Stiglitz: Greenspan and Bush to Blame for the US Crisis

Its difficult to react to an excerpt from an unpublished interview.

Although we strongly agree with what he has said here, we are dumbfounded that there is no mention of the big US banks and Wall Street, who were engaging in serial fraud and corruption of the system going back to Enron and beyond, encouraging accounting fraud and reckless speculation. Greenspan and Bush were obvious figureheads and enablers, having accomplished little or nothing in their private lives before their moment on the stage.

Are we at the point we predicted when the real perpetrators start looking for scapegoats and patsies to toss over the back of the sled to hold off the oncoming pack of wolves?

If so, Greenspan and Bush make a likely pair of shallow boobs to take the fall. But it won't fix anything. And where were all the professors and pundits during the period in which this was all happening? Playing dumb for the most part, or putting out weighty sounding defenses of these offenses for a few pieces of silver.

The scapegoat phase is predictable but fruitless overall. The system must be reformed; the banks must be restrained again. The theft of the public good will continue until this occurs. They will distort every program, pollute every dollar of aid, to their continuing looting of the public trust.

There is a growing call in the US to pull one's money out of the big Wall Street banks. We're not sure about the effective of this, since it keeps the stock and bond markets intact, but its a start. Petitions for redress have been ignored. We've elected the Democrats and they have done far too little, waiting for the safety of a likely Democratic president. So now the time for boycotts has begun it appears.

The system must be reformed. Glass-Steagall must be reinstated. The Wall Street Banks must be restrained from using the public money to finance their private speculations. We must stop privatizing gains and socializing their losses.

Greenspan, Bush to blame for U.S. crisis: Stiglitz
Reuters
Sun Apr 27, 6:48 AM ET

Former Federal Reserve Chairman Alan Greenspan and the government of President George W. Bush were to blame for the U.S. financial crisis, Nobel laureate economist Joseph Stiglitz said in a magazine interview.

"This man (Greenspan) has unfortunately made a lot of mistakes," said former World Bank chief economist Stiglitz, according to a preview of the interview to be published on Monday in profil magazine.

"His first one was to support all the tax cuts which were introduced under Bush -- they didn't stimulate the economy very much ... This task was then transferred more towards monetary policy, though then (Greenspan) created a flood of credits with low interest rates," Stiglitz was quoted as saying.

Earlier in April, Greenspan said in an interview with CNBC television that the U.S. economy was in recession and defended his chairmanship of the U.S. central bank against charges that his policy missteps had laid the groundwork for the crisis.

He said decisions during his charge had been rationally constructed based on evidence at the time.

Stiglitz said Bush's government was also to blame.

"I reproach them, that the economy was not as resilient as it could have been due to the ongoing tax cuts and the huge costs incurred by the war in Iraq," he was quoted as saying.

He said it was a myth that Europe could decouple itself from the United States.

"Especially the weak dollar will continue to hit the European economy hard, because it will make it much harder to export," he said.

(Reporting by Karin Strohecker; Editing by David Holmes)

Greenspan, Bernanke, and Volcker: A Study in Contrasts

Here is an excerpt of an essay from Jeremy Grantham on the last three Fed chairmen that is worth reading.

The information about Alan Greenspan is entirely consistent with information we had received in a long correspondence with Pierre Rinfret before he passed away. Pierre was an economist who knew alan Greenspan from his time at NYU to their positions as colleagues in the Nixon Administration and afterwards.

The complete eight page essay requires a free registration here and can be downloaded here.

Immoral Hazard
Jeremy Grantham

Greenspan, Bernanke, and Volcker: A Study in Contrasts

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. Let us pause here to regret
the absence of Mr. Volcker and wonder what a parallel
Volcker universe would have been like. Just as we can
wonder how much a few votes in Florida or a vote in the
Supreme Court would have changed our world from what
it is today.

Paul Volcker inherited about as big a mess as we have
today. He worked out what he had to do and did it with
unusual lack of concern about what Congress thought of
the necessary pain involved and the number of enemies
he might make. He paid the price for forthright behavior
by being replaced, despite a record for correct and tough
behavior that makes for the most invidious comparison
today. When Volcker was replaced, by the way, he did not
moan and groan but like an old soldier quietly disappeared.
There were no high-profi le announcements about the
economy or any $300,000-an-evening appearances paid
for by financial firms.

Greenspan came onto my radar screen in the late sixties as
a seller of economic and fi nancial advice to the investment
industry. To be brutally honest, he was considered run of
the mill by anyone I knew then or have met later who
knew his service then.

His high point in most memories,
certainly mine, was a famous call in January 1973 that, “it
is rare that you can be as unqualifiedly bullish as you now
can,” a few days before a market decline of over 60% in
real terms, second only to the Great Crash in a century,
accompanied also by a bitter recession.

This was one of the first of a long line of terrible prognostications for
which he has remarkably not been remembered, except
by a handful of us amateur historians. Then in the mid
seventies he disappeared into some government job, of
which I was barely aware, until he re-emerged with a bang
in 1987, without as far as I can find having done anything
documentably very well. And we can agree that at least
occasionally people can indeed prove their effectiveness
beyond doubt. This was obviously not the first or last
time such appointments were made where a job crying
for proof of character and achievement under pressure is
awarded more for what you might call political skills.

This has indeed not been our finest hour in the U.S. Times
are bad enough, in fact, to make us mourn the American
leadership skills of WWII and the generosity and foresight
of the Marshall Plan. We can all wonder at the incredible
vision, drive, organizational skill, and willingness to
sacrifi ce resources that were required by the Manhattan
Project and compare it to the rudderless or even deliberate
avoidance of leadership of the greatest issues today:
climate change and energy security. We can only wonder
what a Manhattan Project aimed at alternative energy
might have accomplished by now, had it been started 15
years ago.

What we have had in lieu of vision, leadership,
and backbone is a series of easy paths taken.

At the time that Paul Volcker broke the back of inflation in
the early 1980s, the recognition that risk and leverage had
consequences was baked into the pie: if you were to take
excessive risk you had better win the bet. If you missed
the target, the expected result would be more or less total
failure, and that seemed then and for decades earlier a
reasonable law of nature.

Now in contrast we get ready to celebrate the 20th
anniversary of the era of the Great Moral Hazard.
Slowly at first, but with steadily growing
traction, the idea was planted that asset bubbles would
be tolerated, but consequences of their bursting would be
moderated or avoided entirely...

Stiglitz: US Recession May Echo the 1930s

Nobel Winner Stiglitz: U.S. Facing Long Recession
By CNBC.com
25 Apr 2008 02:17 PM ET

The U.S. economy is already in recession -- and may echo the 1930s, Nobel Laureate Joseph Stiglitz said Friday.

"The big question is: how will the government respond?" said Stiglitz, in an interview with CNBC. Stiglitz, a Columbia University professor and 2001 winner of the Nobel prize, detailed his bleak outlook for the American economy.

"This is going to be one of the worst economic downturns since the Great Depression," said Stiglitz.

He explained that main cause of the current situation is historically unique—and thus is befuddling those charged with creating solutions.

Other downturns were primarily caused by excesses in inventories or inflation; but this slowdown is due to the condition of "badly impaired" banks and financial entities, which are unwilling and/or unable to lend capital -- stymieing the very borrowers who usually drive the country back to vitality, Stiglitz said. And the Federal Reserve may have used up its ammunition -- and the faith investors and planners have put in it.

"[The Fed] will be between a rock and hard place. And we're not over-worrying about credit. But [simultaneously], we need to start worrying about the real sector," he said.

And if inflation wasn't the prime recession cause, it's still a menace. The professor points to the two-pronged danger of high oil prices joined by climbing food prices, harming businesses and scaring consumers.

"Oil is particularly bad," as it means that more U.S. dollars "will be going abroad," he said.

The housing downturn is an even worse economic factor than casual observers realized, Stiglitz said. He explained that during the real estate boom, Americans were able to withdraw billions of dollars from their home equity.

"[But] with housing prices coming down, it's going to be difficult to do that anymore," he said -- drying up a spending source. And within that problem, still another complication: people typically spent the money they drew off their home equity on consumption, rather than investment -- garnering no return on the spending.

"The savings rate as we go into the recession is zero. Which means [savings] will go up, " he said—decreasing consumer spending and weakening retail further.

What about the government stimulus package?

"The Bush Administration's response is too little, too late -- and very badly designed," he declared. The amount ostensibly being infused into the economy by tax rebate checks will be a "drop in the bucket" compared to the money being held back and siphoned out by the factors he mentioned.

"If you really wanted to stimulate the economy, increase unemployment insurance," he suggested. (That would require giving money to the less fortunate which is anathema to 'silver spoon specimens' like Bush. - Jesse)

"The president is telling people to go out and get jobs—and there are no jobs for them," he said.

CNBC Interview with Joseph Stiglitz

CalPERS: CEO To Step Down Unexpectedly the Day after the Chief Investment Officer Resigns

The CalPERS CEO is stepping down according to Bloomberg Television. The Chief Investment Officer resigned yesterday to pursue an independent career in 'green investment.'




Calpers Chief Fred Buenrostro May Leave By Year End, People Say
By Dan Levy

April 25 (Bloomberg) -- California Public Employees' Retirement System Chief Executive Officer Fred Buenrostro is planning to leave by the end of the year, according to two people familiar with the matter.

The board is in discussions with Buenrostro about his departure from the largest U.S. public pension fund, known as Calpers, said the people, who declined to be identified. He has been in the job since 2002 and was on its board of directors for 15 years. Calpers has $244 billion in assets.

The executive would be the third top-ranking officer at Calpers to exit this year. Russell Read, Calpers' chief investment officer, said April 23 that he is resigning on June 30 to begin investing in environmental technologies.

Calpers' spokeswoman Pat Macht didn't immediately return a call for comment.

Buenrostro has a bachelor's degree from Pepperdine University and a law degree from the University of Pacific's McGeorge School of Law.

Read quit after overseeing Calpers investment strategy for two years. Chief Operating Investment Officer Anne Stausboll will replace him until a permanent successor is found.

Calpers last year placed its first direct investments in commodities and in February approved putting as much as 3 percent of its investments in raw materials, seeking to take advantage of soaring worldwide prices. The fund is shifting more of its portfolio from stocks and bonds into private equity, real estate and securities that perform well when inflation accelerates.

Calpers, based in Sacramento, earned a 19.1 percent return for the year ended June 30, 2007, according to its most recent annual report, compared with a gain of 18.4 percent on the Standard & Poor's 500 Index of stocks.

The fund had about 60 percent of its portfolio invested in public equity, about 24 percent in bonds and other fixed income, 8 percent in real estate, 6.7 percent in private equity and 1.4 percent in cash equivalents, the report said.


CalPERS' top investment officer stepping down
After just two years, Russell Read quits the state pension post to pursue green investing.
By Tom Petruno, Los Angeles Times Staff Writer
April 24, 2008

The giant CalPERS pension fund is losing its investment chief to the green movement.

In a surprise, Russell Read -- who has been principal investment officer of the California Public Employees' Retirement System for just two years -- told the pension system's board this week that he's leaving June 30.

Read, 44, said in a letter to the board that he was quitting "to pursue my long-standing interest in environmental and clean-technology investing."

He said by phone from a meeting in New Orleans that his plans weren't fully formed.

He isn't sure if he'll try to manage his own investment fund or build a business in some other way. Whatever the model, he said, he wanted to help bring together what he viewed as now "disconnected efforts" worldwide to develop and implement the best green technologies.

"I might have the ability to play a major role in something that I think is of absolute paramount importance," he said.

Read said he hadn't planned to depart CalPERS this soon, but that events in the mushrooming green-investing industry overtook his own timing. "I didn't anticipate [its] rapid development," he said.

Yet Read, who holds a PhD in economics from Stanford University and earned $958,000 at CalPERS last year, knows plenty about green investing. He has long been a private investor in Maine timberland and is involved in a hardwood reforestation project there.

Read has been pushing the $242-billion CalPERS fund, the nation's largest public pension fund, to shift a chunk of its assets away from stocks and bonds and into commodities, such as oil and timberlands, as well as into public-private partnerships that build infrastructure projects.

One new CalPERS' initiative is a 10-year, $600-million commitment to private-equity funds that are focused on investing in companies developing new energy sources, anti-pollution devices, recycling technologies and other green efforts.

Anne Stausboll, CalPERS' assistant executive officer for investments, will take over as interim investment chief, CalPERS said.

Read came to CalPERS from New York-based Deutsche Asset Management.

CalPERS vows to ease market crisis
by Keren Holland 25 April 2008

The California Public Employees’ Retirement System (CalPERS) has vowed to ‘aggressively deploy its capacity’ to alleviate current market disruption brought about by the collapse of the auction rate market.

At its recent investment committee, board members were told CalPERS’ Credit Enhancement Program had received an unprecedented number of enquiries to provide liquidity and credit enhancement for conversions into financing structures such as variable rate demand obligations.

The situation is the result of recent difficulties in the auction rate market, where public finance makes up 50% of the $330bn securities issued.

Auctions for these securities began to fail in February when investors declined to bid because of fears monoline insurers, which backed the debt, were no longer creditworthy, and large investment banks declined to act as bidders of last resort, as they had in the past.

This meant issuers were forced to pay a high penalty interest rate, which CalPERS said was putting an onerous burden on municipalities in California and beyond...

About CalPERS

The California Public Employees' Retirement System (CalPERS) provides pension fund, healthcare and other retirement services for approximately 1.5 million California public employees.

As of October 2007, it owns $254.8 billion worth of stock, bonds, funds, private equity and real estate. It is the largest pension fund in the United States.

CalPERS provides benefits to all state government employees and, by contract, to local agency and school employees. Many California counties and large cities have their own retirement system.

California teachers are covered under CalSTRS (California State Teacher Retirement System), with funds in excess of $179.6 billion.