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Alan Greenspan Forecasts Extremely Low Economic Growth for Germany, Finland, Norway, Denmark, Sweden, Holland and Canada

Alan Greenspan, the former chairman of the Federal Reserve, weighed in last week on one of the pressing issues facing the incoming Trump administration and the country — slow economic growth. Greenspan’s explanation is novel and bound to be controversial. To preview: He blames the welfare state and overall uncertainty for the slowdown. …

By scouring economic statistics, Greenspan thinks he’s discovered heretofore hidden relationships that explain weak productivity growth.

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“The messenger wore a skirt,” says Marna Tucker, “Could Alan Greenspan take that?”*

by run75411

Re-posted from New Agenda April 2009, Bill reminds us of some of the history leading up to today:

Editor’s note: We are pleased to present this guest post by Bill H, who’s known around the internet as run75441, and who can usually be found writing in his area of expertise: finance.

Recently, Stanford Magazine did a nice article on one of the University’s former law review presidents who graduated at the top of the 1964 class. The first female to hold either distinction of graduating first in her class and also as president of the school’s Law Review. “Prophet and Loss.” April 2009.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” Alan Greenspan

“I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way,” Rubin told the Washington Post.

“My recollection was . . . this was done in a more strident way” … “characterized as being abrasive.” Arthur Levitt

It would seem these three, coupled with Larry Summers’s push back in Congress on the regulation of derivatives, had the problem and not Brooksley Born. Since then, all three men have suggested there should have been more regulation of the derivatives market that Greenspan has called its recent collapse a “once in-a-century credit tsunami.” Called a modern day Cassandra by Stanford Magazine, one could only wonder where we would be today if the economic and financial wizards had heeded her words.

Short histories on CDO/CDS . . . Collateral Debt Obligations (CDO) were invented by Drexel Burnham Lambert (Milken) as a way to package asset based securities. The CDO was tranched into similar asset backed securities of the same rating allowing investors to concentrate on the rating rather than the issuer of the bond. Ten years later, JP Morgan invented Credit Default Swaps (CDS) was used as a mechanism to bet on a 3rd party default. In 2000, CDS were made legal with the passage of the Commodity Futures Modernization Act and any regulation of them was stymied with this bills passage. Later on, an investment firm decided to team CDS and CDO together, transferring the risk from the CDO to the issuer of the CDS, and creating a synthetic CDO.

It was 1994, that Bankers Trust lost ~$800 million from various derivative investments. The chief losers were P&G and Gibson Greetings. Bankers Trust was formed by a consortium of banks, shedding the loan image for conducting trades. Bankers Trust was successfully sued by P&G for its losses by claiming racketeering and fraud. Bankers Trust also became known for its remarks about Gibson Greetings not knowing what Bankers Trust was doing. In 1998, Bankers Trust pled guilty to institutional fraud due to the failure of certain members of senior management to escheat abandoned property to the State of New York and other states. Again in 1998, LCTM was struck by a downturn in the market when Russia defaulted on government bonds, a security LCTM was holding. To make a significant profit on small differences in value, the hedge fund took high-leveraged positions. At the start of 1998, the fund had assets of about $5 billion and had borrowed about $125 billion. When investors panicked and sold Japanese and European bonds and bought US treasuries, the spreads between LCTM holdings increased, resulting in a loss of ~$1.8 billion by August 1998. LCTM was saved by an orchestrated Fed bailout utilizing private investors.

It was in 1998 and Brooksley Born testified to Congress about the dangers of the unregulated derivatives market referencing the LCTM losses as a recent example. It was also then that deputy Treasurer Larry Summers testified to Congress that Born’s desire to regulate is “casting a shadow of regulatory uncertainty over an otherwise thriving market.” Larry’s testimony set the stage for Congress to rein in the power of the Brooksley Born’s CFTC and the passage of Phil Gramm’s Financial Service Modernization Act of 1999 prohibiting the regulation of the derivatives market (In 2005, the revised bankruptcy laws would place derivatives outside of the laws also making it the first to receive compensation). W$ and banks had clear unregulated sailing in the sea of laissez faire in 2000 with a closing of the door for debtors in 2005. It was little better than a roach motel, you could check in but you can not check out.

Again in 1999 and in the Senate that opposition arose to the passage of the Financial Services in the form of Senator Dorgan of North Dakota. An excerpt from the Senator’s speech that day before the bill was passed:

“I, obviously, am in a minority here. We have people who dressed in their best suits and they just think this is the greatest piece of legislation that has ever been given to Congress. We have choruses of folks standing outside this Chamber who spent their lifetimes working to get this done, to say: Would you just forget all that nonsense back in the 1930s about bank failures and Glass-Steagall and the requirement to separate risk from banking enterprises; just forget all that. Time has moved on. Let’s understand that. Change with the time. 

We have folks outside who have worked on this very hard and who very much want this to happen. We have a lot of folks in here who are very compliant to say: Absolutely, let me be the lead singer. And here we are. We have this bill, which I will bet, in 5, 10, 15 years from now, we will be back thinking of this bill like we thought of the bill passed in the late 1970s and early 1980s, in which this Congress unhitched the savings and loans so some sleepy little Texas institution could gather brokered deposits from all around America and, like a giant rocket, become a huge enterprise. And guess what. With all the speculation in the S&Ls and brokered deposits and all the things that went with it that this Congress allowed, what did it cost the American taxpayer to bail out that bunch of failures? What did it cost? Hundreds of billions of dollars. I will bet one day somebody is going to look back at this and they are going to say: How on Earth could we have thought it made sense to allow the banking industry to concentrate, through merger and acquisition, to become bigger and bigger and bigger; far more firms in the category of too big to fail?

Senator Dorgan’s Speech, November 4, 1999 on “Gramm-Leach-Bliley Act” also known as the Financial Services Modernization Act

Larry Summers has been present throughout much of this change, supporting it, denigrating the opposition, and now claiming his experience at D. E Shaw gives him an insider’ knowledge as to how the derivatives market works. While President of Harvard University; Larry received a letter (May 12, 2002) from Iris Mack, a new employee of the Harvard Management Company managing Harvard’s endowment funds. A Doctorate in Mathematics from Harvard and a former employee of Enron who dealt in derivative trades, she expressed concerns about the trades (swaps and other complex financial instruments) being made by the funds and the lack of understanding of the trades by the traders. On July 1, Iris was called into the office of Jack Meyer, the chief manager of Harvard Management. On July 2, Iris was fired for making what Harvard Management termed as: “baseless allegations against HMC to individuals outside of HMC.” “Ex-Employee Says She Warned Harvard of Risky Moves” Boston Globe, April 3, 2009. While Harvard Management Company claims above normal returns on its endowment funds, it has spent much of last year selling off private equity and investments to raise cash.

The attitude expressed by our head of the Economic Council is one of “trust me now” as I have all of the experience necessary to fix the current economic and financial problems even though he has helped to initiate today’s issues by denigrating Brooksley Born’s request for regulatory power to Congress, even though he ignored the advice of Iris Mack at Harvard University, even though he consulted to D.E. Shaw, a hedge fund, and making ~$5.2 million while being the financial engineer’s engineer, and even though he has been repeatedly wrong in his direction and advice to Congress and Industry. In the name of deregulation and global efficiency, Larry was its cheer leader while signing off on a letter encouraging the dumping of toxic wastes in Asia at the World Bank. He helped to shepherd China into the WTO claiming:

“’The agreement with China is a one-way street,’ Summers said. ‘China opens its markets to an unprecedented degree, while in return the United States simply maintains its current market access policies,’ he said. ‘It is difficult’, Summers added, ‘to discern any disadvantage to the United States in passing this legislation.’”

— Robert Waldman, Economist, Angry Bear blog.

Personality, ego, and a blind belief in the ability of the market place to dictate the proper path and the correction has gotten in front of common sense. Maybe it is time to sideline Summers and his protégé Geithner in favor of Born, Mack, and Dorgan. Each has shown more foresight into how today’s problems and issues were created and how to resolve them.

“I certainly am not pleased with the results,” she adds. “I think the market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been.”   

Brooksley Born, Stanford Magazine, April 2009

*“The messenger wore a skirt,” says Marna Tucker, a Washington lawyer and a longtime friend of Born. “Could Alan Greenspan take that?”

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We Beat the Germans in 1918/And They’ve Hardly Bothered Us Since Then

Brad DeLong culls the comments to this post at Crooked Timber to produce a “with notably rare exceptions” Greatest Hits package—his second post riffing on the original—in honor of The Maestro continuing to attempt to improve the reputations of Paul Volcker and Ben Bernanke, if not G. William (“I ran a company, I didn’t need to know about Finance”) Miller.*

I point you to Dr. DeLong on the off chance that you didn’t read any of the other three (one by Henry, two by Brad) posts, while we all wait for Patrick or Jim MacDonald to continue the riff with more variations.

Economics question of the day: whose productivity will be greater: someone who reads all (now four, counting this one) posts, someone who starts with Dr. DeLong’s second, someone who starts with Dr. DeLong’s first, or someone who only read Henry Farrell’s original post but kept clicking back to see the newer comments?

Explain your answer in terms of the value-added of aggregators and/or hedonic pricing. Best answers will be forwarded to Bill Dudley, the current leader of the FRB of New York, on the off chance he ever agrees to speak in Queens again.

*I refuse to believe that Alan Greenspan is stupid enough to believe the things he’s saying now. Next thing you know, he’ll be claiming that his Ph.D. thesis was so perfect that no one should ever read it, lest they despair of following in his giant footsteps.

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Only that which is rational is real

CNBC reports

Greenspan … added that the financial crisis could not have been foreseen.

“It is just not feasible to forecast a financial crisis,” he said. “A financial crisis by definition is a sharp abrupt, unexpected decline in asset prices.”

Notice that he says if it is unexpected, then it *can’t* be forecast. That is if the risk bearing capacity weighted average investor doesn’t forecast something then it isn’t forecastable. Greenspan is asserting that financial markets are efficient by definition. He displays no willingness to allow data or evidence any role in answering the question.

Only that which is rational is real. The key policy relevant question is answered by definition, that is, by authority. Efficient is whatever markets are, and also what they should be, therefore markets are what they should be – by definition.

This is dogma, this is faith, this is medieval thinking. Galileo lived in vain. The enlightenment arrived in the Fed when Bernanke replaced Greenspan.

via Atrios. More ranting after the jump.

Also “Former Federal Reserve Chairman Alan Greenspan said that the recent stock market decline is “typical” of a recovery,” If a decline is typical then it is forecastable. If a decline is typical during a recovery, then financial markets are inefficient. I see no basis for the claim (which, I amdit, was constructed with only one actually quoted word).

Note how the efficient markets hypothesis is switched on and off for convenience. Something which could have been prevented with tighter regulation must have been unpredictable. Something which might or might not alarm people was predictable and isn’t news. I am fairly sure that no one believes that financial markets are efficient. It is just a debating trick. It can be assumed at will in order to make absurd arguments. It is absurd and has high status, for some reason, so it is a license to make clearly false claims which are not dismissed.

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The Perfect Negative Indicator Weighs In

Alan Greenspan:

The U.S. Federal Reserve has done all it can do to reduce unemployment and needs to worry more about the risk of inflation from the stimulus it poured into the economy, former Fed Chairman Alan Greenspan said on Sunday.

But didn’t we just Get All That Money Back? [link added]

Greenspan’s reason unemployment will go down soon: GOVERNMENT JOBS:

Greenspan said he expected the U.S. unemployment rate, which is currently at 10 percent, to “be significantly lower a year from now” but still very high.

The U.S. Census Bureau’s plan to hire close to 800,000 workers by April will take several tenths of a percent off the unemployment rate, he said.

Let’s ignore that 800,000 temporary hires won’t balance the 900,000 jobs to be lost on the state level next year (h/t Brad DeLong) And let’s ignore that temporary jobs are, by definition, “frictional” and not “structural” employment.

But let’s not forget, as Ben Bernanke did,* that, as noted by Dean Baker, “the dual mandate [of the Fed] is full employment (defined as 4.0 percent unemployment) and price stability.” [emphasis mine].

10.0% is not 4.0%. Indeed, 9.3% (10.0-0.7) is not 4.0%. So unless there is a miraculous 5.3% of other employment coming Real Soon Now (and I don’t even see Daniel Gross predicting that, let alone Mark Thoma or Paul Krugman), the Fed, as has been standard under Bernanke, is missing its targets.

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Greenspan vs Klein on Democracy Now

Just an FYI related to recent postings here. Democracy Now for 9/24 has about a 38 minute discussion with both Naomie Klien and Alan Greenspan. The remaining minutes is with Jeremy Scahill.

This particular exchange caught my attention:

AMY GOODMAN: Alan Greenspan, you write in the end of your book, “A Federal Reserve System that will be confronted with the challenge of inflation pressure and populist politics that have been relatively quiescent in recent years” is something that is very significant. You say the year — the United States in 2030 is likely to be characterized by populist politics that have been relatively quiescent in recent years. How important is populist politics, and what do you envision those to look like?

ALAN GREENSPAN: Well, remember what populist politics is. It’s a very special brand of short-term focus, which invariably creates very difficult long-term problems. A goodly part of the book, as you know, is written about how populism has gripped, say, many Latin American countries to their detriment. And the term “populist politics” is essentially another way of saying short term versus longer term. And people who emphasize short-term benefits for long-term costs end up with very little in the way of economic growth and prosperity.

Personally, I have never viewed populism as short term viewing. Infact, I read nothing at Wikipedia that suggested such.

Populism is a political doctrine or philosophy that purports to defend the interests of the common people against an entrenched, self-serving or corrupt elite.

I think Mr. Greenspan has a little projection (in pysch terms) happening here. Naomie Klein furthers the question and raises his policies as playing a part in the rise of economic populism. His answer, we have bad education. She follow up on his example of Latin America:

But you also mentioned economic populism in Latin America in your book, and you blame it for inflation episodes and the collapse of regimes and the toppling of governments, and one of your examples was Chile in the 1970s. Was Chile — was Salvador Allende’s regime toppled because of inflation, or didn’t the CIA have something to do with that?

ALAN GREENSPAN: Well, look, let’s — I’m using Latin America as an example. The key question is not Latin America. Let’s get back to the United States. Let’s get back to the world at large and face the issue of populism here. Remember, the populist issue in Latin America goes back to the roots of Spanish and Portuguese colonization.

I’m sorry, but if that answer wasn’t a classic “troll” response I don’t know what is.

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