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walliman

Now Greenspan doesn't like bailouts?

The former Fed chief's criticism of the rescues of Bear Stearns, Freddie and Fannie is infuriating because he created the mess that led to them.

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NowGreenspanDoesntLikeBailouts.aspx

By Bill Fleckenstein

Last Thursday, the government reported that the Consumer Price Index was running at 5.6% year over year, the highest rate in about 16 years. Given that inflation is as high as it is, many folks are probably puzzled as to why, at the same time, home prices are collapsing.

That confusion became clear to me last week when I did an online chat. It is an odd mixture, one that was not only preventable but foreseeable.

In the shameless-self-promotion department, this is exactly why I wrote "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve."I would encourage folks who are still puzzled about how these terrible problems can coexist to pick up a copy. Not because I need the book royalties but because I think it might be helpful.

The sorry state that we find ourselves in is a function of the Fed's interest-rate-targeting policies. More specifically, it was caused by the policies of Alan Greenspan, the Fed chief from 1987 to 2006. Just as this column was being filed, he graced the front page of The Wall Street Journal with some, shall we say, interesting observations.

Time for a new eyeglass prescription
In an article headlined "Greenspan sees bottom in housing, criticizes bailout," he said, "Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009." (He did leave himself some wiggle room, as he also noted that "prices could continue to drift lower through 2009 and beyond.")

Of course, we shouldn't forget that this is the same man who in October 2006 opined, "I think the worst of this (housing problem) may well be over."

As I also note in the book, while Greenspan was in office he went to great lengths to suggest that housing couldn't experience a bubble. And, as The Journal pointed out, he also tried to make the case in 2004, when many of us were already certain a disastrous bubble was in full bloom, that "a national severe price distortion seems most unlikely in the United States, given its size and diversity."

This illustrates my strongly held (and well-documented) view that when it comes to matters of economics, Greenspan is utterly clueless and unable to learn from his mistakes.

The reason I'm so angry is his logic, which The Journal paraphrased as follows: "The Fed-financed takeover of investment bank Bear Stearns also made government backing of Fannie and Freddie debt 'inevitable'" (his adjective, my emphasis). Then Greenspan went on to tell the newspaper: "There's no credible argument for bailing out Bear Stearns and not the GSEs (government-sponsored enterprises)."

Own up to your bubble
The problem with that line of logic: Greenspan made the Bear Stearns bailout inevitable when he set the precedent of rescuing Wall Street during the collapse of hedge fund Long-Term Capital Management in 1998.

Of course, those actions led to the massive blowoff to the stock bubble, the response to which led to the real-estate bubble. Thus, had he not bailed out Wall Street, I don't believe we would ever have been in a situation in which a Bear Stearns bailout would have been required or even considered.

In sum, it was Greenspan who set this train wreck in motion, with his specific policies regarding Long-Term Capital, dramatically altering the financial landscape by creating what's known as the "Greenspan put." Making matters worse, in the wake of that "warning shot," he advocated the deregulation of the financial system and championed securitization at every chance he got. While in charge, he never tried to put a stop to any dangerous policy but, rather, pursued it aggressively.

They live and they die by the square root of pi
Delusions of infallibility bring me to another subject: quantitative trading. Quantitative analysts have pursued a strategy based on the notion that the money to be made in stocks comes via mathematics rather than from company fundamentals. I believe that this strategy is responsible for much of the pandemonium we see on a regular basis. (For more on this subject, see "Market hackers running out of ammo.")

No market seems to be safe from these maniacal, algorithm-wielding computer beasts. In a way, their systems have made it possible (in the short run) for almost anything to trade at any price, whether foreign exchange, stocks or commodities in general.

A friend who is a quant educated me on the broader picture and what needs to be done:

"The problem is not quants per se but funds of funds and short-term performance focus. So investors got what they bargained for: high returns and low volatility for a short while, until payback time. Large quants that likely caused this current dislocation got capital allocated to them by fund-of-fund/clueless pension-fund managers.

"Capital is being allocated by nearly incompetent, self-righteous folks, and that's where the problem is. Hiring of competent managers for our mutual and pension funds should be given a priority.

"Quantitative portfolio construction based on sound macro/value ideas and risk management is here to stay. Kill short-term-profit focus, kill calendar performance boogies, and quants will again become liquidity providers -- smoothing instead of exaggerating volatility. Kill the system that allowed quants to get so big. Don't shoot the quants -- they are the messengers of a broken system of values. We just don't like the message they brought to us."

My friend's view notwithstanding, I believe that when the book is written on 2004-08, a key feature of what went wrong -- besides the mistakes made by the Federal Reserve, which brought us the stock, housing and credit bubbles in the first place -- will be the damage attendant to the incorrect notion that quantitative systems were infallible.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.

CapitalIdea · Joined: 08 Apr 2008 Posts: 2290 Location: Quick! Look Left!

yeah, greenspan hustled out the door at the first sign of trouble.

and immediately started blaming everyone else!

That's conservatism!
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Lenin_N_Things · Posted: Tue Aug 19, 2008 3:56 am Post subject:

Greenspan was in "power" during the unfortunate Clinton administration
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In 2012, Adults Will Undo Everything The Left Does To America

CapitalIdea · Joined: 08 Apr 2008 Posts: 2290 Location: Quick! Look Left!

Greenspan studied the housing industry his entire career and came up with the "home equity = ATM = hot consumer economy" equation.
It was brilliant, but a totally evil, destructive scheme. And like I said, he hustled out the door at the first sign of trouble, and started blaming everybody else early.

Clever if anybody buys it.
_________________
"Get-out-the-vote ads on radio and television aren't released to the media" Laughing

-Ben Smith, Politico

Amolibri · Joined: 13 Apr 2008 Posts: 332

September 19, 2008, 9:27 am
They’ll Bill You Later
By Tobin Harshaw
So all that bad debt held by Wall Street may soon become the property of Joe and Jill Taxpayer, at least if the Fed and Treasury can sell the idea to Congress.
Former Clinton labor secretary Robert Reich isn’t buying. He writes on his blog:
It’s not likely to do all that much good because no one knows how much bad debt there is out there. Even if the government bought a lot of it, investors and lenders still couldn’t be sure how much remained. After all, big banks have already written down hundreds of billions of bad debts, and that hasn’t restored confidence in the Street. As the economy slows, bad debts will grow. Again, the problem isn’t a liquidity or solvency crisis; it’s a crisis of trust …

A better idea would be for the Fed and Treasury to organize a giant workout of Wall Street — essentially, a reorganization under bankruptcy, for whatever firms wanted to join in. Equity would be eliminated, along with most preferred stock, creditors would be paid off to the extent possible. And then the participants would start over with clean balance sheets that reflected new, agreed-upon rules for full disclosure, along with minimum capitalization. Everyone would know where they stood. Bad debts would be eliminated. Taxpayers wouldn’t get left holding the bag. And there would be no “moral hazard” incentive for future financial wizards to take giant risks with other taxpayers’ money.

In yesterday’s Wall Street Journal, three financial bigwigs called for recreating the Resolution Trust Company, which got us through the S & L scandals of the ’80’s. But the anonymous finance executive who writes under the nom de blog Calculated Risk thinks the parallel isn’t perfect:
This new entity would be very different from the RTC in a number of ways. The RTC was created to dispose of assets accumulated from failed Savings & Loans.

The new entity, according to the WSJ, would purchase illiquid assets “at a steep discount from solvent financial institutions and then eventually sell them back into the market”.

With the RTC, the government already had direct responsibility for the assets since they acquired them from insured S&Ls that had failed. The role of the RTC was to liquidate certain of these assets.
In the current situation, the government has no financial responsibility for the assets, except for a few exceptions like the assets of Fannie and Freddie, and the NY Fed’s assets acquired in the JPMorgan / Bear Stearns deal. The new entity will both buy assets “at a steep discount” and eventually sell the assets. So unlike the RTC, this new entity puts the taxpayers at risk.

Details of how this will work aren’t available yet. But one of the key problems — in addition to the risk to the taxpayer — is that this program will actually reduce regulatory capital as losses are realized. The opposite of the goal!

Mark Kleiman of the Reality-Based Community has a potpourri of interrelated musings:
One pretty clearly good idea: a federal guarantee for money market funds. But then of course those funds are going to have to be regulated as banks are, and pay their fair share toward the deposit-insurance systeem. And of course it’s not fair to protect those funds that tried to goose their returns a few basis points by buying not-quite-safe paper. If the investors are to be held harmless, then the management companies ought to take the hit …

What worries me is the idea of buying “assets, not institutions.” We want to protect the financial system, not the executives and shareholders of the banks and quasi-banks and asset managers and hedge funds. And although it’s essential to prevent (and reverse) physical abandonment of housing, it would be wrong to reward those who bought houses they couldn’t afford (or bought SUV’s by borrowing against the appreciation of the houses they were in) at the expense of those more prudent and thrifty ..

What is — or ought to be — deeply shocking is the obvious irrelevance of the White House. No one is even pretending that the Decider is making any of the actual decisions. Evidently Bernanke and Paulson think they have more credibility both on the Hill and in the markets than does the President.

Personally, I’m reasonably happy to let the experts and the legislators work this one out. They can invite the Beloved Leader in for the signing ceremony. But we shouldn’t soon forgive the Republican Party for sticking us with a leader who has to be pushed aside when the real money is on the table.

And George Mason economist Arnold Kling, writing at EconLog, offers a hypothetical reminding us that the values of these loans are, in fact, pretty hypothetical.

Let’s see if I get this straight. There are a whole bunch of mortgage-backed securities, the value of which is not known, because nobody knows what the default rates on the underlying mortgages are likely to be. A government agency, Bailie Mae, is going to put up, say, a billion dollars. Companies will make offers. It might go like this:

Shake-E Bancorp offers to sell securities with a face amount of $1.4 billion for $700 million. 50 cents on the dollar.
Shift-E Investments offers to sell securities with a face amount of $1.2 billion for $720 million. 60 cents on the dollar.
Slime-E Insurance offers to sell securities with a face amount of $1.0 billion for $900 million. 90 cents on the dollar.
Bailie Mae then buys $700 million from Shake-E (the entire $1.4 billion face amount), $300 million from Shift-E, and leaves Slime-E to pound sand.
It sounds to me as though Bailie Mae is going to be wearing a big sign around its neck saying, “Adversely Select Against Me.” For all we know, Slime-E’s offer was the best deal. Recall that we stipulated that we don’t know what the securities are really worth. That’s what makes “hard-to-sell assets,” you know, hard to sell.

Once upon a time, Bailie Mae was supposedly going to help home owners. I guess when push comes to shove, the real bailout money goes to financial institutions, not individuals.
Why do I not think my readers will be surprised …
_________________
Hope has two beautiful daughters - their names are anger and courage; anger at the way things are, and courage to see that they do not remain the way they are.

St. Augustine

Amolibri · Joined: 13 Apr 2008 Posts: 332

Firing Back on the CRA Libel
By Sara Robinson
Created 09/30/2008

Summary:
Conservatives are twisting the facts beyond the breaking point to support their revisionist history about a law that encourages lending in low-income communities. But don’t be fooled: the financial crisis was caused by conservative financial follies and bankers run amok and nothing more. Here's how you can fire back at 11 basic myths about the Community Reinvestment Act and the role of government regulation in this Wall Street mess.

Conservative pundits and politicians have piled onto the excuse like shipwreck victims clinging to a passing log: The real blame for the current economic crisis lies not with anything they did, but rather with the 1977 Community Reinvestment Act—a successful Carter-era program designed to get banks to stop covert discrimination, and encourage them to invest their money in low-income neighborhoods.

It's always easy to tell when the cons are completely lost at sea. The lies get more absurdly preposterous—and also more transparently self-serving. But when they go so far as to openly and unapologetically latch onto race and class as an excuse for their woes (which this is, at its heart), you know they're taking on water fast—and scared of going under entirely.

You can hear the conservative commentators burbling this CRA fable from the Wall Street Journal to the National Review; from Rush to YouTube. Neil Cavuto put the essence of the argument right out there on Fox News: “Loaning to minorities and risky folks is a disaster.” See! It's all the liberals' fault for insisting on social justice!

Conservatives are twisting the facts beyond the breaking point to support their revisionist history. But don’t be fooled: the financial crisis was caused by conservative financial follies and bankers run amok and nothing more. Here are the basic myths they're trying to push about the CRA—and the facts that will enable you to fire back.
excerpt:
The CRA didn't force lenders to make riskier loans than they would have otherwise. It simply required that they take each applicant on his or her own merits, and give people in poorer neighborhoods the same fair chance at a mortgage that everybody else in town was getting. It wasn't about preferential treatment. It was just about basic equality.

read more @
www.ourfuture.org
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Hope has two beautiful daughters - their names are anger and courage; anger at the way things are, and courage to see that they do not remain the way they are.

St. Augustine