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Dumping On Alan Greenspan

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March 22, 2010

On Friday, March 19, former Federal Reserve chair, Alan Greenspan appeared before the Brookings Institution to present his 48-page paper entitled, “The Crisis”.  The obvious subject of the paper concerned the causes of the 2008 financial crisis.  With this document, Greenspan attempted to add his own spin to history, for the sake of restoring his tattered public image.  The man once known as “The Maestro” had fallen into the orchestra pit and was struggling to preserve his prestige.  After the release of his paper on Friday, there has been no shortage of criticism, despite Greenspan’s “enlightened” change of attitude concerning bank regulation.  Greenspan’s refusal to admit the Federal Reserve’s monetary policy had anything to do with causing the crisis has placed him directly in the crosshairs of more than a few critics.

Sewell Chan of The New York Times provided this summary of Greenspan’s paper:

Mr. Greenspan, who has long argued that the market is often a more effective regulator than the government, has now adopted a more expansive view of the proper role of the state.

He argues that regulators should enforce collateral and capital requirements, limit or ban certain kinds of concentrated bank lending, and even compel financial companies to develop “living wills” that specify how they are to be liquidated in an orderly way.

*   *   *

. . . Mr. Greenspan warned that “megabanks” formed through mergers created the potential for “unusually large systemic risks” should they fail.

Mr. Greenspan added:  “Regrettably, we did little to address the problem.”

That is as close as Greenspan came to admitting that the Federal Reserve had a role in helping to cause the financial crisis.  Nevertheless, these magic words from page 39 of “The Crisis” are what got everybody jumping:

To my knowledge, that lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble.

The best retort to this denial of reality came from Barry Ritholtz, author of Bailout Nation.  His essay entitled, “Explaining the Impact of Ultra-Low Rates to Greenspan” is a must read.  Here’s how Ritholtz concluded the piece:

The lack of regulatory enforcement was a huge factor in allowing the credit bubble to inflate, and set the stage for the entire credit crisis.  But it was intricately interwoven with the ultra low rates Alan Greenspan set as Fed Chair.

So while he is correct in pointing out that his own failures as a bank regulator are in part to blame, he needs to also recognize that his failures in setting monetary policy was also a major factor.

In other words, his incompetence as a regulator made his incompetence as a central banker even worse.

Paul La Monica wrote an interesting post for CNN Money’s The Buzz blog entitled, “Greenspan and Bernanke still don’t get it”.  He was similarly unimpressed with Greenspan’s denial that Fed monetary policy helped cause the crisis:

This argument is getting tiresome.  Keeping rates so low helped inflate the bubble.

*   *   *

“The Fed wasn’t the sole culprit.  But if not for an artificially steep yield curve, we probably would not have had a global financial crisis,” said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala.

“Greenspan and Bernanke are missing the point.  It all stems from monetary policy,” Norris added.  “If you give bankers an inducement to lend more than they ordinarily would they are going to do so.”

From across the pond, Stephen Foley wrote a great article for The Independent entitled, “For the wrong answers, turn to Greenspan”.  He began the piece this way:

The former US Federal Reserve chairman, the wizened wiseman of laissez-faire economics, shocked us all — and probably himself — when he told a congressional panel in 2008 that he had found “a flaw in the model I perceived is the critical functioning structure that defines how the world works, so to speak”.  He meant that he had realised banks cannot be trusted to manage their own risks, and that markets do not smoothly self-correct.

But instead of taking that revelation and helping to point the way to a new, post-crisis financial world, he has shuddered to an intellectual halt.  It is the same intellectual stop sign that Wall Street’s bankers are at.  The failure to move forward is regrettable, dangerous and more than a little self-serving.

These reactions to Greenspan’s paper are surely just the beginning of an overwhelming backlash.  The Economist has already weighed in and before too long, we might even see a movie documenting the Fed’s responsibility for helping to cause The Great Recession.

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Where The Money Is

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June 1, 2009

For the past few months we have been hearing TV “experts” tell us that “it’s almost over” when discussing the Great Recession.  Beyond that, many of the TV news-readers insist that the “bear market” is over and that we are now in a “bull market”.  In his new column for The Atlantic (named after his book A Failure of Capitalism) Judge Richard A. Posner is using the term “depression” rather than “recession” to describe the current state of the economy.  In other words, he’s being a little more blunt about the situation than most commentators would care to be.  Meanwhile, the “happy talk” people, who want everyone to throw what is left of their life savings back into the stock market, are saying that the recession is over.  If you look beyond the “good news” coming from the TV and pay attention to who the “financial experts” quoted in those stories are … you will find that they are salaried employees of such companies as Barclay’s Capital and Charles Schwab  … in other words:  the brokerages and asset managers who want your money.   A more sober report on the subject, prepared by the National Association for Business Economics (NABE) revealed that 74 percent of the economists it surveyed were of the opinion that the recession would end in the third quarter of this year.  Nineteen percent of the economists surveyed by the NABE predicted that the recession would end during the fourth quarter of 2009 and the remaining 7 percent opined that the recession would end during the first quarter of 2010.

Some investors, who would rather not wait for our recession to end before jumping back into the stock market, are rapidly flocking to what are called “emerging markets”.  To get a better understanding of what emerging markets are all about, read Chuan Li’s (mercifully short) paper on the subject for the University of Iowa Center for International Finance and Development.  The rising popularity of investing in emerging markets was evident in Fareed Zakaria’s article from the June 8 issue of Newsweek:

It is becoming increasingly clear that the story of the global economy is a tale of two worlds.  In one, there is only gloom and doom, and in the other there is light and hope.  In the traditional bastions of wealth and power — America, Europe and Japan — it is difficult to find much good news.  But there is a new world out there — China, India, Indonesia, Brazil — in which economic growth continues to power ahead, in which governments are not buried under a mountain of debt and in which citizens remain remarkably optimistic about their future.  This divergence, between the once rich and the once poor, might mark a turn in history.

*    *    *

Compare the two worlds.  On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. America is having trouble selling its IOUs at attractive prices (the last three Treasury auctions have gone badly); its largest state, California, is veering toward total fiscal collapse; and its budget deficit is going to surpass 13 percent of GDP —  a level last seen during World War II.  With all these burdens, even if there is a recovery, the United States might not return to fast-paced growth for a while.  And it’s probably more dynamic than Europe or Japan.

Meanwhile, emerging-market banks are largely healthy and profitable.  (Every Indian bank, government-owned and private, posted profits in the last quarter of 2008!)  The governments are in good fiscal shape.  China’s strengths are well known — $2 trillion in reserves, a budget deficit that is less than 3 percent of GDP — but consider Brazil, which is now posting a current account surplus.

On May 31, The Economic Times reported similarly good news for emerging markets:

Growth potential and a long-term outlook for emerging markets remain structurally intact despite cyclically declining exports and capital outflows, a research report released on Sunday said.

According to Credit Suisse Research’s latest edition of Global Investor, looking forward to an eventual recovery from the current crisis, growth led by domestic factors in emerging markets is set to succeed debt-fuelled US private consumption as the most important driver of global economic growth over coming years.

The Seeking Alpha website featured an article by David Hunkar, following a similar theme:

Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets.

On May 29, The Wall Street Journal‘s Smart Money magazine ran a piece by Elizabeth O’Brien, featuring investment bargains in “re-emerging” markets:

As the U.S. struggles to reverse the economic slide, some emerging markets are ahead of the game.  The International Monetary Fund projects that while the world’s advanced economies will contract this year, emerging economies will expand by as much as 2.5 percent, and some countries will grow a lot faster.  Even better news:  Some pros are finding they don’t have to pay a lot to own profitable “foreign” stocks.  The valuations on foreign stocks have become “very, very attractive,” says Uri Landesman, chief equity strategist for asset manager ING Investment Management Americas.

As for The Wall Street Journal itself, the paper ran a June 1 article entitled: “New Driver for Stocks”, explaining that China and other emerging markets are responsible the rebound in the demand for oil:

International stock markets have long taken their cues from the U.S., but as it became clear that emerging-market economies would hold up best and rebound first from the downturn, the U.S. has in some ways moved over to the passenger seat.

Jim Lowell of MarketWatch wrote a June 1 commentary discussing some emerging market exchange-traded funds (ETFs), wherein he made note of his concern about the “socio-politico volatility” in some emerging market regions:

Daring to drink the water of the above funds could prove to be little more than a way to tap into Montezuma’s revenge.  But history tells us that investors who discount the rewards are as prone to disappointment as those who dismiss the risks.

On May 29, ETF Guide discussed some of the exchange-traded funds focused on emerging markets:

Don’t look now, but emerging markets have re-discovered their mojo.  After declining more than 50 percent last year and leading global stocks into a freefall, emerging markets stocks now find themselves with a 35 percent year-to-date gain on average.

A website focused solely on this area of investments is Emerging Index.

So if you have become too risk-averse to allow yourself to get hosed when this “bear market rally” ends, you may want to consider the advantages and disadvantages of investing in emerging markets.  Nevertheless, “emerging market” investments might seem problematic as a way of dodging whatever bullets come by, when American stock market indices sink.  The fact that the ETFs discussed in the above articles are traded on American exchanges raises a question in my mind as to whether they could be vulnerable to broad-market declines as they happen in this country.  That situation could be compounded by the fact that many of the underlying stocks for such funds are, themselves, traded on American exchanges, even though the stocks are for foreign corporations.  By way of disclosure, as of the time of writing this entry, I have no such investments myself, although by the time you read this  . . .   I just might.

Update: I subsequently “stuck my foot in the water” by investing in the iShares MSCI Brazil Index ETF (ticker symbol: EWZ).  Any guesses as to how long I stick with it?

June 3 Update: Today the S&P 500 dropped 1.37 percent and EWZ dropped 5.37 percent — similar to the losses posted by many American companies.   Suffice it to say:  I am not a happy camper!  I plan on unloading it.


Revenge Of The AstroNerds

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April 20, 2009

I used to be an AstroNerd.  Back in the mid-1980s, I was a member of the Chicago Astronomical Society.   On the second Friday of every month, I would attend the monthly meeting at 7 p.m.  We would usually see slides of the spectacular space pictures taken by an astronomer who had the opportunity to use the telescope at some major observatory and there would be a discussion period.  Back then, the launch of the Hubble Space Telescope seemed as though it would never happen because of the tragedy involving the Challenger space shuttle.  At the Chicago Astronomical Society meetings, I was amused by the fact that some of the members were outraged because manufacturers of “hobbyist” telescopes (such as Celestron and Meade) were introducing new scopes, driven by a hand-held computer, allowing the user to view dozens of different celestial objects over the course of an hour.  These complainers had been used to working on calculations as to where to find some binary star or nebula they wanted to see and spending almost the entire night trying to find it.  Suddenly, any spoiled brat with two thousand bucks to spend, could get involved in astronomy with a much greater reward.  To the old-timers:  this was cheating.  At the end of each meeting, I would walk home from the Adler Planetarium and watch Miami Vice.  Although I have yet to purchase a really nice Celestron, I eventually did move to Miami, where there is so much humidity and city light, you can only see a small handful of stars even on a clear, “winter” night.  To escape the reflected urban light, some people take their telescopes out to the Everglades and feed themselves to the alligator-sized mosquitoes.  Others risk death by driving along the two-lane, Overseas Highway (the head-on collision capitol of the world) to go sky-watching in the Florida Keys.

Last week, I was amazed by the television program, 400 Years of the Telescope, broadcast on PBS.   (It’s also available on DVD at the above link.)  I found it shocking that currently, there are a number of absurdly enormous earthbound telescopes under construction.  Apparently, computer technology can be used to enhance the images from these scopes to rival the views from the Hubble.  As for the Hubble, I was surprised to learn that the numerous repairs to that device, beginning with the heroic job by astronaut Story Musgrave, actually included upgrades.  The current image quality from the Hubble is now “hundreds of times better” than its designers ever anticipated.  An example is this photograph of the Orion Nebula taken in 2006.

Given our current economic crisis, astronomy and space exploration are having more trouble than ever obtaining funding.   An example of this is discussed in the current (May) issue of The Atlantic.  (As an aside, this issue has three great articles about the economy here, here and here.)  Thomas Mallon wrote an article about the current effort by a number of scientists and Carl Sagan’s widow, Ann Druyan, to develop and launch a privately-funded spacecraft that would be propelled by sunlight.  They anticipate that this concept could eventually be used for interstellar flight.  As Mallon pointed out, NASA will soon be out of the business of launching people into space, with no viable plan on the drawing board to continue doing so:

Between the shuttle’s planned retirement in 2010 and a new system’s development, the U.S. government will have to rely on the old Soviet Soyuz to get crews and supplies up to the International Space Station.  Worse, the first of our own new launch vehicles, Ares 1, is already beginning to look unreliable, at least in tests.  American politicians now mostly avoid the old conditional trope “If we can put a man on the moon” — because we can’t, not anymore.

Mallon explained that Ann Druyan has found it difficult obtaining funding because these days, the people with the enthusiasm for space exploration and the money — are using it to pay their own fare for a ride into space:

The Discovery Channel did put up a quarter million dollars to jump-start the renewed effort, and she has her fingers crossed for a few big potential donors she can’t really talk about.  Even so, she can’t get over the general timidity and lack of imagination she keeps encountering, and she’s particularly aghast at the scads of cash some ego-tripping big-money men seem willing to spend on personal space tourism:  “Isn’t the whole planet enough for them?”  Google’s Sergey Brin — whose company the project also appealed to, unsuccessfully, years ago — is yet another billionaire who hopes to romp around in orbit.

Although The Great Recession is having an attenuated impact on the super-rich, its consequences for society as a whole will be incalculable if too much scientific research is put on “hold” indefinitely.  Let’s hope that some billionaires rise to the occasion and save us from falling into a dark age of scientific stagnation.  Come on, Bill Gates  —  give your fellow nerds some help!