02/13/2004 Simply Not Credible *

It was rather choppy, but the major indices generally ended the week little changed. The Dow, S&P500 and Utilities posted slight advances. The strongest S&P groups were Oil & Gas Drilling, Steel, and Aluminum. The Transports, Morgan Stanley Cyclical, and Morgan Stanley Consumer indices added about 1%. The Russell 2000 was slightly positive, while the S&P400 Mid-cap index gained 1%. The technology sector was unimpressive. The NASDAQ100 and Morgan Stanley High Tech indices dipped about 1%. The Street.com Internet index was unchanged. The Semiconductors and NASDAQ Telecom indices dropped 2%. The Biotechs’ 2% rise increased 2004 gains to 8%. The financial stocks were generally impressive, with the Broker/Dealers up 3% (up 9% y-t-d). The Banks were slightly positive. With bullion up $6.80, the HUI index added 2%. The Treasury market was strong. Two-year Treasury yields dipped almost 7 basis points to 1.67%. Five-year Treasury yields dropped 10 basis points to 2.98%, while 10-year yields declined 5 basis points to 4.02%. Long-bond yields were about unchanged at 4.92%. Benchmark Fannie Mae mortgage-backed yields sank 11 basis points. There was a new 10-year Treasury note issued this week, so spread calculations are tricky. The 10-year dollar swap spread narrowed 2 to 38.5. The yield on December Eurodollar futures sank 14.5 basis points this week to 1.78%, 32 basis points below the January 29th high. Corporate spreads were mixed, with investment grade spreads little changed. Junk bonds generally recovered some of recent lost ground. Bloomberg tallied $14.6 billion of corporate issuance, the strongest week in a month (weekly avg. of $12.8 billion). Investment grade issuers included Goldman Sachs $2.75 billion, Wal-Mart $1.25 billion, Assurant $975 million, Duke Energy $875 million, CIT Group $750 million, Time Warner $440 million, Con Edison $400 million, MidAmerican Energy $250 million, National City Bank $200 million, Infinity Property & Casualty $200 million, Private Export Funding $200 million, Russel Metals $170 million, John Hancock Global $160 million, Huntington National $150 million, Overseas Shipholding $150 million, Marshall & Ilsley $200 million, Alabama Power $200 million, Georgia Power $150 million, Compass Bank $125 million, and SLM $100 million. Junk bond funds suffered their second straight week of $1 billion outflows (from AMG). All the same, junk Issuers included AES $500 million, Solo Cup $325 million, Pantry $250 million, GCI $250 million, BF Saul REIT $250 million, North Atlantic Trading $200 million, Phillips Van-Heusen $150 million, Erico International $140 million, WII Components $120 million, and North Atlantic Holdings $95 million. A Merrill Lynch junk spread index has widened 36 basis points over the past three weeks. The convert issuance market really came to life this week. Issuers included Solectron $450 million, AMR $300 million, Fluor $300 billion, Citadel Broadcasting $300 million, Sirius Satellite $250 million, Alliant Techsystems $250 million, Dick’s Sporting Goods $250 million, Intermune $150 million, Safeguard Scientific $125 million, and CuraGen $100 million. Foreign dollar debt issuers included Republic of Philippines $1.3 billion, Kredit Wiederfaufbau $1 billion, Ubiquitel $270 million, Banco Mercantil Norte $250 million, and Brasil Telecom $200 million. The ABS market enjoyed a strong week with $12 billion of issuance (from JPMorgan). Year-to-date issuance of $50 billion is running a third higher than comparable 2003. Half of this week’s new ABS was said to be from home equity loan securitizations. February 12 – Dow Jones (Emily Barrett): “Pakistan’s Eurobond launch lived up to high expectations Thursday, as a heavily oversubscribed $500 million deal reopened the international market for the nation’s debt. The bonds priced at par, to pay a coupon of 6.75%, well below initial guidance of 6.875%. ‘The bond offers investors exposure to an improving credit with great scarcity value. Most people were content to buy bonds at the tight end of the range because they were committed to participating,’ said George Niedringhaus, syndicate official at ABN Amro. Pakistan last visited the international debt market in 1999, with $623 million in Eurobonds due 2005. The new bond presented a rare opportunity for investors whose appetite for high-yielding emerging-markets assets has been tested by a heavy $17 billion of new issuance so far this year. Word from the road show was that the order book filled almost immediately, and orders reached $2 billion… the yield on Pakistan’s bond compares closely with Turkey’s dollar bond due 2009. The Turkish bond launched in November last year with a much higher coupon of 11.75%, and currently yields 6.51%.” Freddie Mac posted 30-year fixed mortgage rates declined 6 basis points last week to 5.66%. Fifteen-year fixed rates dropped 7 basis points to 4.96%. One-year adjustable-rate mortgages could be had at 3.57%, down 4 basis points. The Mortgage Bankers Association Purchase application index dipped 4.2% to a one-month low. Purchase applications were, however, up 21% y-o-y, with dollar volume up 37% y-o-y. The Refi index dipped about 5%, while remaining above 3,000 for the fourth straight week. The average Purchase application was for $214,600. The average adjustable-rate mortgage was for $295,800. Broad money supply (M3) declined $8.7 billion for the week of February 2nd. M1 was up less than $1 billion, with Currency up $0.4 billion and Checkable Deposits up $0.2 billion. M2 rose $7.3 billion, as Savings Deposits gained $7.8 billion, Small Denominated Deposits declined about $1 billion, and Retail Money Fund deposits added $0.4 billion. M3 components Institutional Money Fund deposits declined $3.9 billion and Large Denominated Deposits declined $12.9 billion. Repurchase Agreements added $1.8 billion, while Eurodollar deposits dipped $1.5 billion. Fed “custody” Holdings of U.S. Debt, Agencies added $8.6 billion. Since the end of July, “Custody” holdings have surged $193.8 billion, or almost 39% annualized. Total Bank Credit rose $16.2 billion, with 5-week gains of a notable $103.0 billion. Security holdings jumped $18.0 billion, while Loans & Leases dipped $1.7 billion. Commercial & Industrial loans were about unchanged, while Real Estate loans gained $6.5 billion. Consumer loans declined $3.4 billion and Security loans dropped $4.0 billion. Elsewhere, Commercial Paper outstanding jumped $12.7 billion last week. Non-financial CP actually declined $3.9 billion, while Financial CP surged $16.6 billion. Financial CP is up $35 billion since year end. Currency Watch: It was another volatile week in currency markets. The dollar approached record lows against the euro today before reversing. The British pound this week traded to an 11 ½ year high and the Australian dollar to a 7-year high. The dollar index this morning traded below 85, although an afternoon recovery cut its loss for the week to less than 1%. February 10 – The Asian Wall Street Journal (Michael R. Sesit): “Maybe it is about time U.S. and European government officials came clean. When they complain about Asian countries intervening in foreign-exchange markets to keep their currencies from rising against the dollar, they invariably talk about Western companies becoming less competitive and about lost jobs. Rarely, if ever, do they finger the enormous accumulation of foreign-exchange reserves that often accompanies the intervention. Yet, explains Steve Barrow, the expansion of global reserves creates excess liquidity, which in turn is the fuel that feeds financial-market bubbles, and, during the long run, threatens to destabilize the global economy. ‘The rise in reserves that we are seeing right now suggests that the world is on the verge of boom-and-bust cycles that could exceed anything we have seen before,’ says the chief currency strategist at Bear Stearns in London. In aggregate, global reserves first reached $1 trillion during 1991. Eight-and-a-half years later, they had ballooned to $2 trillion. Just three years after that, they rose to $3 trillion. By the end of 2003, the top 11 Asian central banks had accumulated $1.94 trillion in reserves, an increase of $514 billion, or 36%, from a year earlier.” February 10 – Bloomberg (Heather Harris): “European Central Bank Chief Economist Otmar Issing said the euro’s gains improve the prospects for low inflation and there is no point in short-term action by central banks to try and influence exchange rates, German daily Sueddeutsche Zeitung reported. ‘The stronger euro lowers import prices and the prospects for the general price development improve,’ Issing told the newspaper… ‘The best contribution we can make is to inflation-free growth. There is no point in unleashing a short burst of fire.’ Regarding the U.S. budget and current account deficits, Issing said it’s ‘questionable’ how long central banks in Asia will continue to finance U.S. spending. ‘In the long term, investors will question whether they desire a risk premium for their investments.’” Commodity Watch: The CRB index added 2%, and the Goldman Sachs Commodity index jumped 4%. Copper prices rose to the highest level in eight years. Copper is already up 16% y-t-d, with 12-month gains surpassing 60%. From Bloomberg (referencing a Morgan Stanley research report): “The world will produce 426,000 tons less (of copper) than it will use this year, forcing manufacturers to dig deeper into inventories…” Zinc reached a three-year high yesterday. Lumber futures surpassed $380 this week. Lumber prices are up 15% so far this year to the highest level since mid-1999. Crude oil futures (March) jumped better than $2 this week to close at $34.56. February 11 – Bloomberg (Jim Coulter): “Oil demand this year is rising faster than expected as a surging Chinese economy begins to spur growth in surrounding nations, the International Energy Agency said. The Paris-based group, which advises 26 nations on energy policy, boosted its estimate of the rise in oil use this year by 220,000 barrels a day to 1.4 million. Consumption will total 79.9 million barrels a day… Oil inventories in the 30 nations of the Organization for Economic Cooperation and Development are falling, leaving consumers vulnerable, the IEA has said. Stockpiles fell further in December, losing 1.26 million barrels a day, to 2.52 billion.” Global Reflation Watch: February 12 – Bloomberg (Tian Ying): “China’s industrial production grew last month at a record pace, surging as companies such as Siemens AG and BOE Technology Group Co. expand to meet rising demand in the world’s sixth-largest economy. Production rose 19 percent from a year earlier after an 18 percent gain in December…” February 13 – Bloomberg (Tian Ying): “China’s money supply grew in January at its slowest pace in at least 11 months, suggesting government efforts to damp investment may be working. M2, the broadest measure of money supply, grew 18 percent from a year earlier after expanding 20 percent in December…” February 12 – Wall Street Journal (James T. Areddy): “Stepping up China’s efforts to cool down the economy before it overheats, the government has asked banks to cut the pace at which new loans are made this year. But analysts question how well the tactic will work without more flexibility in the exchange rate.” February 12 – Bloomberg (Mayumi Otsuma): “Japanese machinery orders rose 8.1 percent in December, bolstering economists' predictions that growing business investment is fueling growth in the world’s second-largest economy. The greater-than-expected gain in private machinery orders, excluding shipping and utilities, contributed to a record 11.3 percent increase in the fourth quarter.” February 12 – Bloomberg (Shanthy Nambiar): “Indonesia’s fourth-quarter growth was probably the fastest in three years as low interest rates boosted consumer spending… Southeast Asia’s biggest economy probably grew 4.5 percent from a year earlier…” February 12 – Bloomberg (Cherian Thomas): “Indian industrial production accelerated in the first three quarters of the fiscal year after a record harvest put money in farmers’ pockets, spurring demand for appliances made by Electrolux Kelvinator Ltd. and other goods. Production at factories, utilities and mines rose 6.3 percent in the nine months to Dec. 31, from 5.5 percent growth a year earlier… ‘There is intrinsic momentum in the economy and growth is visible,' said Rajeev Karwal, chief executive of Electrolux Kelvinator… ‘Demand in villages and smaller towns are driving growth.’” February 13 – Bloomberg (Andy Mukherjee): “The last piece in India’s growth jigsaw seems to be finally falling into place. On Tuesday, ICICI Bank Ltd., India’s second-biggest lender, said it plans to sell as much as 35 billion rupees ($773 million) worth of new shares, to finance increased lending. The ICICI share sale, which will be the country’s biggest- ever equity offer by a private company, is the clearest signal so far that India’s banks, wading in surplus cash, may finally be lending enough to worry about running out of money.” February 12 – Bloomberg (Francois de Beaupuy): “France’s economy, Europe’s third-largest, expanded 0.5 percent in the fourth quarter from the third, the quickest pace in 1 1/2 years, suggesting export growth made up for a slowdown in consumer spending.” February 11 – Bloomberg (Theophilos Argitis): “Greece’s economy expanded by 5 percent in the fourth quarter from the previous year on increased spending for the 2004 Olympic Games, making the nation the fastest growing in the European Union. The annual growth figure in the fourth quarter matched the pace of the previous three months, the Athens-based Economy Ministry said in a preliminary report. The economy grew 4.7 percent for all of 2003, the fastest rate in 25 years…” February 10 – Bloomberg (Halia Pavliva): “Ukraine’s economy probably will expand faster than earlier expected because of rising exports and strengthening domestic demand, the central bank said. Gross domestic product will grow from 8.5 percent and 9 percent in 2004, faster than earlier expected range of from 6 percent to 6.5 percent, the central bank said at a press conference.” Bubble Economy Watch: Belying hopes that we’d “turned the corner,” December’s Trade Deficit surged to $42.5 billion (up from November’s $38.4 billion), the second-largest on record. Goods Imports jumped to a record $111.1 billion, up 7.6% from one year ago. Goods Exports declined about $800 million for the month to $62.9 billion, though were up an impressive 12.8% y-o-y. Nonetheless, Goods Exports would need to increase 77% to match Goods Imports. For all of 2003, our Trade Deficit surged 17% above 2002’s record to an atrocious $489.4 billion. An early February reading on Consumer Confidence was not encouraging. The University of Michigan index sank an unexpected 10.7 points, giving back most of January’s sharp gain. Gauges of both Current Conditions and the Outlook sank. Weak January auto sales hurt Total Retail Sales (up 5.0% y-o-y), yet it is worth noting that Retail Sales Ex-Autos were up 6.6% y-o-y. Our federal government’s finances are a mess. Last month’s $1.4 billion shortfall was the first January deficit since 1992. It also compares poorly with last year’s $10.6 billion January surplus. Fiscal year-to-date Revenues were up 1.6% to $625.0 billion, while Total y-t-d Spending was up 5.9% to $755.1 billion. The y-t-d deficit was up 33% to $130.1 billion, with tax refund checks destined to quickly push the deficit much higher. Domestic Credit Inflation Watch: From the Bond Market Association’s most-recent Research Quarterly: “New issue activity in the U.S. bond markets topped last year’s record, totaling $6.92 trillion in 2003, an increase of 27.9 percent from the previous record of $5.41 trillion set in 2002. The continued trend of strong debt issuance across most sectors reflects the effects of the low-interest rate environment, increased demand for capital in the corporate sector and continued financing requirements in both the federal government and state and local entities… Long-term federal agencies set a new record in 2003, totaling $1.28 Trillion, up 21.7 percent from the $1.04 trillion issued in 2002… Mortgage-related securities issuance, which includes agency and private-label pass-throughs and CMOs, set yet another record in 2003, totaling $3.2 Trillion, up 39.2 percent from the previous record of $2.30 Trillion in 2002… Issuance of agency mortgage-backed securities increased to $2.13 Trillion in 2003, up 47.6 percent… New Issuance of non-agency MBS increased 50.1 percent in 2003, to $466.9 billion… New (corporate bond) issuance volume grew 13.9 percent, to $743.6 billion, up from $652.7 billion in 2002… New issue volume of non-convertible high-yield debt was especially strong, increasing 113.6 percent during 2003, to $122.9 billion… Issuance in the asset-backed securities (ABS) market set a new record in 2003, totaling $584.2 billion, up 19.4 percent from the previous record of $489.1 billion set in 2002. The increase in new issue activity was led by the growth in the home equity loan (HEL) securitization market, which increased almost 50 percent… Municipal bond issuance (of $452.4 billion) set a record in 2003, topping the previous record of $430.0 billion set in 2002. Gross coupon issuance of U.S. Treasury securities totaled $745.2 billion during 2003, a 30.4 percent increase over the $571.6 billion issued in 2002… The average daily volume of total outstanding repurchase (repo) and reveres repo agreement contracts totaled $4.04 trillion in 2003, a 6.7 percent increase… In excess of $262.7 Trillion in repo trades were submitted by (Government Securities Clearing Corp) participants in 2003, with an average daily volume of approximately $1.1 Trillion… In 2003, foreign investors purchased a net $639.5 billion in fixed income securities as of the end of November, 28.6 percent higher than the net purchase in 2002.” From Freddie Mac’s February Economic & Housing Outlook: “Our models predict another record year of total home sales, on the order of 7.28 million units in 2004. We expect families will take advantage of extremely low mortgage rates and focus on their current living arrangements from both a consumption and investment perspective. By 2005, total sales will ease to 7.24 million units. Similarly, housing starts will be very robust in 2004, coming in near the 2003 level of 1.85 million units… House price appreciation should fair well in 2004, averaging about 6.5%, well above the general rate of inflation. In addition, we increased the third quarter 2003 growth estimate by over two percentage points to 7%, owing to the strength in home sales and refinance volume during the quarter… Residential mortgage debt growth should exceed double digits over the next year, rising by around 12% in 2004.” February 13 – New York Times (Jonathan Fuerbringer): “Americans poured a near record amount into stock mutual funds in January, suggesting that last year’s rebound from a three-year rout had restored investors’ confidence in stocks. But the inflow of $40.8 billion last month may not be as positive as it appears. Some analysts consider it a sign that investors may be too bullish, too willing to expect last year’s enormous gains to be repeated. The mutual fund data show that many investors are jumping into 2003’s best bets, like foreign and smaller company stocks, which have already had big runs.” February 13 – Bloomberg (Liz Willen): “Tuition at some of New York’s top private kindergartens will exceed $26,000 for the first time in September, almost as much as the cost of attending Princeton University and twice the price of the state universities. ‘It’s supply and demand,' said Nina Bauer, a counselor at Ivy Wise Kids, a service that for $5,000 will coach parents on how to prepare four- and five-year-olds for tests and interviews. ‘Wall Street got big bonuses this year. Everyone is just dying to get in. No one has ever once asked me about tuition.’ Parents of the 30,000 students at the city’s private schools are receiving contracts this week showing next year’s tuitions will rise to record levels after five years of annual growth of as much as 7 percent.” February 11 – Dow Jones: “Official results from New Jersey’s Casino Control Commission indicate that gaming revenue in January increased 9.7%, to $366.5 million, from $333.9 million in the same period a year earlier…” Countrywide Financial posted Average Daily Applications of $1.78 billion during January, up a third from December. The Total Pipeline increased 16% during the month to $38.4 billion. Average Daily Applications were down 11% from January 2003, with Non-purchase/refi fundings down 56%. Purchase fundings were up 19% from January 2003 to $9.3 billion. Home Equity fundings were up 41% from 12 months earlier, while Subprime fundings were up 80%. “Adjustable-rate loan production of $9 billion jumped 138% over the month of January 2003 and accounted for 46 percent of total monthly fundings.” Adjustable-rate mortgages accounted for 12% of funding during January 2003. “Total Assets at Countrywide Bank rose 5 percent over the prior month to $20 billion,” and were up 290% y-o-y. February 10 – Reuters (Richard Leong) - Fannie Mae and a consortium of lenders aim to revive a U.S. manufactured housing industry that has been battered in recent years by high loan defaults and a bloated inventory of repossessed homes. ‘We want to strengthen the market for manufactured housing financing, and eliminate predatory and anti-consumer features that have contributed to instability in the marketplace over time,’ Fannie Mae Chairman and Chief Executive Officer Franklin Raines said…Fannie Mae, the biggest buyer of U.S. home loans, and the lending group will make it more affordable to obtain a mortgage to buy a manufactured home, the company said. A consumer could access 30-year financing for such a home with down payments as low as 5 percent. Total Assets expanded $33.3 billion, or 21% annualized, to $681 billion at insurance behemoth AIG Group. Total Assets were up 21% y-o-y. Weekly bankruptcy filings jumped to 30,512, the highest level since November. Monetary Management According to Dr. Greenspan “Fear over US Treasuries sales [by foreigners] misplaced – Greenspan”; “Greenspan – Fed not concerned about weak dollar”; "U.S. consumer debt under control – Greenspan.” These Reuters headlines captured the essence of Greenspan’s Wednesday appearance before the House Financial Services Committee. He downplayed the current account deficit; he downplayed mortgage Credit excess; he downplayed today’s acute economic and financial vulnerability. And our apparently sanguine Fed chairman remains on a roll when it comes to re-writing central banking theory - and making history in the process. “Monetary Management According to Dr. Greenspan” is extraordinarily experimental and radical, as well as being hopelessly flawed. It is, as well, captivating. He remains analytically focused on nebulous (and “experimental”) concepts such as economic and financial “flexibility,” “productivity,” and “conceptual output.” Curiously, however, he chose (out of character) this time to also venture into traditional central banking terrain, with comments on money and Credit. But don’t get your hopes up… From Chairman Greenspan: “In the process of assessing risk, we monitor a broad range of economic and financial indicators. Included in this group are a number of measures of liquidity and credit creation in the economy. By most standard measures, aggregate liquidity does not appear excessive. The monetary aggregate M2 expanded only 5-1/4 percent during 2003, somewhat less than nominal GDP, and actually contracted during the fourth quarter. The growth of nonfederal debt, at 7-3/4 percent, was relatively brisk in 2003. However, a significant portion of that growth was associated with the record turnover of existing homes and the high level of cash-out refinancing, which are not expected to continue at their recent pace. A narrower measure, that of credit held by banks, also grew only moderately in 2003. All told, our accommodative monetary policy stance to date does not seem to have generated excessive volumes of liquidity or credit.” I found the preceding paragraph the most important aspect of Dr. Greenspan’s testimony. “Liquidity does not appear excessive”? “Accommodative policy stance…does not seem to have generated excessive volume of liquidity or credit”? This is Simply Not Credible (yet it is these days quite market-friendly blather). He certainly knows better than to claim M2 as a contemporary indicator of liquidity, and Dr. Greenspan is also well aware that the greatest Credit excesses emanate these days from non-bank sources (GSE, MBS, ABS, Wall Street firms, captive finance, foreign central banks, etc.). As for indicators of excess liquidity, we can begin with collapsed corporate spreads, surging stock prices, major equity fund inflows, the California Real Estate Bubble, $1 Trillion of 12-month mortgage debt growth, record total Credit growth, 4% 10-year Treasury yields, unprecedented marketable debt issuance, record junk and emerging market debt sales, $34 crude oil, surging prices for metals and many commodities, a dollar index near 7-year lows, and rampant speculation in myriad markets at home and abroad. To make matters more interesting, this (specious) testimony follows on the heels of a G7 meeting where there was clearly no meeting of the minds on how to deal with U.S. imbalances. In addition, it is also worth keeping in mind that it follows by only two weeks the dropping of “considerable period.” Our Fed chairman had an opportunity to send a clear signal to the markets and our global partners that the Federal Reserve had commenced a move toward a less excess-inducing policy stance, but did nothing of the sort. Indeed, it was almost as if he was gesturing to the marketplace that it had over-reacted to the removal of “considerable period.” I found myself scratching my head, contemplating the possibility that our faltering currency and the unfolding global Credit/speculative boom are more than agreeable to our radical central bank. In response to a question regarding hedge funds, Dr. Greenspan made further astonishing comments: “I think that hedge funds, which I would define as financial institutions in which investors are only of high income levels -- the value that these institutions have is to create a very significant amount of liquidity in our system and I think that while they have a reputation of being sort of peculiar type of financial group, I think they’ve been very helpful to the liquidity and hence the international flexibility of our financial system. We have to be very careful that we make sure that they don’t become an investment vehicle for people in lower and moderate incomes because that appropriately requires registration and SEC oversight. I grant you that registering advisers in and of itself is not a problem, but the question is what is the purpose of that unless you’re going to go further and therefore I feel uncomfortable about that issue.” It is Simply Not Credible – especially post-LTCM – that our chief central banker takes such a Pollyannaish view towards the expansive hedge funds and the Leveraged Speculating Community. Yet such a perspective is music to the ears of the speculative marketplace. And the key issue is certainly not the type of hedge fund investors (whether they are “sophisticated” or not), but rather the nature of market impact and systemic vulnerability associated with the historic proliferation of highly-leveraged, short-term trading oriented speculators. There are many infamous examples throughout history (The South Sea Bubble and “Roaring Twenties” quickly come to mind) that clearly demonstrate the risk of succumbing to the seduction of liquidity created through leveraged speculation. Accordingly, the acquiescence of leveraged speculation ranks near the very top of the list of the radical Fed’s most grievous errors. It is fascinating to have the former Goldman Sachs co-chairman posing questions to our Fed chairman. I found the following discussion – and Dr. Greenspan’s apparent “impatient” demeanor – especially intriguing. Senator Jon Corzine: “With regard to top 10 countries holding our national debt. I have a particular curiosity about the Caribbean banking centers and what their implications are with respect to our concern about funding of all kinds of miscellaneous problems that could potentially exist. And I would love to hear an analysis of what is driving the fourth-highest concentration of our debt being held by Caribbean banking centers.” Alan Greenspan: “I’m sorry, was that a question to me?” Senator Corzine: “Yes, that is a question that we can ask if there could be an analysis that...” Alan Greenspan: “One has to look at it.” Senator Corzine: “Yes, please.” Alan Greenspan: “And in the context of, as you are far more aware than I, that the amount of information that those individual institutions in those various areas produce is less than we would like to see. But we’ll take a look at it and see what we can find.” Senator Corzine: “I think the issue in the funding of global terror, one wonders why so much of the external debt the United States is getting housed in among institutions that we have very little idea about. I think it’s a fair...” Alan Greenspan: “We’ll see what we can find.” My comment: It is Simply Not Credible that the Fed has not by now spent significant resources delving into the issue of ballooning holdings of U.S. securities at off-shore banking centers. And it is again worthwhile highlighting the ongoing dialogue between Congressman Ron Paul and Dr. Greenspan: Congressman Ron Paul: “I want to call attention to the committee that I certainly was pleased that you brought up the subject of deficits, because deficits obviously do cause a problem. And you mentioned that deficits may eventually cause interest rates to go up. But I also would like to suggest that deficits alone are not the problem, because whether you borrow the money or tax the money out of the economy, it still puts pressure on the capital market. So deficits alone are not the problem. It’s big government; it’s big spending, and the amount we spend here that really, really counts. But you said that deficits could -- future expectations of deficits -- could raise interest rates -- and I certainly would agree with that. But we also must remember that future expectations of the inflation rate and the future expectations of the value of the dollar also can raise interest rates. And those are monetary policy causes. And, therefore, the pressure or the emphasis or the blame for high interest rates that will come can’t be put on the deficit alone. It has to be put on those who manage monetary policy. Also, you warned on page seven that the printing presses won’t run indefinitely. You used the word ‘indefinitely.’ And that’s good, because if they do run this fast indefinitely, we all know what will and can happen. So that’s good that eventually you will turn the printing presses off. But for now, you said you can be patient. And that means we’ll just let the money flow and see what happens, which I think is a risky proposition. But you mentioned the condition of protectionism. You worry about protectionism, which I think is characteristic in all societies that destroy their currencies, and especially when you have fluctuating fiat currencies. People yield to the temptations of protectionism. But once again, there are different ways of bringing about protectionism. There are the tariffs, but there is also the competitive devaluations and the exchange rate of the dollar, which is a reflection of monetary policy.” “But my question is related a little bit to the wording of indefinitely and being patient, because they’re arbitrary, they’re subjective. And in January, your FOMC report omitted two words -- two words that were subjective, and that was ‘considerable period.’ And I find that very interesting, and also very alarming, the amount of clout, the amount of power that we as a nation, and we as a committee have allowed to get into the hands of one or two individuals or a committee. From the time the market was up to the release of that report, the stock market lost $250 billion as a reflection of the concern about the dropping of two words.” “Frederick Hayek was fond of saying that the managed economy was in danger because it was based on a pretense of knowledge: that certain things the economic planners don’t know. And for instance, he would agree with me that we don’t know, you don’t know, the Congress doesn’t know what the overnight rates ought to be, and that we reject the marketplace. But it’s part of the system. And I understand that.” “But doesn’t it ever occur to you that maybe there’s too much power in the hands of those who control monetary policy. The power to create the financial bubbles. The power to, maybe, bring the bubble about. The power to change the value of the stock markets within minutes. That to me is just an ominous power and challenges the whole concept of freedom and liberty and sound money.” Alan Greenspan: “Congressman, as I’ve said to you before, the problem you’re alluding to is called the conversion of a commodity standard to fiat money. We have statutorily gone onto a fiat money standard, and as a consequence of that, it is inevitable that the authority which is the producer of the money supply will have inordinate power. And this is one of the reasons why I’ve indicated because of that and because of the fact that we are unelected officials, it is mandatory that we be as transparent as we conceivably can. And remember that we are accountable to the electorate and to the Congress and the power that we have is all granted by you. We don’t have any capability whatsoever to do anything without the agreement or even the acquiescence of the Congress of the United States. We recognize that. And one of the reasons I am here today is to endeavor to convey why we are doing what we are doing. And I will continue to do that and I’m sure that all of my colleagues are fully aware of the responsibility that the Congress has given us. And I trust that it will be adhered to, principles of the Constitution of the United States more so than one would ordinarily do.” In a speech a few weeks back, Dr. Greenspan made reference to Walter Bagehot’s classic work on early central banking theory, Lombard Street. Mr. Bagehot would be no fan of Monetary Management According to Alan Greenspan. From Mr. Bagehot’s Lombard Street (1873): “A permanent Governor of the Bank of England would be one of the greatest men in England. He would be a little ‘monarch’ in the City; he would be far greater than the ‘Lord Mayor.’ He would be the personal embodiment of the Bank of England; he would be constantly clothed with an almost indefinite prestige. Everybody in business would bow down before him and try to stand well with him, for he might in a panic be able to save almost anyone he liked, and ruin almost anyone he liked. A day might come when his favour might mean prosperity, and his distrust might mean ruin. A position with so much real power and so much apparent dignity would be intensely coveted. Practical men would be apt to say that it was better than the Prime Ministership, for it would last much longer, and would have a greater jurisdiction over that which practical men would most value, -- over money.” These great insights resonate today at least as well as they have at any time since they were written more than 130 years ago (including the late-twenties period with the ‘monarch’ Benjamin Strong!). Today’s Monarch, Sir Alan Greenspan, has become the embodiment of the entire U.S. financial sector, the U.S. economy, and, increasingly, the entire global financial system. He is the Master of the Speculator Class. His immense real power has quelled panic more than a few times; in the process his favour has meant unimaginable prosperity. But might distrust mean ruin? I would strongly argue that Dr. Greenspan is tottering down a course of the dubious and incredible. He has lost his bearings, and our system has lost its bearings. Having others lose faith is dangerous. And a loss of trust would be truly ruinous.