Sunday, December 16, 2007

Greenspan on subprime, it’s the communists’ fault

Credit crisis worsens as Alan Greenspan says the Fed is powerless

Greenspan says that a period of low inflation was caused by the end of the cold war. The fairly well educated masses could produce all these cheap goods to export to us. This meant he and other central bankers could drop interest rates and create the worst housing bubble in history. His view is that there is nothing he could do to prevent this and there is now nothing central banks can do to prevent the deflation. He adds that compared to the rest of the world the US housing bubble is average, I think the UK bubble is near the top.

Posted by happyrenterz @ 11:36 AM (1567 views)
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18 thoughts on “Greenspan on subprime, it’s the communists’ fault

  • japanese uncle says:

    He now looks increasing like a geriatric conmen which he really is.

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  • I wonder if Greenspan crossed his fingers behind his back when saying this? He, like fast Eddie over here, in collusion with the treasury of the government then in power deliberately engineered the consumer and asset boom of the last ten years. He like fast Eddie has also then ‘come out’ and said “oops, it was us, we knew this would happen”, and like Eddies successors has then pointed his finger at the lenders and the borrowers now up to their necks in the mire and said “it was them, they are responsible because they were irresponsible, they should have known better”.
    I was more surprised by the return to the Macarthyite mantra of blaming the commies, but I suppose that given his age they are the only group that he could think of blaming at short notice.

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  • japanese uncle says:

    iguana

    Many thanks for your comments which is what I wanted to say.

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  • new user 2007 says:

    His excuse that official rates had little impact from 2001 i.e. it was general liquidity that was the problem, has one key flaw in it…if it is true then there should have been no reason why rates could not have been increased without worrying about th broader economy (the worrying part is that his comments imply that monetary policy is ineffective).

    Yet his policies are the same as the BoE (admittedly he has a better excuse for inflating assets as the Fed’s core mandate is a mix of price stability and full employment, as opposed to ours, which is price stability) i.e. lowering rates when asset prices are falling (as they ARE apparently deflationary), but not raising rates when asset prices are rising (as they are NOT inflationary).

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  • I think he’s partly right. Since the collapse of communism the “new” countries of eastern Europe, Russia, and China, together with the oil-producing states, have swamped the west with their savings. For many years they didn’t trust their own institutions to manage their money safely – officials were corrupt, banks were prone to collapse, and memories of previous political instability weighed heavily on their minds. They saw the western economies as the only safe place for their savings. This tidal wave of savings pushed our interest rates down to record lows. Even if central banks had maintained high official rates, other loan mechanisms would have emerged and the west would still have been swamped with cheap money (witness high house prices in New Zealand, despite the highest official interest rates in the developed world). Low interest rates didn’t matter to those eastern savers – they were glad to have capital protection, interest was merely icing on the cake.

    All this foreign money came flooding into London and New York, invigourating the financial services sector. Some of the money was reinvested in the same booming economies of eastern Europe (Bulgarian fly-to-let property, Polish factories) and Asia (Indian call-centres, Malaysian factories), but a lot of the money ended up literally at home. The western property and shares boom has been fuelled by mortgages and leverage thanks to all this new money.

    Today it’s all changing. Savers in China see far higher returns in their local stockmarket than in the USA; Japanese savers are getting jittery about the carry trade; and eastern Europe’s new EU membership means investing at home is both safer and more rewarding than before. The hot money that flowed in throughout the 1990s and early 2000s is now flowing back out, with disastrous consequences for western currencies (lower), inflation (higher), and our economies in general. The silver lining for us aspiring first time buyers is that the withdrawal of all that speculative hot money will cause house prices to fall (though interest rates will be higher). Provided you have saved up a decent deposit, stepping onto the property ladder is about to become a whole lot easier.

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  • Well put, Drewster. The reasons for the credit crunch are a bit more complicated than just the Fed and other central banks fighting off recession the easy, short-term way of providing easy credit. Global economic crises are often the result of emerging countries with a combination of high savings, protectionist trade policies and large trade surpluses. Attempts to manage the resulting currency volatility can make it difficult or impossible to get monetary policy right for the reasons you mention. The emerging countries’ policy of keeping their own currencies undervalued in order to support the currency of (and their own exports to) the main financial power generates low interest rates and asset bubbles in the emerging countries themselves. The US had a loose monetary policy in the 1920s partly to support the GBP and the result was a US equity bubble which, when spiked, led to global disaster. A similar set of events took place in Japan in the 1980s (supporting the dollar led in Japan to property and other asset bubbles, which, when spiked, led to a decade of stagnation, this time confined largely to Japan). Similar problems are building up in China for similar reasons and I’d be inclined to short Chinese assets.

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  • sold 2 rent 1 says:

    Guys,

    When will you realise that it is not the central banker’s fault.
    The fault is with the banking system that tries and eventually fails to expand debt to infinity.

    This mess would have happened no matter who was in charge. Think about it. If IRs had been higher we would have had more recessions and then slashed rates anyway.

    The fault in the banking system causes the K-wave. The central bankers are making human/rational/greedy decisions and that is why the K-wave has repeated 4 times.

    The big question is can this K-wave keep repeating until infinity? – meaning that we have a severe depression every 70 years or so.

    I say no as the level of US debt at its peak is higher each time

    1840s – 150pc GDP
    1930s – 270pc GDP
    now – 350pc GDP and growing

    Just like debt can’t expand to infinity, the k-wave debt peaks can’t keep growing to infinity either.

    IMHO this is the last K-wave as awareness from bankers and the public alike is growing about the flaw in the system

    Corrupt Banking System – Youtube
    Views: 158,734 in 6 months

    We have been trying to avoid a depression since 2000 and that can only lead to the collapse of the entire banking system. The first avoidance caused the biggest asset bubble in history. A second attempt at avoiding a depression will cause the end of money.

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  • @sold 2 rent 1

    I *REALLY* hope you are wrong but that said, I’m worried. Ideally, I’d like to have my own land with cattle, crops, good neighbours and useful means to protect my property (a rifle, shotgun and similar for my neighbours).

    In reality of course, I live in one of the most heavily regulated, politically correct, countries in the world. The police cannot protect me against criminals but they can sure as hell make my life difficult if I try to defend my interests (a rented flat LOL!!).

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  • unfair guys.. greenspan did his job, but it was the governments and the people who colluded to make the situation which is now to be brought upon us. The people believed the walter mittee dream, and that is it. Not Greenspan.. and instead of blaming people, it is now important people prepare themselves. As the horse has now bolted, done the Grand National 12 times, and is having a few down at the local.

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  • S2R..

    All things in moderation!

    It is a huge tragedy that in democratic politics, both blame and credit always seem to be apportioned to those who least deserve them.

    Lawson was the chancellor who created the mess that Lamont took the blame for, Clarke was the architect who sorted the mess, for which Brown took the credit…

    Major was probably more in tune with the cares and concerns of the British electorate than any other Prime Minister in British history – but the press got bored with him, and hounded him out..

    If a business plan – or a home purchase deal – needs low interest rates to be viable, then the deal is not fireproof.

    High interest rates promote saving and prudent borrowing – economic stability is borne of not letting the economy dance on high cliffs..

    Forget k-wave jargon – see the wood for the trees!

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  • sold 2 rent 1 says:

    UT,

    Having followed your posts for well over a year, you appear to be a smart individual.
    What I can’t grasp is your failure to understand k-theory – I have posted many articles relating to it.

    Have you actually tried to understand K-theory or are you just not a “cycles” person. As this crisis deepens K-theory is gaining more support.

    K-theory identifies the banking system as the source of the problem. Once K-theory becomes accepted as mainstream then the banking system’s days are numbered. How ironic is that.

    Maybe I should use the sentiment for K-theory on this site as to how long the current banking system can survive.

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  • UT and S2R1

    All behaviour can be broken down into waves. Knowing the number frequency and size of all the contributing waves however is a near impossible task. Maths tells us that ANY function can be represented as a Fourier series of waves. Simply put, just because you have identified one feature or trend over time does not mean that trend will continue or that you have not missed the bigger overlying trend. My advise is, don’t get too hung up on theories and stick to the fundamentals.

    1) The west has been in industrial decline for 20 years.
    2) The east has been in industrial growth for 20 years.
    3) The west consumes far more than it produces.

    Conclusion.
    The west will see it’s buying power reduced. This can happen in two ways.
    1) Inflation
    2) Recession

    If we go down the inflation route we are doomed. If we focus recession in the service sector and fight tooth and nail to encourage industry we have a chance.

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  • planning4acrash says:

    S2R, what I don’t get is, what is the solution? What is the alternative to the current banking system? Or are you talking about a new regulatory framework? We need currency surely, are you talking about gold backed currency? Or will you wait for history to tell us where the journey ends?

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  • @p4ac: A gold-backed currency is one option; a single world currency is another. I can’t really see either one coming to pass. The BRIC countries (Brazil, Russia, India, China) all use fiat money and it has hardly stopped their progress. Public awareness of the fundamental problems might increase slowly, but public perception is like an oil tanker, it takes ages to turn around. Also I think that as a country we would lose more than we would gain from a gold-backed currency.

    There are countries in Latin America which have had economic collapse, flight from currency, massive devaluations, etc – but they’ve always bounced back, either with renewed faith in the existing currency (Mexico 1994), a new currency initially pegged to the dollar (Argentina 1991, Brazil 1994), or dollarisation (Ecuador 2000). That’s one possibility for our future – a few lean years comng soon then back to the trough.

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  • Blindleadtheblind says:

    Drewster, understand that as a country the current system endorsed at present has been corupted beyond belief and will end in shear misery for the vast majority. The financial institutions backed by governments have abused the system to breaking point, and now shock horror the system is broke. Unfixable. Pointing fingers of blame will come often and from many, but understand the system cannot be fixed and you have a head start on many. They can talk about relaxing the banking capital requirements, injections from central banks, coordination ad infinitum, but the result will be the same. Failure. You cant get a bigger loss than the one you are seeing unfold right now.
    S2R’s points regarding the K-Winter are very much valid and vindicated imo. There is no quick fix hence the necessity to purge the excess out of the system can take many years.

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  • European-bear says:

    Fiat money was invented just before the industrial revolution. For those of you who do not understand it works something like this. Someone deposits gold with a goldsmith, say $1000 worth of gold, for safe keeping. The goldsmith figures he can lend the gold out and get interest, and thus make money on someone else’s deposit. Then he figures that instead of actually lending the gold out, he hands out a promisory note to value of the the gold, which has to be paid back with interest. Now since he still has the actual gold in the store, he can keep handing out pomisory notes to lots of different people to the value of the gold, all paying interest. The promisory notes are money…. But now the gold standard is no longer in place so the promisory notes are no longer backed by gold, but by a financial reserve system….this is the whole basis of the present financial system of creating money. I believe the banks are allowed to lend out x10 the amount they have in reserves. Every time they lend the money, money is “created”, every time it is paid back it is “destroyed”. Without this system the industrial revolution would not have happened and we would still all be living as serfs under the rule of King (Gordan) Brown. The banks have lent numerous promisory notes to sub prime, and if they do not get them back, then you can work out for yourselves what will happen. I know there is some faith in K wave theory, but I for one think it is just techies looking for long term trends. Look at data long enough, change the x and y axis scales and you can get any sort of long term pattern, especially if you want only 1 or 2 cycles. What has been consistent for a long time is the regular boom bust business cycle every 10-15 years without fail. Now we are heading for bust….Global catastrophy, no way, bad recession in Anglo Saxon economies, probably, but then it will bounce back and repeat the cycle again…

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  • sold 2 rent 1 says:

    A return to a gold standard is becoming more popular.

    A gold standard comes with its own flaws too. You can bet your bottom dollar that the greedy bankers will have cornered the market before any switch over is made. The general masses will be enslaved again.

    Gold has served well for 1000s of years as a monetary base. Maybe it is time to move on. I think the future has a twist here which we will have to wait and see.

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  • The other more sensible option is to tie the value of currency to something physical and immutable, a physical unit like the Joule. After all, what is money, but a store of work?

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