The “Maestro” Blows Smoke To Deflect Blame from His Willful Ignorance

Alan Greenspan spoke to the WSJ about his new book & both seem to be an attempt to launder his career that ended on a rather dubious note as architect of the housing “bubble” that brought on the Great Recession. His masterly manipulations of interest rates massively under-priced risk & artificially-cheap credit sparked an artificial boom that pumped air into the prices of various assets & commodities.

The rot began on Sir Alan’s watch in 1997 when he was rolled by Robert Rubin, then US Treasury Secretary, to flood global capital markets with liquidity after a credit crunch in financial market in countries in East and Southeast Asia leading to exchange rate meltdowns. Rubin, an insider whose expertise is “fixing deals” rather than understanding how markets function, insisted that the inherent instability of capital markets made it necessary to intervene.

Doubtless, the good Treasury Secretary was just as worried about his pals on Wall Street as when he helped engineer similar interventions to the Tequila Crisis of 1994. As it is, much of the high-interest bearing Mexican debt was distributed by Rubin’s former firm, Goldman Sachs, or was being held by other Wall Street financial interests. In turn, a controversial use was made of the US Treasury’s Exchange Stabilization Fund (along with other assistance from IMF).

As a keen observer of Asian economies prior to the 1997 debacle there, it was my impression that propping up Mexico’s “Tesobonos” created “moral hazard” in providing precedence for taxpayers being put on the hook for financial-sector misbehavior. Indeed, it could be said that the response to the “Tequila Crisis” provided a template for bail-outs since then, including the TARP in the aftermath of the 2007 housing crash.

It is unsurprisingly that Greenspan deflects blame from central banks, & by implication himself, by conjuring up explanations for bubbles based on “pop-psychology”. In his interview he adds “fear” as a human element to join his famous quip about “irrational exuberance” to explain what he views as part of mass hysteria that supposedly drove housing or other asset prices to unsustainable levels.

Of course, a good & honest economist would turn to economic explanations for “bubbles” available in Austrian Business Cycle Theory (ABCT). It turns out that ABCT lays the blame squarely at the feet of Sir Alan & his ilk that would play god with money & interest rates to provide the fuel that pumps air into asset or commodity bubbles.

Perhaps Greenspan’s greatest economic sin was his guise as an omniscient “central planner” to engage in the equivalent of price-fixing to set interest at increasingly-absurd low rates. In so doing, it set into motion a variety of distortions that even an undergraduate student of economics would have warned against.

For his part,, Greenspan & his successor Ben Bernanke, are responsible for one of the most massive destruction of wealth in the history of mankind. And by introducing “financial repression” to keep interest rates far below market (“natural”) rates, income disparities have widened in favor of financial sector insiders & those with the means to leverage their debts. With so few new loans made to start-up firms, labor remains in excess supply, keeping down real wages increases so that the disparity looks even worse.

And so long periods of artificially-low interest rates also prompted a cycle of economic “financialization” whereby resources were diverted away from the real sector into the banking sector & to facilitate the ballooning of sovereign debt around the world as other central bankers joined the game.

As it is, there has been very little growth in bank loans to the private-sector since 2007. This is because bankers find lending to governments to be less risky & to be cheaper since there is no need to hire loan officers to evaluate loan requests or collateral.

The Fed policy of hyper-low interest rates provided liquidity that drove down the returns on cash, so that investors sought other assets to gain higher income, driving up the value of almost every class of assets.

Of equally destructive force is the impact of under-pricing credit invites
interest rates to artificially-low levels will cause distortions in the production structure of the private economy. Pumping newly-printed money and cheap credit into the economy provide funding for weak business plans with low rates of return that would not be able to secure financing at higher interest rates.

Indeed, allowing access to borrowing at temporarily-cheap credit will doom many business ventures with low rates of profitability that will be washed away in a tide of rising credit costs. This is because it is impossible for interest rates to be suppressed forever without either sparking massive increases in consumer & producer prices.

Alas, this is all likely to end very badly once expectations shift towards higher interest rates, causing a rapid reversal from inflated valuations that will wipe out enormous amounts of capital.

It might be said that Alan Greenspan is a either a heinous villain that willfully sought to weaken the US economy & destroy the credibility of the dollar or he is so impervious to logic that he is a …(the reader is invited to fill in their own noun here)… .

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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