday, said cash bailouts, while creating a larger budget deficit, have the advantage of helping homeowners without distorting property prices or interest rates on mortgages.

``Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this,'' Greenspan said. ``It's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely.''

Greenspan's approach differs from that of Treasury Secretary Henry Paulson, who negotiated a freeze on the interest rates of some subprime mortgages without pledging any government money to help homeowners or banks.

``Alan Greenspan has followed two propositions through his life: A smaller government is better, and a market economy operates on trust,'' said Vincent Reinhart, former head of the Fed's monetary affairs division and now a resident scholar at the American Enterprise Institute in Washington. ``I think he was suggesting that it would be better to sacrifice the first -- spend more -- than the second -- interfere with contracts.''

The former chairman didn't specifically mention the Bush administration's plan, and wasn't asked about it directly.

Meltzer Differs

Allan Meltzer, professor of political economy at Carnegie Mellon University in Pittsburgh, said Greenspan's proposal for a cash bailout might cost ``hundreds of billions'' of dollars and would reward risky behavior.

``It is not a good idea for the government to bail out people who make mistakes,'' said Meltzer, the author of a 2002 book on the early history of the Fed. ``The markets are beginning to come to grips with this and bailing them out is a mistake, not a small one but a big one.''

Greenspan, who was Fed chairman for almost two decades until Ben S. Bernanke took over early last year, repeated that recession risks are rising.

``The probabilities of a recession have moved up to close to 50 percent -- whether it's above or below is really extraordinarily difficult to tell,'' Greenspan said.

In a Dec. 13 interview with National Public Radio, he said the economy is ``getting close to stall speed.'' On Nov. 7, he told a conference in Sao Paulo that the chances of a recession were ``less than 50-50.''

Greenspan also warned that the U.S. economy was facing the hazards of both rising inflation and slower growth. ``We are beginning to get not stagflation, but the early symptoms of it,'' Greenspan said on ABC.

Cooling Expansion

U.S. economic growth will slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, according to a survey of 63 economists by Bloomberg News taken Dec. 3 to Dec. 10. The world's largest economy grew at a 4.9 percent pace from July through September.

Spending, which accounts for more than two-thirds of the economy, will grow in 2008 at the slowest pace in 17 years as higher fuel costs and falling home values limit consumers' buying power, economists predict.

President George W. Bush announced this month that Paulson and other members of his administration had reached an agreement with the mortgage industry to help as many as 1.2 million homeowners avoid foreclosure when their adjustable-rate mortgages jump to higher rates.

``We're not bailing people out,'' Bush said today. ``It's going to take a while to work through the housing bubble, but we can mitigate some of the issues.''

Working with Paulson and the government's housing regulators, lenders and the companies who manage home loans agreed to freeze some adjustable mortgages at current rates for five years. Others will be given help refinancing or qualifying for loans backed by the Federal Housing Authority.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

# posted by Jeff D @ 12/17/2007 09:15:00 AM 0 comments links to this post

On Aug. 9, 2007, and the days immediately following, financial markets in much of the world seized up. Virtually overnight the seemingly insatiable desire for financial risk came to an abrupt halt as the price of risk unexpectedly surged. Interest rates on a wide range of asset classes, especially interbank lending, asset-backed commercial paper and junk bonds, rose sharply relative to riskless U.S. Treasury securities. Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.

The 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.

A large segment of the erstwhile Third World, especially China, replicated the successful economic export-oriented model of the so-called Asian Tigers: Fairly well educated, low-cost workforces were joined with developed-world technology and protected by an increasing rule of law, to unleash explosive economic growth. Since 2000, the real GDP growth of the developing world has been more than double that of the developed world.

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 and, as a consequence, the savings rate of the developing world soared from 24% of nominal GDP in 1999 to 33% in 2006, far outstripping its investment rate.

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. In the U.S., for example, the surge of innovation and productivity growth apparently started taking a breather in 2004. That weakened global investment has been the major determinant in the decline of global real long-term interest rates is also the conclusion of a recent (March 2007) Bank of Canada study.

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.

The value of equities traded on the world's major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles world-wide, Japan and Germany (for differing reasons) being the only principal exceptions. 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.

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.

Demand in those days was driven by the expectation of rising prices--the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted).

I and my colleagues at the Fed believed that the potential threat of corrosive deflation in 2003 was real, even though deflation was not thought to be the most likely projection. 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.

In mid-2004, as the economy firmed, the Federal Reserve started to reverse the easy monetary policy. I had expected, as a bonus, a consequent increase in long-term interest rates, which might have helped to dampen the then mounting U.S. housing price surge. It did not happen. We had presumed long-term rates, including mortgage rates, would rise, as had been the case at the beginnings of five previous monetary policy tightening episodes, dating back to 1980. But after an initial surge in the spring of 2004, long-term rates fell back and, despite progressive Federal Reserve tightening through 2005, long-term rates barely moved.

In retrospect, global economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities. Simple correlations between short- and long-term interest rates in the U.S. remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates.

Arbitragable assets--equities, bonds and real estate, and the financial assets engendered by their intermediation--now swamp the resources of central banks. The market value of global long-term securities is approaching $100 trillion. Carry trade and foreign exchange markets have become huge.

The depth of these markets became readily apparent in March 2004, when Japanese monetary authorities abruptly ceased intervention in support of the U.S. dollar after accumulating more than $150 billion of foreign exchange in the preceding three months. Beyond a few days of gyrations following the halt in purchases, nothing of lasting significance appears to have happened. Even the then seemingly massive Japanese purchases of foreign exchange barely budged the prices of the vast global pool of tradable securities.

In theory, central banks can expand their balance sheets without limit. In practice, they are constrained by the potential inflationary impact of their actions. The ability of central banks and their governments to join with the International Monetary Fund in broad-based currency stabilization is arguably long since gone. More generally, global forces, combined with lower international trade barriers, have diminished the scope of national governments to affect the paths of their economies.

The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

Mr. Greenspan, former chairman of the Federal Reserve, is president of Greenspan Associates LLC and author of "The Age of Turbulence: Adventures in a New World" (Penguin, 2007).

# posted by Jeff D @ 12/12/2007 02:47:00 PM 0 comments links to this post

----

Greenspan Was `Very Bad' Fed Chairman, Says Artus of Natixis

That's the blunt verdict of Patrick Artus, chief economist of Natixis SA and one of France's most listened-to pundits: He is an economic adviser to the French government.

In his latest book (``Les incendiaires: Les banques centrales depassees par la globalisation'' or the arsonists: central banks overtaken by globalization), Artus, 56, blames Greenspan and other central bankers for being so focused on inflation that they failed to prevent real-estate and stock-market bubbles which, in turn, burst and caused pain.

Artus joined me for a candid telephone conversation.

Nayeri: Do you really mean what you say in this book, or is this just a provocative pamphlet?

Artus: Oh no, this is a serious book. It's not provocation.

What I'm saying is that there's no point setting central-bank targets in stone, until the end of time.

It was perfectly legitimate for central banks in the 1980s and 1990s to have price stability as their target. Inflation was the problem back then.

Maybe in the future, say by 2010, with the rise in commodity prices, inflation will become our main problem again. But since the mid-1990s, inflation in the classical sense is not the problem. The problem now is asset-price inflation, and indebtedness, the reason being that globalization has wiped out inflation risk.

`A Mess'

Nayeri: Joseph Stiglitz went on the record on Nov. 16 as saying that Greenspan had ``made a mess'' and that the U.S. now faced a recession. Do you agree?

Artus: Yes. Greenspan was an arsonist and a fireman combined. He derived all his glory from his reaction to the savings-and- loans crisis, to the collapse of Long-Term Capital Management LP, and to Sept. 11, 2001. But LTCM and the savings-and-loans crisis were his doing. He absolutely failed to see where the malfunctions in the U.S. economy were.

Greenspan came up with a phrase, ``irrational exuberance,'' in 1997, but he didn't do anything about it.

Nayeri: How would you sum up his track record, then?

Artus: He was a very bad Federal Reserve chairman. He created four major crises: savings and loans, LTCM, new-technology shares, and subprime mortgages.

Nayeri: But surely you will acknowledge that Greenspan saved the planet at crucial turning points?

Artus: Yes, but after the fact. He's congratulated for his role as fireman, but he's the one who started the fire.

No Vision

He had no vision of what was dangerous. Today, we're destroying the world banking system with this subprime crisis. Outstanding subprime loans add up to $1.2 trillion. That's the equivalent of Italy's gross domestic product.

Nayeri: But the world has enjoyed economic prosperity in the meantime.

Artus: The problem is that you pay for it later.

You can always manufacture growth by having extremely low rates and producing asset-price bubbles. But that's not a way to generate growth. You can't do that in the long run.

Nayeri: What about Trichet and the European Central Bank?

Artus: It's the same thing, only there's no subprime crisis in Europe.

(French President Nicolas) Sarkozy's criticism of the ECB is the opposite of mine. There is no evidence of any kind that European interest rates have slowed growth.

In fact, monetary policy saved growth, which is usually weak, by producing a real-estate boom. But we're paying the price today. People are too deep in debt.

Nayeri: So which central bank has done well by your reckoning?

Artus: The most modern central banks are the Bank of England and the Bank of Sweden.

The Bank of England is the only central bank that has factored real-estate prices into its policy making, and that also looks at exchange rates. It has a global vision of the economy, and that's what we like. They completely slipped up when it came to the banks, but that was the Financial Services Authority, it wasn't them.

``Les incendiaires'' is published by Perrin (175 pages, 14.80 euros.)

(Farah Nayeri writes for Bloomberg News. The opinions expressed are her own.)

To contact the reporter on this story: Farah Nayeri in London at farahn@bloomberg.net .

# posted by Jeff D @ 11/30/2007 09:27:00 PM 0 comments links to this post

Why not just come out and admit they are all about moral hazard. Clearly, that's the REAL message here:

--------

Poole-moral hazard concern won't affect Fed policy

WASHINGTON, Nov 30 (Reuters) - St. Louis Federal Reserve Bank President William Poole said on Friday he would not let concerns about "moral hazard" prevent him from backing further interest cuts in benchmark Fed interest rates.

"I would not want people in the markets to believe that I, at any rate, would be so concered about the moral hazard argument that I wouldn't possibly advocate a 25 basis point or a 50 basis point cut, or whatever might be on the table," Poole told reporters after a speech to the Cato Institute.

# posted by Jeff D @ 11/30/2007 07:23:00 PM 0 comments links to this post

Is central bank independence all it’s cracked up to be?

By Joseph Stiglitz

Alan Greenspan attained an almost iconic status as Governor of the Federal Reserve Board. So, as his term draws to a close and his mantle of infallibility is passed on to his successor, it is worth examining whether his legacy will measure up and what we can expect from the new Fed chief, Ben Bernanke.

Few central bank governors have the kind of hagiography lavished upon them, especially in their lifetime, that Greenspan has had. But what makes for a great central bank governor in our modern societies, great institutions or great individuals?

In economics, we seldom have a clearly defined counterfactual: Would the economy have performed even better or a little differently if someone else had been at the helm? We can’t know, but there is little doubt that those “managing” the economy receive more credit than they deserve, if sometimes less blame.

Many forces behind the boom of the 1990’s, including advances in technology, were set in motion before Bill Clinton took office (just as the legacy of President George W. Bush’s deficits will be felt long after he leaves). So Greenspan cannot be given credit for the boom. But, while no central bank governor can ensure economic prosperity, mismanagement can cause enormous harm. Many of America’s post-World War II recessions were caused by the Fed hiking interest rates too fast and too far.

There is little doubt that Greenspan had great moments, when one could at least imagine a less deft governor doing the “wrong” thing with disastrous consequences. One such moment was the stock market crash of 1987. Perhaps another occurred in 1998, when the Fed lowered interest rates in the face of what appeared to be an impending global financial crisis.

These successes, combined with the 1990’s boom and the seeming durability of price stability, reinforced Greenspan’s exalted status. But they also led many to forget less successful moments. The Fed failed to avert the economic downturn of 1990, and a reading of Greenspan’s testimony to Congress during that period makes clear that the basic nature of the economy’s problems was not well understood.

But the real problem for Greenspan’s legacy concerns what happened to the American economy in the last five years, for which he bears heavy responsibility. Greenspan supported the tax cuts of 2001 with the most specious of arguments – that unless something was done about America’s soaring fiscal surpluses, the national debt would be totally paid off within, say, ten to fifteen years. According to Greenspan, immediate action needed to be taken to avert this looming disaster, which would impede the Fed’s ability to conduct monetary policy!

It says a great deal about the gullibility of financial markets that they took this argument seriously. More accurately, tax cuts were what Wall Street wanted, and financial professionals were willing to accept any argument that served that purpose. Of course, if, say, by 2008 the disappearing national debt really did appear to pose an imminent danger, Congress would have happily obliged in cutting taxes or increasing expenditures.

Greenspan’s irresponsible support of that tax cut was critical to its passage. The fault was not only in the magnitude of the tax cut, but also in its design; by directing the cuts at upper-income Americans, it provided little economic stimulus.

But soaring deficits did not return the economy to full employment, so the Fed did what it had to do – cut interest rates. Lower interest rates worked, but not so much because they boosted investment, but because they led households to refinance their mortgages, and fueled a bubble in housing prices.

In short, as Greenspan departs, he leaves behind an American economy burdened with high household and government debt and fragile balance sheets – a legacy that is already contributing to global financial instability.

It is still not clear what led Greenspan to support the tax cut. Was it a massive economic misjudgment, or was he currying favor with the Bush administration? The most likely explanation is a combination of the two, for he and Bush were pursuing the same “starve the beast” political strategy, which calls for tax cuts to be used to reduce revenues, thereby forcing the public sector to be downsized.

The traditional argument for an independent central bank is that politicians can’t be trusted to conduct monetary and macroeconomic policy. Neither, evidently, can central bank governors, at least when they opine in areas outside their immediate responsibility. Greenspan was as enthusiastic for a policy that led to soaring deficits as any politician; but the fig leaf of being “above politics” gave credence to that policy, engendering support from some who otherwise would have questioned its economic wisdom.

This, then, is Greenspan’s second legacy: growing doubt about central bank independence. Macroeconomic policy can never be devoid of politics: it involves fundamental trade-offs and affects different groups differently. Unemployment harms workers, while the lower interest rates needed to generate more jobs may lead to higher inflation, which especially harms those with nominal assets whose value is eroded. Such fundamental issues cannot be relegated to technocrats, particularly when those technocrats place the interests of one segment of society above others.

Indeed, Greenspan’s political stances were so thinly disguised as professional wisdom that his tenure exposed the dubiousness of the very notion of an independent central bank and a non-partisan central banker. Unfortunately, many countries have committed themselves to precisely this illusion, and it may be a long time before they take heed of Greenspan’s most important lesson. Stressing the new Fed chief’s “professionalism” may only delay the moment when this lesson is learned again. dt-ps

Joseph E. Stiglitz, a Nobel laureate in economics, is Professor of Economics at Columbia University and was Chairman of the Council of Economic Advisers to President Clinton and Chief Economist and Senior Vice President at the World Bank. His most recent book is The Roaring Nineties: A New History of the World’s Most Prosperous Decade.

# posted by Jeff D @ 11/13/2007 08:15:00 AM 0 comments links to this post

By Carol Massar and Michael Patterson

Sept. 18 (Bloomberg) -- Interest rate cuts by Federal Reserve Chairman Ben S. Bernanke will spur inflation, cause the U.S. dollar to collapse and push the world's largest economy into recession, investors Jim Rogers and Marc Faber said.

``Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse,'' Rogers said in an interview from Shanghai. ``If Bernanke starts running those printing presses even faster than he's doing already, yes we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.''

Defaults on subprime home loans have spurred a rise in worldwide borrowing costs and caused losses at investment funds and banks that made bad bets on stocks and debt securities. The Fed today lowered its benchmark interest rate by a half point to 4.75 percent, the first cut in four years. The dollar fell to a record low against the euro, while U.S. stocks surged the most in four years and Treasury two-year notes gained.

Faber and Rogers, who both spoke today before the Fed decision on rates, said the central bank should raise borrowing costs to quell inflation and support the U.S. currency.

``The cause of the problems we have today, they are due to artificially low interest rates, expansionary monetary policies and extremely rapid credit growth that was fueled by a totally irresponsible Fed,'' said Faber, who oversees about $300 million as managing director of Hong Kong-based investment advisory company Marc Faber Ltd. ``It's suicidal to cut interest rates.''

`Stop Inflation'

``They should do something to stop inflation as soon as they can,'' said Rogers, the 64-year-old chairman of Beeland Interests Inc. ``If you don't do something now, if you don't nip it in the bud, it gets much worse down the road.''

Today's rate decision ``is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,'' the rate-setting Federal Open Market Committee said in a statement. The Fed will ``act as needed to foster price stability and sustainable economic growth.''

Fed officials have said the central bank doesn't want to be seen as caving in to funds that piled into the market for securities linked to subprime mortgages, those made to borrowers with poor or limited credit histories.

Sell Dollars, Bonds

``It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions,'' Bernanke said in an Aug. 31 speech in Jackson Hole, Wyoming.

Rogers, who predicted the start of the global commodities rally in 1999, said investors should sell U.S. dollars and bonds. He said he's selling short shares of investment banks and expects them to fall further. The Amex Securities Broker/Dealer Index rose 4.8 percent today, trimming its loss for 2007 to 2.8 percent.

Short selling is the sale of stock borrowed from shareholders in the hope of profiting by repurchasing the securities later at a lower price.

The Standard & Poor's 500 Index advanced the most since March 2003 following the Fed's rate cut, surging 2.9 percent to 1,519.78. The measure has gained 7.2 percent gain this year. The yield on two-year notes fell 0.08 percentage point to 3.99 percent at 3:23 p.m. in New York, according to bond broker Cantor Fitzgerald LP.

Rogers said he is buying agricultural commodities and recommended investors purchase Asian currencies including the Chinese renminbi and the Japanese yen.

Faber, publisher of the Gloom, Boom & Doom Report, said he is buying gold.

`Ballistic' Gold

``Gold is very cheap even at over $700 compared to many other commodities and also compared to many other assets in the world,'' he said in an interview from Hong Kong. ``If the Fed cuts interest rates by a half a point, I think it will go ballistic, I think it will go up a lot.''

Gold rose to a 27-year high today. December futures climbed 1.6 percent to $735.50 an ounce in New York, the highest since Feb. 11, 1980.

The dollar fell 0.8 percent, the most since Aug. 24, to $1.3972 per euro at 4:04 p.m. in New York and touched an all-time low of $1.3981.

Rogers co-founded the Quantum Hedge Fund with George Soros in the 1970s. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''

Faber told investors to bail out of U.S. stocks a week before the 1987 Black Monday crash, according to his Web site. He also told investors to buy gold in 2001, before it more than doubled.

Last month, Faber said U.S. stocks are at the beginning of a bear market in which benchmark indexes may fall more than 30 percent. The Dow Jones Industrial Average has since gained 3.8 percent.

To contact the reporters on this story: Carol Massar in New York at cmassar@bloomberg.net ; Michael Patterson in New York at mpatterson10@bloomberg.net .

# posted by Jeff D @ 9/19/2007 08:04:00 PM 0 comments links to this post

The Banker Looks Back

Sooner or later, the dollar will lose its luster and finally its value, as paper currencies always do. Striving to understand why people trusted it in the first place, historians will naturally reach for the memoirs of the foremost central banker of his day. But Mr. Greenspan's "The Age of Turbulence" will leave them just as confused as they ever were.

The first reports of the book's contents trumpeted Mr. Greenspan's criticism of the current administration's spending habits and his (approving) sense that the Iraq war had something to do with crude oil. But the real news in "The Age of Turbulence" is what it reveals about the greenbacks to which Mr. Greenspan affixed his celebrity signature and the ways in which the currency has been managed and, especially, mismanaged.

A more self-knowing memoirist might have titled this book "The Age of Credulity." The great public drama of Mr. Greenspan's life is, of course, the work he performed as chairman of the Federal Reserve from 1987 to 2006. That work, in all but name, was price fixing. It consisted (and, under his successor, Ben S. Bernanke, still consists) of setting an interest rate and shoving it down the throat of the world's largest economy. It is a mighty strange work for a "libertarian Republican," as the Maestro styles himself here, let alone a former worshipful member of the inner circle of the radical individualist Ayn Rand. "It did not go without notice," the author writes of his swearing-in as chairman of the President's Council of Economic Advisers in 1974, "that Ayn Rand stood beside me as I took the oath of office in the presence of President Ford in the Oval Office."

The fantastic irony of Mr. Greenspan's career path -- from gold-standard libertarian to federal interest-rate fixer -- seems hardly to have registered on Mr. Greenspan himself. The closest he comes to acknowledging it is his description of how the Fed looked to him from the outside. It was, he writes, a "black box." Having watched his mentor, Arthur Burns, struggle with the chairmanship, Mr. Greenspan notes, "it did not seem like a job I felt equipped to do; setting interest rates for an entire economy seemed to involve so much more than I knew." A deeper kind of libertarian might have added: "Maybe nobody can know enough to set interest rates for an entire economy."

So Mr. Greenspan, a consulting economist of no special attainments (on the eve of the 1974 stock-market collapse, he was quoted in the New York Times saying "it is rare that you can be as unqualifiedly bullish as you can now"), agreed to perform the impossible. Succeeding Paul A. Volcker, he became America's monetary central-planner-in-all-but-name. Mr. Greenspan ruled the roost in 74 fiscal quarters, of which recession darkened only five.

DETAILS

THE AGE OF TURBULENCE
By Alan Greenspan
(The Penguin Press, 531 pages, $35)

Under his direction, the Fed became a kind of first responder to the scene of financial and economic distress. It soothed taut nerves following the 1987 stock-market break, nourished a crisis-ridden banking system with cheap money in 1990-92, helped to lead the Clinton administration's rescue of the Mexican economy in 1994-95 and engineered the so-called soft landing of the U.S. economy, also in 1995. It famously trimmed its interest rate three times during the Long-Term Capital Management crisis of 1998, succeeding so well in one artfully timed intervention that the stock market, in the final hour of a single session, leapt by 7%. And the market kept right on leaping, all the way to the Nasdaq's own Mount Everest in March 2000. One of those rare recessions followed, after which came the campaign to scotch what Mr. Greenspan was pleased to call "deflation." To fend off the peril of low and lower everyday prices, the Fed pressed its interest rate all the way down to 1% in 2003 and kept it there until mid-2004. Now it was house prices that went into orbit. They were just beginning to return to Earth when Mr. Greenspan retired from public life.

Readers who got one of the fancy new teaser-rate mortgages in 2003 or 2004, and who have lived to rue the day, are unlikely to find much nourishment in Mr. Greenspan's discussion of the theory of financial bubbles or in his self-exculpating account of the Fed's role in financing them with artificially low interest rates. Nobody can identify a bubble as it is inflating, Mr. Greenspan has long insisted -- though, as you will not read in these pages, Mr. Greenspan was so certain that he detected a stock-market bubble in 1994 that he tried to prick it by pushing interest rates up. Strangely, the author's bubble-sensor failed him later in the decade. He did, in 1997, utter the innocuous phrase "irrational exuberance," but that was as far as he went in attacking sky-high equity valuations.

Mr. Greenspan now writes that the enlightened central banker will let speculation take its course. Following the inevitable blow-up, he will clean up the mess with low interest rates and lots of freshly printed dollar bills -- thereby gassing up a new bubble.

Only one of the troubles with this prescription is that it requires an enlightened central banker to carry it out. Nowhere in this book does Mr. Greenspan own up to his role of underestimating the severity of the credit troubles of 1990, or of cheering on the tech-stock frenzy in 1998-2000, or of dangling the most beguiling teaser rate of all during the mortgage frolics of 2004 -- i.e., that 1% federal-funds rate. In February 2004, only months before the Fed started to raise its rate, in a speech titled "Understanding Household Debt Obligations," Mr. Greenspan demonstrated next to no understanding. His advice to American homeowners was not that they lock in a fixed-rate mortgage while the locking was good, but rather that they consider an adjustable-rate model. He who set the rates got it backward.

An only child of divorced parents growing up in New York City in the 1930s, Mr. Greenspan had seemed destined for better things than a career in interest-rate manipulation. He was an exceptional clarinetist, a Morse code enthusiast and the developer of a personal system for scoring baseball games. The boy who would date Barbara Walters, marry NBC's Andrea Mitchell and be knighted by the queen of England was, above all things, lucky. In 1944, a dark spot on the X-ray of his lung made him undraftable. He spent the late war years in the reed section of the Henry Jerome orchestra. Luck still with him, he gravitated to economics, thence to Ayn Rand and thence -- what could Rand have thought? -- to the security of the federal payroll.

Admirers or detractors of Mr. Greenspan's central banking record will turn the pages of the first half of this book -- the story of his life, his loves and his economics -- without once having to stifle a yawn. But few will remain alert while toiling through the public-policy ruminations that pad out the final 200 pages. As Fed chairman, Mr. Greenspan had a habit of inflicting on captive audiences his not always original views on such topics as rural electrification, education in a global economy and the bright promise of technology. Such ponderations are no more scintillating now that he is out of office.

"As Fed chairman," Mr. Greenspan writes, "I was queried by fellow central bankers with large holdings of U.S. dollars about whether dollars were safe investments." The monetary bureaucrats will find no reassurance in these all-too-many pages.

Mr. Grant is the editor of Grant's Interest Rate Observer.

# posted by Jeff D @ 9/18/2007 03:07:00 PM 0 comments links to this post