"The
Economist's Sell Signal," (November 30, 2013) critiqued the
"The Perils of Falling Inflation," in the magazine's November 9,
2013, issue. "The Perils" attempted to erase history, an effort to
protect the central-banking version of history from criticism.
In Bull by the Horns: Fighting to Save Main Street from Wall Street and
Wall Street from Itself, Sheila Bair, the former FDIC chairman, described
an enlightening encounter with The Economist. In that instance, a
malignant diatribe was published, either sanctioned or produced by the sieve of
banks, bank regulators, globe-hopping bureaucrats, and politicians who
fashioned it.
Bair attended a meeting of the Basel Committee in October 2006.
This was shortly after her appointment as chairman of the Federal Deposit and
Insurance Commission. Bair spoke against Basel II capital rules. Basel II set
regulations by which bank capital was calculated from models; the models
weighted the riskiness of bank assets. Basel II reduced the amount of capital
that banks were required to hold. (Bair wanted banks to meet a "leverage
ratio," with no weighting of asset risk: a simple division of total assets
by total equity; the measurement showing whether banks held enough equity.)
The speech was ridiculed at the meeting. It was a coordinated attack. An
active media campaign followed to discredit Bair's warning about capital
promiscuity. She writes: "A few days after the Mérida [Mexico] meeting
there was a scathing article in The Economist that I suspected had been
leaked by the Germans. [No bankers in the world had more fun prior to 2008 than
the Germans. - FJS] The article essentially said that I was trying to derail 'a
seven-year mission to make the world's banks more efficient,' suggesting I was
a 'Luddite,' and called the Mérida meeting a frank "exchange of
views." That was my first experience with press leaks coming out of the
Basil Commission. It was a complete blindside. We called The Economist and
complained vigorously about its failure to contact us and get our perspective. The
Economist would come our way in understanding the folly of Basel
II."
By 2009, The Economist and other highly respected and authoritative
periodicals gathered the courage to question whether capital had been adequate
before the bust. The great nineteenth-century historian Jacob Burckhardt told
his students history has no method but you must be able to read. This is true
of any subject: a word, a phrase, a puzzling superlative (e.g.: The (Always)
Brilliant Larry Summers), are signals there is a skunk present.
Moving to a skunk that stinks, on December 5, 2013, Bloomberg TV introduced
Sir Alan Greenspan, 2001 recipient of the Enron Prize for Distinguished
Public Service, thusly: "Former Fed Chairman Alan
Greenspan knows a thing or two about bubbles because back in 1996 he saw the
signs of an overvalued market, coining the term 'irrational exuberance.' Just
days after his speech, stocks fell. The dot.com bubble began to burst. He joins
us right now...."
Should this Greenspan reconstruction gain traction, the ex-chair may
succeed Janet Yellen.
The detached but diligent observer might deduce this bewildering
introduction as follows: Alan Greenspan received a large advance from his
publisher for a book he is flogging (if memory serves correctly: I am God
and You are Not). In the book world, the size of the advance meets, in
exact proportion, the media coverage bestowed upon the author. It would not do
for the Bloomberg TV hostess, who looked as though she was in kindergarten when
His Holiness proclaimed "irrational exuberance," to note the
spineless Fed chairman wet his pants when Larry Lindsay, Phil Gramm, and Jim
Bunning subsequently (after the "irrational exuberance" speech) told
him to "put up or shut up," the forensic details may be found on
pages 160-164 of Panderer
to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left
a Legacy of Recession
It is a close run thing to compare the forecasts of Greenspan and the
soon-to-depart Fed Chairman Ben S. Bernanke. A large research team may discover
there really was a moment when one of the two was correct. Past performance
does not inhibit the man. Greenspan recently told some interviewer that stocks
are "very cheap." To Bloomberg on December 5, he made no such claim,
but predicted "we're on the edge of a significant rise in long-term rates.
[They are] significantly lower than they ordinarily would be ... That obviously
is a result of QE 1,2,3."
With this degree of backstabbing, maybe he'll get Bernanke fired and grab
the throne before Yellen gets her chance.
The reasonable investor may think "very cheap" and "QE
1,2,3" are a contradiction. This may not be true in the world of Alan
Greenspan. (Leaving Him aside, it is one reason to think the stock market is in
a bubble. There are about 212 others, back to Greenspan.)
As Fed chairman, he cut rates when he should not have (post-LTCM, for
example), he raised them when it too late (1999) and cut them to compensate for
his earlier errors (2000). With reference to his "very cheap" and
"QE 1,2,3" TV observations, Greenspan kept raising the Fed funds rate
from mid-1999 until May 2000. From the time the FOMC started raising
rates until March 2000, the Nasdaq 100 rose from around 2000 to 5000. Thus, to
Greenspan, he was holding the tiller when rates rose and the stock market
entered a terminal bubble: evidence that raising rates may not halt a runaway
stallion.
The Nasdaq then fell to 3200 (on May 20, 2000), a loss of 36%. On that
date, Greenspan raised - not lowered - the fed funds rate by
0.5%. The Nasdaq 100 then fell another 26% through the end of 2000. Possible
interpretations (re: Greenspan) include: (1) by May, the damage of choking
credit had been done (the Fed contracted the monetary base by 20% in the first
seven weeks of 2000), so raising rates was incidental to the stock market's
continued plunge, (2) raising rates caused the market to sell off another 26%
(this would be consistent with fears that if the Fed "tapers,"
markets will collapse), or (3) the stock market was so overpriced, once it broke,
all of the corporate concerns that had been brushed aside were
front-and-center. (To distinguish: cutting the money supply by 20% is quite
different from simply reducing the amount of money printed from, for instance,
$85 billion to $80 billion a month. That is not to say the effect would differ,
given how bubbles depend on ever-expanding gobs of credit.)
This data from "musty archives" (see speech, AG, August 30, 2002)
is mentioned not to bury Greenspan, nor to praise him, but to show how the
advice and calculations of Wall Street strategists may not produce the
cause-and-effect relationships proposed.
Greenspan (Bloomberg TV) went on to say Bitcoin is in a bubble, of which,
if he knows nothing, leaves us equally ignorant. His reason for making the
claim was another condemnation of central banking: "Currencies that [are]
exchangeable have to be backed by something. When we were on the gold standard,
gold and silver had intrinsic value and people would be willing to exchange
their goods and services for gold and silver and wouldn't ask any
questions."
Now that he's outside the federal bureaucracy, Greenspan sold the 40+
years, central-banking monetary standard down the river.
A final note, from the Wall Street Journal, December 6, 1941:
"Likelihood of a continuation of United States-Japanese discussions
bolstered domestic commodity markets yesterday. Cotton traders apparently
derived considerable encouragement from the latest developments in the
U.S.-Japanese situation."
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