Sunday, November 12, 2006

Dr. Strangelove or: How Greenspan Learned To Stop Worrying And Love The Bubble.


Given the obvious pressure that the Chairman of the United States Federal Reserve must face while executing his duties, its small wonder that Alan Greenspan, now retired, is starting to show some signs of the past strain.

It’s like an economist’s equivalent of post-traumatic stress disorder.

Just picture yourself holding the fate of the economy in your hands, year after year, knowing all the while that one false move and entire strata of the American population will be dining on Raman Noodles and Little Debbies.

Not to mention the constant and intense scrutiny.

Imagine having to say “I have found no greater satisfaction than achieving success through honest dealing and strict adherence to the view that, for you to gain, those you deal with should gain as well.” just to super-size your fries.

That just can’t be good for the human psyche.

As a result, Greenspan’s recent skittish ramblings should really come as no surprise.

First, witness the statement he made that appears to have greatly invigorated the Bulls on Wall Street leading to a truly spectacular rally in October.

“I suspect that we are coming to the end of this [housing] downtrend… There is a good chance of coming out of this in good shape… I don't know, but I think the worst of this may well be over”

Then, later in the month, when asked if he thought that dropping the Fed funds rate to 1% after the collapse of the dot-com bubble could have contributed to inflating the now even more ominous housing bubble, Greenspan responded:

"I don't think the boom came from a 1 per cent Fed funds rate or from the Fed's easing. It came from the collapse of the Berlin Wall…. [which] brought billions of cheap labourers on to the scene. This was highly disinflationary… real asset prices, like house prices, rose dramatically."

That one is actually not so far off as anyone who has lived in the bubbliest areas in the US in recent years can surely attest to the dramatic influx of East German laborers. You know ladies, the ones who are always whistling and shouting “Mir zeigen, was du Baby hast!!” as you pass by the job site.

Now though, it seems Greenspan is starting to turn back a little on his prior statements adding earlier this month that, for housing:

“This is not the bottom, but the worst is behind us”

Possible translation: “As we continue to head towards the worst levels of the current downturn, the worst that we have seen may still be bested by an even greater degree of worsening declines.”

Even more recently, Greenspan added this reasonably unambiguous outlook for the US economy.

"The economy is obviously going through a significant slowing period, which as best I can tell is more than likely temporary,"

Hmm… Although, it is hard to tell whether you should hang your hat on the “significant” or the “temporary”… Oh well, hopefully it’s just more accurate than the following outlook that Greenspan offered his Fed colleagues in August of 1990, at roughly the exact start of the 90’s recession (July-Q3 1990 to March-Q1 1991):

"I think there are several things we can stipulate with some degree of certainty; namely, that those who argue that we are already in a recession I think are reasonably certain to be wrong,"


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