Did Greenspan Steal Your Retirement?

By Kevin Cook | November 10, 2008 | 11:32 AM | 5 Comments

Greenspan bashers must be reproducing lately. There's always been a cadre of folks who blame his policies for the housing and credit bubbles, but it's become more fashionable recently as the banking system verged on the brink of collapse. "He single-handedly fueled the problems by keeping interest rates at 1% for so long!" they scream.

And now that numerous financial institutions have imploded, trillions in assets have evaporated, and the stock market is down nearly 40% for the year (or back to where it was in 1998--however you want to paint it), they are coming out of the woodwork to put together the puzzle pieces that explain the "obvious, inevitable" chain of events that led to this economic disaster.

Yeah, it's easy to see all the pieces in hindsight. But, Greenspan was fighting another war after 2001 and it didn't involve terrorists. It was the awful specter of Japan-style deflation which at that time had kept their economy under water for going on 12 years--and last time I checked, they're still there. He did what he thought was best with the information he had at the time. He chose the lesser of two evils, given the choice between inflation and deflation. How could he know that lenders would create a house of cards that could nearly bankrupt a nation?

That's the nature of the black swan. You can't know how things will work out because you can't possibly see how all the variables will interact over the long-run. This ain't roulette. Greenspan turned out to be "wrong," but was he? Maybe he staved off a deflationary depression. We can't know now because we went down a different path.

So, did he fuel a housing-credit bubble?  He actually sort of admitted that by saying in 2002 that he was hopeful that consumers would continue to use their homes as piggy banks and that this would re-start the economy. A sort of Main St. "wealth effect" to bolster the flagging Wall St. one that Nasdaq 5,000 signified.

The real culprits in my book are the banks who, swimming in all that liquidity, constructed elaborate financing mechanisms that gave consumers more house and more credit than they deserved. The government implicitly helped too by making Fannie and Freddie enablers of the Wall St. credit addiction.

What's sad is that we look at our retirement and "college" portfolios now and feel duped. Why? Because we have to ask now...

"We're 30% of the S&P 500's earnings for the past 5 years built on a financial engineering house of cards where banks were allowed to take on irresponsible risk and leverage that jeopardized the entire economy?"

They used OPM to take big gambles and they lost. The money is gone. The wealth is gone. And who is making it up? Consumers still saddled with too much debt. And taxpayers who watch the U.S. debt continue to pile up. Now I'm finally starting to like this idea about limiting Wall St. executive compensation for failing institutions. They played with risk models they didn't understand. At the minimum, they should at least come to Chicago and have options traders teach them how to use the models.

Greenspan Greenspan did not use any of the Fed regulatory powers to combat the effects of his low interest rate policy. Whether he was blind to what was happening or an accomplice, he is still to blame for much of the financial mess we are in. Submitted by Anonymous (not verified) on Mon, 2008/11/10 - 1:33pm » reply |

Oh, I almost forgot. Japan Oh, I almost forgot. Japan has one of the highest rates of savings on the planet. Hence, their loose monetary policy has not been as pernicious for them as it has been or will be for US. Submitted by leonardsimon on Mon, 2008/11/10 - 1:24pm » reply |

Japan Japan is not a good example of deflation. Deflation is a decrease in the money supply. Japan as had a zero interest policy for many years. It is that policy that has brought about the Yen carry trade that served to export inflation and bubbles all over the globe. Japanese assets are deflating in price but that's because of their epic bubble that was created in the 1980's. Just because some asset prices are falling doesn't mean that deflation is pervasive in the economy. Greenspan abetted the banks by providing the monetary base for excessive loan creation. He wasn't ever fighting deflation. The collapse of asset bubbles necessitates that prices fall, but that does not equal deflation. Submitted by leonardsimon on Mon, 2008/11/10 - 1:19pm » reply |