"While everyone enjoys an economic party the long-term costs of a bubble to the economy and society are potentially great. They include a reduction in the long-term saving rate, a seemingly random distribution of wealth, and the diversion of financial human capital into the acquisition of wealth. The case for a central bank ultimately to burst that bubble becomes overwhelming. I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights.”
Larry Lindsey,
FOMC Minutes, September 24, 1996
"I recognise that there is a stock market bubble problem at this point, and I agree with Governor Lindsey that this is a problem that we should keep an eye on.... We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.”
Alan Greenspan,
FOMC Minutes, September 24, 1996
"Where a bubble becomes so large as to pose a threat the entire economic system, the central bank may appropriately decide to use monetary policy to counteract a bubble, notwithstanding the effects that monetary tightening might have elsewhere in the economy.
But how do we know when
irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability."
Alan Greenspan,
Speech to the American Enterprise Institute, December 5, 1996
"In 1999 I started wondering what Robert Rubin might have said to Alan Greenspan in a private meeting in 1997 to cause him to reverse his policy bias shortly after his famous "irrational exuberance" speech. Greenspan embraced the monetary easing that led to the tech bubble, and joined the fight against regulation of derivatives, and the repeal of Glass-Steagall, in which the Fed was absolutely instrumental."
Jesse,
Phony Financial Reform, 4 April 2010
"In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.
The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous. Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000–2001, he helped inflate the housing bubble.
There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history—a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight."
Joseph Stiglitz,
Capitalist Fools, 2009
"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission [CFTC] — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"
PBS Frontline,
The Warning, 2009
"I first met Alan Greenspan in 1948 when we both attended the New York University School of Commerce, Accounts and Finance. I have, therefore, known Dr. Greenspan for more than 50 years.
One of the absolute lies about him is that he retired from his consulting business a wealthy man. Absolutely and totally untrue. He had a horrible record on forecasting the American economy. When he closed down his economic consulting business to go on the Board of the Federal Reserve he did so because he had no clients left and the business was going under. When he closed down he did not have a single client left on a retainer basis. His only source of income was his speech making.
The driving force that may push Greenspan more than anyone or himself realizes is that he graduated from the Bronx High School of Science and that his peers included one Henry Kissinger and other famous politicians of about his age."
Pierre Rinfret, Economist, Presidential Advisor, 2004
"The influential Greenspan was an ardent proponent of unfettered markets. Born was a powerful Washington lawyer with a track record for activist causes. Over lunch, in his private dining room at the stately headquarters of the Fed in Washington, Greenspan probed their differences. “Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying. “What is there not to agree on?” Born says she replied. “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,” she recalls. Greenspan, Born says, believed the market would take care of itself."
Rick Schmitt,
Prophet and Loss, Stanford Magazine, March 2009
"It comes as a surprise to many people that, despite the fiasco at Citigroup and his role in causing the subprime mess, Rubin remains inside the circle at the White House. Nearly two decades after first migrating to Washington, he apparently is still calling the shots of U.S. financial and economic policy with the full support of President Barrack Obama.
Working through his favorite marionettes, Treasury Secretary Tim Geithner and Economic Policy Czar Larry Summers, most recently Rubin managed the defense of Wall Street following the great crisis. No matter what Secretary Geithner says or when he says it in public, you can be sure that those utterances have the full knowledge and approval of his handler Larry Summers and their common political owner and sponsor, Robert Rubin."
Chris Whalen,
The Institutional Risk Analyst, 29 June 2010
"The visitor logs through a request with the Clinton Presidential library showed Epstein first visiting the White House on Feb. 25, 1993 – a little more than a month after the Democrat first took office. During that visit, his destination was listed as 'WW' — apparently the West Wing – and his invitation was issued by 'Rubin,' according to the report."
Mark Lungariello,
Epstein visited Clinton White House at least 17 times, NY Post, 2 December 2021
"It’s not that the former Fed boss Greenspan was incompetent
that is remarkable. Incompetence is common enough after
all, even in important jobs. What’s remarkable is that so
many people don’t seem, even now, to get it. Do people
just believe high-quality self-justifying blarney? Or is
it just that they apparently want to believe that critical
jobs in a great country attract great talent by divine right. Sometimes, of course, they do, but sometimes the most
important jobs – even that of a presidency or a Fed boss
– end up with mediocrities."
Jeremy Grantham,
Immoral Hazard, 25 April 2008
"If any single person is most responsible for the financial crisis, it’s Alan Greenspan. He presided over a Fed that lowered interest rates to zero (adjusted for inflation) but failed to prevent banks from using essentially free money to speculate wildly. You do not have to be a brain surgeon to understand that if money is free, banks will take it and lend it out. And if oversight is inadequate, the banks will lend the money to anyone who can stand up straight and to many who cannot. The result will be a giant subprime lending bubble that will burst.
If any three people are most responsible for the failure of financial regulation, they are Greenspan, Larry Summers, and my former colleague, Bob Rubin. In 1999 they advised Congress to repeal the Glass-Steagall Act, which since 1933 had separated commercial from investment banking. By 1999, Wall Street was salivating over such a repeal because it wanted to create financial supermarkets that could use commercial deposits to place bets in the financial casino. That would yield the Street trillions.
At the same time, Greenspan, Summers, and Rubin also quashed the efforts of the Commodity Futures Trading Corporation to regulate derivatives, when its director began to worry that derivative trading already was getting out of control."
Robert Reich,
Why the Economy Is So Out of Whack, Christian Science Monitor, 6 April 2010
Alan Greenspan has passed on. He is a child of God, and I remember him in my prayers. But as the economist Joseph Stiglitz says in the quote above:
"Behind the debates over future policy is a debate over history — a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight."
The tenor of the turn of the century was deregulation of the financial system, overturning the protections that were put in place during the Great Depression. PBS had several excellent documentaries on the financial crisis and its causes including The Warning and The Long Demise of Glass-Steagall among others.
I lived and traded through that entire period, and was watching events develop very carefully from the late 1990s until the present.
What concerns me is that the first and second asset bubbles were not accidents, or well-intentioned mistakes in judgement, or reliance on faulty economic theories.
In the 1990s the people at the Fed and most competent economists knew what was happening. And they stood by and let it happen, many of them infamously cashing in. And the same thing happened in the financial crisis of 2008 that was even more fully developed, and willful.
And the same thing is happening again, now. And it will leave a mark.
I am reminded of an old engineering maxim that was common when I was a boy systems engineer in the 1980s.
Great designs have linear consequences. Bad designs have exponential consequences.
Given the design of our current financial and political system, it looks like rough seas ahead, mateys.
Stocks corrected a bit today, after the recent failed rally.
SpaceX has fully cratered back to the IPO price.
The 'smoothing' that was done to bring that IPO out was fairly impressive. It reminded me of the bad old days on the Street.
It's a slightly different environment now on the Street and in politics. They are emboldened.
Gold and silver were pounded down again, and the Dollar continued to edge higher.
The Dollar 'strength' is really euro weakness.
VIX popped back up from its recent lows.
Bitcoin fall back down to the bottom of its trading range. Wash, rinse, repeat.
The chart below shows the enormous concentration of wealth in the hands of a very few individuals in the United States during this era of Asset Bubble economics.
It is a wealth transfer. As Dean Baker put it in 2014:
"The problem of the last three decades is not the 'vicissitudes of the marketplace,' but rather deliberate actions by the government to redistribute income from the rest of us to the one percent."
Until there is meaningful reform, there will be no balance in the system, and no sustainable recovery.
This reminds me of the two previous bubbles and busts. A feeling of helplessness as otherwise good people are urged by the worst of us to throw their futures away.
A greedy herd is surging forward, with the intensity of biblically possessed swine, plunging obsessively towards the abyss.
Try not to get in their way. Help where you can.
There is always room for hope.
Have a pleasant evening.
