07/26/2001 End of an Era *

It was a particularly unsettled week in global equity markets, as unrelenting earnings disasters, fears of continued economic deterioration, and general financial jitters kept investors on edge. As the week wore on, U.S. stocks and bonds benefited from the expectation that more Fed rate cuts are in the offing. For the week, the Dow declined over 1%, while the S&P500 suffered only a marginal loss. Economically sensitive issues underperformed, with the Transports and Morgan Stanley Cyclical indices declining 2%. The Morgan Stanley Consumer Index and the Utilities lost 1%. The broader market recovered strongly toward the end of the week, as the small cap Russell 2000 closed largely unchanged while the S&P400 Mid-Cap index dropped 1%. The technology stocks, after early losses, generally ended the week with gains. The NASDAQ100 was slightly positive, while the Morgan Stanley High Tech index jumped 2% and the Semiconductors surged 5%. The Street.com Internet index declined 2%, while the NASDAQ telecommunications index added 1%. The Biotech stocks gained 2% for the week. Financial stocks were volatile as well, with the S&P Bank and AMEX Securities Broker/Dealer indices ending the week with 1% gains. With bullion dropping almost $3, the HUI Gold index sank almost 4% this week.

There was considerable indecision in the credit market, although worsening financial crisis in Argentina and hopes for more Fed rate cuts seemed to fuel the late-week rally. For the week, 2-year Treasury yields declined 10 basis points to 3.85%, while 5-year yields dropped 6 basis points to 4.58%. Longer-dated maturities were lackluster, with the key 10-year Treasury yield declining only three basis points to 5.09%. Long-bond yields declined one basis point to 5.54%. Yields on benchmark Fannie Mae mortgage-backs declined 4 basis points, while agency yields generally dropped 5 basis points. The benchmark 10-year dollar swap spread narrowed one to 80. Most U.S. spreads were relatively unchanged for the week. The dollar continues to trade unimpressively, giving up almost 1% against the euro this week. With Argentina at the brink, the JPMorgan emerging market bond spread index widened 24 basis points to 931. Argentina bond spreads widened 124 basis points to 1612. This afternoon Bloomberg reported that Argentine banks suffered their "biggest one-month decline in deposits in six years."

Yesterday Moody’s aggressively downgraded Argentina’s foreign and local currency debt obligations of national, provincial and local government issuers, as well a major banks and corporations, with the rating agency noting "that the downgrade reflects a significant increase in Argentina’s default risk associated with the deterioration in the government’s financial position, uncertain near-term growth prospects, and concerns about the willingness of the political class to support on an on-going basis various economic measures…" Ratings are now just one notch above Ecuador, which has been in default on its debts for some time. Outside of the obvious contagion effects on Brazil, it is impossible to predict the impact of an Argentine debt default and potential currency devaluation. It is also impossible to know the extent of derivative exposure for U.S. institutions, although total exposure must be quite significant.

This week from Bloomberg: "The hedge fund industry is growing so fast it may be outrunning the supply of experienced managers who can handle billions of dollars in new investments, the top U.S. money-management regulator said. The Securities and Exchange Commission has stepped up scrutiny with a recent ‘mini-boom’ in the number of fraud cases charging that hedge fund managers misused investor money, said Paul Roye, director of the Securities and Exchange Commission’s investment management division. ‘Be cautious about the hedge fund craze,’ Roye told a group of U.S. public pension fund managers last week. ‘New funds have sprouted in the United States and Europe run by managers with little experience, raising questions about capacity to handle the billions of dollars flowing into these funds.’ Following last year’s collapse of Internet, software and other technology stocks, hedge funds may be the next trendy investment ‘bubble’ to burst, Roye said…An increasing portion of the growth in hedge funds is coming from pension funds, Roye told public fund managers…Roye said that when stock prices were moving steadily up, pension funds didn't have to worry much about meeting growth targets, because almost any index fund would do that…"

Also from Bloomberg: "The U.S. office vacancy rate rose to its highest point in four years in the second quarter in the midst of signs that the market’s softness is spreading beyond cities with high concentrations of technology-related companies. The rate rose to 10.8 percent from 9.5 percent at the end of March, according to Torto Wheaton Research, a unit of CB Richard Ellis Services Inc., the nation’s largest property broker. The last time the rate was this high was in the second quarter of 1997." Quoting an industry expert: "The suddenness and severity of the office market recession is surprising to long-time observers of the commercial real estate markets." This time last year San Francisco and Seattle enjoyed vacancy rates of 2.5%. A dramatic change in fortunes has seen vacancy rates jump to 10.3% and 9.4%, respectively.

A separate Bloomberg article ran with the headline "Commercial Mortgage Securities Slump as New Issuance Surges." It appears a deluge of commercial mortgage securities is heading to the market, with estimates of $8 billion of new securities over the next month. This would be double last month’s issuance. The article quoted an analyst who has seen "the stack of commercial mortgage bond sale prospectuses on her desk [grow] to about three-feet thick from about three inches last month." According to Bloomberg, $30 billion of CMBS were issued during the first-half, and there are now about $300 billion of commercial mortgage bonds outstanding, in a market that should be monitored closely going forward. According to JPMorgan, month-to-date asset-back security issuance of $23.4 billion is already a July record, with year-to-date issuance of $164.7 billion running 36% above last year. The ABS and corporate issuance boom does at least partially explain the weakness in bank loan data.

From MarketNews International (www.marketnews.com): "According to data from Moody's Investors Service, the bond rater said Monday that the size of the U.S. corporate bond universe continues to expand at a fairly aggressive rate. At the end of last quarter rated U.S. corporate bond universe grew by around 16% from a year ago, compared to the 13% growth of both Q1 of this year and Q4 of last year, Moody’s said in a statement. ‘This is by no means the swiftest spurt of growth to visit the corporate bond market, but 16% growth for a market with an estimated size of around $2.6 billion isn’t bad at all,’ the statement said." Moody’s reported domestic corporate debt issuance of $212 billion during the first half, a record amount for a six-month period. Importantly, however, there has apparently been only $2.2 billion of new issuance so far this month, about one-tenth last months level. Demand could be waning.

June new home sales were reported today at an annualized rate of 922,000 units, up 17% year over year, and easily on pace for a record year. Wednesday the National Association of Realtors reported another booming month of existing home sales, with June sales up 3% from very strong year ago levels. This was the fifth strongest month on record, with average (mean) prices jumping $6,600 during the month to $190,200. Average prices have surged $15,600 over the past four months, and are up $30,000 (19%) during the past 30 months. Median prices jumped $7,200 during June and are up 8.8% year over year, the strongest annual increase since 1991. Doing the dollar transaction volume calculation (annualized sales volume multiplied by average prices), we see June sales dollars up 9% year over year. June transaction dollars ran 25% above June 1998, 57% above 1997, and 71% above 1996. This is one spectacular Bubble in real estate finance. While increasing, the inventory of unsold homes remains quite lean at 3.8 months.

The California Association of Realtors (CAR) reported the strongest month of sales so far this year, with median prices in the state up $23,861 over the past 12 months, a 9.8% increase. Condo prices have jumped 12.6% to $209,830. All seventeen California regions have experienced positive price gains during the year, with nine enjoying double-digit increases. While no comparison to last year, average prices have nonetheless increased $23,160 during the past year in the San Francisco Bay Area. It is, however, worth noting that sales volumes decreased 6.4% from last year. Inventory remains low at 3.6 months, with it taking on average 26 days to sell a home (down from last year’s 30 days). Leslie Appleton-Young from the CAR stated: "We’re continuing to see a divergence between the Southern California and the San Francisco Bay Area residential real estate markets. The Bay Area market posted double-digit declines across the board. Southern California, in contrast, experienced less of a decline in sales. In the more affordable Riverside/San Bernardino region, sales were up 20 percent."

The San Jose Mercury News (using sales information from DataQuick) reported that sales in the Greater San Francisco Bay area (10 counties) were down 17% from last June. Interestingly, prices were up 7% year over year to $391,000. Only Santa Clara County reported a decline, with prices down 0.4% to $473,000 (although sales plummeted 25%.) Prices in Napa have jumped 26% to $314,000, with double-digit gains for Alameda, Contra Costa, San Mateo, and Solano counties. Median prices are up 5% in Marin to $595,000. From the article: "In contrast to most months in 2000, when median prices soared 25% and higher compared with the year before, increases this year mostly have been more modest…" Silicon Valley apartment rents have declined 7%, with "high-amenity properties" down from 18 to 25%.

From this week’s news release from the Florida Association of Realtors (PRNewswire): "It’s summertime and the housing market in Florida continued to sizzle…" Sales were up 7% from very strong year ago numbers. Median statewide prices jumped 9% to $132,500, "translating to a 39.9% increase over the five-year period." By major metropolitan area, year over year prices were up 22% in Miami, 16% in Fort Lauderdale, and 15% in Jacksonville, Gainesville and Orlando. Quoting a real estate executive, "a couple of things are fueling the increase in home sales…with the uncertainty of the stock market over the last year, people are looking to invest in real estate instead of stocks."

Yesterday’s article from the Boston Herald began "call it the Massachusetts home sales miracle…overall, sales of detached single-family homes shot up 36% in June…condo sales also surged, rising 23.9%..." Median home prices rose 2.6% during the month to $311,051, as condo prices jumped 10% to $221,190. Over the past year, prices have been rising at double-digit rates throughout the state, with prices up 16% in Greater Boston (first quarter y-o-y). Over this period condo prices rose almost 17%.

From the Q&A session of Alan Greenspan’s July 24th Testimony before the Senate Banking, Housing Affairs Committee:

Colorado Senator Wayne Allard: "Chairman Greenspan, I think you would agree with me that housing has played a significant role in our economy historically, and it continues to play a significant role today. And these are not necessarily high-tech jobs. And I wondered if you could elaborate -- and you didn’t mention that -- make any comment in your remarks about housing. I just wondered if you could maybe elaborate on the trends for housing prices, spending on residential structures, and mortgage interest rates.

Chairman Greenspan: "Senator, I think one of the things that’s occurring in this country is the evolution of housing into a very sophisticated, complex industry, in the sense that we not only have got standard home building aspects of homeownership-related activities, but we're also beginning to find that as homeownership rises and as the market value of homes continues to rise, even in a period when stock prices are falling, we’re observing a rather remarkable employment of that so-called home equity wealth in all sorts of household decisions."

Indiana Senator Evan Bayh: "…with regard to Senator Allard’s question, my final question, with regard to home equity. This has been a good thing for the American economy and temporarily helpful in addressing the consumer issue and the current sluggishness. My question to you is, since it has historically been a significant percentage of household savings, is this a worrisome long-term trend, people drawing down their home equity substantially?"

Chairman Greenspan: "…If unrealized capital gains were declining, which is, of course, what happens when you extract equity from homes, yes, it would be a problem. But there is no evidence of that. Indeed, despite the fact of the significant extraction of home equity gains, the level of unrealized capital gains in homes continues to rise apace. So it's not a depleting asset, if I may put it that way. It could be, but fortunately it is not."

Here we go again; another dangerous Bubble and another pathetic example of either flawed analysis or obfuscation from our Federal Reserve Chairman. With the Fed having for years studied asset Bubbles, and especially after the bursting of the technology Bubble, there is today absolutely no excuse for misreading the expanding real estate Bubble. Admittedly, the technology Bubble, while conspicuous in many ways, was at the same time rather complex - especially in regard to underlying credit excess and related processes and distortions, particularly in the telecom and Internet sectors. While we protested, Greenspan was at the time able to state without general protest that it is not possible to recognize a bubble until after the fact (music to the ears for those propagating Bubble excess!). But the current real estate bubble is straightforward: enormous lending excess – especially by the government-sponsored enterprises – leading to rising prices, overconsumption, overborrowing, and severe economic distortions and imbalances. After all, why would we not expect real estate inflation with the government-sponsored enterprises increasing lending by about $1 trillion during the past three years?

There is now no doubt that mortgage finance is the heart and soul of the Great American Credit Bubble, as well as being the inevitable Achilles heel of a vulnerable U.S. Bubble economy. It is also true that real estate has increasingly become the dominant underlying collateral for the U.S. monetary system. This is a dangerous game, and I regret that I am again compelled to accuse chairman Greenspan of gross negligence for his role in this monetary fiasco. Who is minding the store? While it clearly serves his purpose today, the negative consequences of continued mortgage credit excess will be enormous down the road. Long ago economists recognized that to back a monetary system with land was asking for trouble, creating a mechanism with a strong proclivity toward inflationary excess. Quoting Charles Rist: "One other of [John] Law’s ideas deserves our attention for a moment, that of securing money on land. It is an idea which recurs periodically among currency cranks" (History of Monetary and Credit Theory From John Law to The Present Day, 1940). As we are witnessing currently, an inflationary increase in money and credit fuels higher real estate prices, additional collateral value to borrow against, and only more self-feeding inflationary credit creation.

Rising prices also have a major dampening impact on defaults and credit losses. Obviously, a homeowner will sell a home and capture capital gains before he allows foreclosure. This, as we have seen with Fannie Mae and others, leads to a dramatic reduction in provisions for future losses, thus overstating true mortgage-lending profits. These seemingly rich and easily achieved "profits" (especially with major credit losses elsewhere) only entice a redirection of lending activity to real estate (as we see with previous telecom lending behemoths JPMorgan and Bank of America) and an influx of aggressive new participants (similar to the proliferation of companies during the tech bubble). Obviously, such keen interest from the lending community only exacerbates the real estate Bubble, as they compete in an asset Bubble environment with virtually limitless lending opportunities. Minimal boom-time lending losses also lead to an underpricing of mortgage insurance, which acts to increase the availability of mortgage credit, especially for those with minimal savings or those seeking to fully extract price gains.

Most importantly, artificially low credit losses and surging industry accounting profits add to the perception of the safety of mortgage-back and agency securities. This, in concert with significant losses experienced in equities, telecom and corporate debt, leads to a major push into mortgage-related securities by investors and the momentous speculating community. And, importantly, with the contemporary credit mechanism functioning with unlimited capability for monetary expansion, demand for literally $100’s of billions of new borrowings can be easily accommodated with no pressure on interest rates (despite negative household savings!). Now that is not your grandfather’s Credit system (or your father’s or older sister’s)! In fact, as we have witnessed, interest rates may very well decline in the midst of unprecedented demand for mortgage borrowings. It should be recognized that such a pricing relationship between credit demand and supply is not prone to either correct imbalances or gravitate toward equilibrium – but the exact opposite. Especially with the GSEs and their implied government guarantees, an unlimited supply of mortgage lending is easily transformed into increased money market fund deposits and other monetary assets.

It is a central dictum of Credit Bubble analysis that credit losses grow exponentially during the final "terminal stage" of excess. This contention is certainly supported by the enormous credit losses being suffered currently throughout the telecom sector. This industry experienced its "terminal stage" of excess during 1998 and 1999, with a veritable explosion of lending and associated spending and speculative excesses. The problem with these loans today – many having found a home in Wall Street "structured products" (such as the CDOs that have created huge losses for American Express and others) – is that not only are defaults much greater than were expected, investor recoveries after bankruptcy or workout are often a fraction of what models would have anticipated. This is a key aspect of lending excess during this extraordinary cycle, as the explosion of credit severely distorts the underlying economics of entire industries (economies). With telecom, it fueled the great "Communications Arms Race," with devastating consequences for the profitability and financial position of the entire industry. Not only did it ensure major losses for most participants (note JDS Uniphase’s $50 billion loss), it also created incredible overcapacity and today’s disastrous business environment all along the technology "food chain." During the boom, it was not appreciated that the telecom lending Bubble had set in motion precarious industry spending dynamics that would become apparent as soon as a bursting bubble abruptly terminated the keys to the entire process: unlimited credit availability and massive speculative flows.

Similar lending and speculation dynamics in the consumer finance sector continue to have major distorting effects on the consumption-based U.S. economy. As the manufacturing sector continues to go to seed, investment distortions foster unrelenting spending excess in household and consumption structures. Further, the consumer lending bubble is perpetuating the enormous trade deficits and the accumulation of massive foreign liabilities. Yet admittedly, as long as these "Bubble Dollars" are "recycled" directly back to the U.S. financial sector (a process augmented by aggressive international borrowing by the GSEs, U.S. money center banks, and Wall Street firms, as well as what are surely enormous "Hot Money" flows from the global "leveraged speculating community), the process appears to function wonderfully for the dollar and all concerned (like the tech bubble in 1999).

Let there be no doubt, however, that continued excess is only ensuring the inevitability of major debt problems for the U.S. household sector, its lenders and the U.S. financial system. But for now, as long as continued reckless mortgage credit excess supports rising home prices - which buttresses consumer spending, keeps the consumption-based U.S. economy levitated, and fuels continued wage gains - the debt levels don’t look exceedingly onerous to those of a bullish persuasion. And, as we have witnessed repeatedly, if the aggressive lending community has any window whatsoever, they will merrily continue to advance new credit. This is precisely why we have warned repeatedly that asset inflation is terribly seductive and dangerous.

Alarmingly, U.S. consumer debt Bubble dynamics are increasingly reminiscent of the LDC (less-developed country) debt Bubble from the late 1970s and early 1980s. Back then it was general U.S. inflation, the oil shocks, and a flood of "petrodollars" "recycled" back to the U.S. multinational banks that were at the heart of critical lending Bubble processes. With the perception of great profit opportunities and limited default risk ("sovereign nations don’t go bankrupt!") these "recycled" dollars were lent aggressively (until the Bubble burst!) to the LDCs, including Mexico, Brazil, Argentina, South Korea, the Philippines, and Taiwan. Today, it’s largely mortgage credit inflation, massive American trade deficits, and the resulting "Bubble Dollars" this time "recycled" right back to high-yielding U.S. consumer debt instruments and related securities/instruments.

From William Greider’s classic Secrets of the Temple: "The major bank executives did not seem the least embarrassed by their aggressive position in the less-developed countries. On the whole, they were proud of it. Walter Wriston (Citibank chairman), the most forthright among them, openly boasted that these countries were his best customers. The interest-rate returns were higher and loan losses were lower than on domestic lending to American enterprises. In public and in private, Wriston scoffed at critics who perennially warned that America’s largest banks were dangerously overcommitted. ‘In my view,’ Wriston predicted, ‘the fears that banks have reached a limit will turn out to be wrong tomorrow, as it always has in the past.’ Citibank’s vice chairman, G.A. Constanzo, derided the ‘doomsday fantasies’ of defaulting nations and failing banks. ‘The concept of banks, flooded with OPEC deposits, chasing loans of deteriorating quality is an Alice in Wonderland fantasy,’ he wrote.

Voices of caution included that of (Fed) Governor Henry Wallich…In June 1981, he gave a speech entitled ‘LDC Debt – to Worry or Not to Worry’…‘today we are in a transitional phase that in the long run is not sustainable [Wallich warned]. In the short run, it is made to appear sustainable in some degree by inflation, which causes a country to amortize its debts via interest rates. Fundamentally, a good number of countries are borrowing amounts that cannot be continued far into the future without leading to burdens that appear unsustainable from historical experience.’"

This was both cogent and powerful analysis, correctly assessing the LDC debt problems that were soon to take center stage. Then, as today, lenders were blinded by perceived profit opportunities and by recent history. Unfortunately, Mr. Wallich’s comments are today alarmingly applicable to the U.S. consumer Credit Bubble. Like the early 1980’s, we are currently in a "transitional phase," this time with a deflating U.S. economic Bubble and faltering global economy. In truly fascinating Credit Bubble dynamics, lenders continued to finance the LDCs despite what should have been conspicuous warning signs, just as they did commercial real estate in the late 1980s, the technology/telecom sector in 1999/2000, and today with the consumer. And in all cases, unsustainable Credit Bubbles faltered, with major losses developing as soon as boom-time credit availability waned. When the flow of new money stops, it does not take long for previous lending mistakes and other consequences of financial excesses to surface. Amazingly, in the face of a bursting tech bubble and a faltering U.S. manufacturing sector, the dysfunctional U.S. financial sector and aggressive leveraged speculating community has only set its sights more directly on consumer and mortgage lending. In the short run, this continued boom-time borrowing and spending is made to appear sustainable in some degree by housing inflation. As was the case with the LDCs, "a good number of consumers are borrowing amounts that cannot be continued far into the future…" There is one very difficult systemic adjustment process in store for the U.S. the day it is forced to wean itself of years of mortgage credit inflation.

The following except from Greider is similarly disconcerting: "The financial condition of the borrowing countries was, meanwhile, deteriorating. They were compelled to pay the higher real interest rates…rolling over loans at higher and higher prices, going deeper into debt just to stay even. Yet their economies were no longer expanding robustly as they had in the 1970s, but sinking."

But just like we are seeing today with the U.S. consumer, as long as additional borrowings are forthcoming, the situation does not necessarily appear unsustainable. George Soros’ (Alchemy of Finance) analysis of the LDC situation is also pertinent: "…one of the most striking features of the situation was that the borrowing countries continued to meet the traditional yardsticks used to determine their creditworthiness even as their overall debt burden grew at an alarming rate. Banks use ratios – such as external debt as a percentage of exports, debt service as a percentage of exports – to measure creditworthiness. The international lending activity of the banks set in motion a self-reinforcing and self-validating process that increased the debt servicing ability of the debtors, as measured by these ratios, almost as fast as their debt….The self-validating process of credit expansion – inflation for short – was unsound in more ways than one. Prices and wages rose at accelerating rates. Balance-of-payments deficits and surpluses were perpetuated. The balance sheets of the banks deteriorated. Much of the investment activity financed by bank lending was misdirected. The creditworthiness of the debtors was illusory. Yet, as long as the process validated itself, the world economy prospered."

For those of you that missed it, Wednesday’s Wall Street Journal included a must read article "Refinancing Is Sustaining Spending, But Do Dangers Lurk in the Details?" (www.msnbc.com/news/605278.asp ). This article, coming the day after Greenspan’s testimony, should send shockwaves through the Federal Reserve. Homeowners refinancing to "splurge on ‘some goodies.’" A couple borrowing $55,000 - based on a 26% increase in appraised value in 18-months - which they "sank into vacation-and-investment property." Another couple has repeatedly used refinancings to purchase items such as a big screen TV, while their "credit card debt grew to more than $40,000." A retired engineer from Arizona extracted $100,000 to build a vacation home, after plans to use profits from his stock portfolio were sunk with the market. An Arizona flight attendant extracted $70,000 and is "investing in the stock market and considering buying another home for investment purposes…now, her goal is to turn her cash-out windfall into $250,000 over the next 10 to 15 years."

From the WSJ: "There are lots of theories about why home prices are defying gravity…" including "lenders are egging on potential buyers by aggressively hawking mortgage loans, whose fees are helping offset shrinking profits from commercial lending." "To some economists, the popularity of cash-out refinancing suggests Americans are growing more financially sophisticated (what?). Frank Nothaft, an economist at Freddie Mac, one of the two big governments-sponsored mortgage companies, says consumers are acting more like corporations, which refinance their debt whenever possible to reduce costs or fund new spending."

Ponder for a moment how long it would take that flight attendant to save $70,000 from her after-tax income. Would she be speculating in the stock market had it not been for the major real estate inflation and the ease of equity extraction? How many are taking advantage of real estate inflation and mortgage interest deductibility to fund their retirement accounts or otherwise speculate in the markets? What are the ramifications for financial market liquidity when this mortgage refi boom runs its course? How about when the mortgage finance Bubble is pierced? Would that couple have let their credit card balances rise to $40,000 if they didn’t perceive perpetual home equity to borrow against? What will be the impact on spending and credit losses when home prices stop rising? And how about the great number of individuals using extracted equity as down payment for vacation home or investment property mortgages? How about those using inflated home equity to move up to more expensive homes? Could there be clearer examples of credit excess begetting credit excess?

Despite this weird environment with the Greenspan Fed fully supporting consumer credit excess, this Bubble could not be more conspicuously precarious. We are, unfortunately, destined to find out one of these days (when this Bubble bursts) that this last bout ("terminal stage") of reckless mortgage lending has greatly increased the vulnerability of the consumer and financial sectors to enormous losses, with profound ramifications for the U.S. financial system and economy. It will make the problems associated with the telecom debt collapse look minor in comparison. And for those questioning the validity of real estate Bubble analysis, it is worth recognizing that during the past three years (1998 through 2000) total mortgage lending increased $1.657 trillion, just over double the $817.2 billion lent the preceding three years. If, as looks likely, net additional mortgage borrowings reach $600 billion this year, total mortgage lending will have expanded an astonishing $2.26 trillion, or 43%, in just four years. John Law would be proud.

Watching Alan Greenspan this week, I couldn’t help but to sense we are witnessing the End of an Era. Not because I expect him to retire soon, although I doubt he enjoys his work as much these days. Instead, I see the approaching end to the Greenspan era of unrelenting financial stimulation and economic growth of any sort, at any cost. He may talk inflation hawk, but this is but the clever guise of the Grand Master of Stimulation. Remember, it was after only after a few short months on the job that he came aggressively to Wall Street’s rescue after the 1987 stock market crash. With very few exceptions, he has acted on behalf of the interests of the leveraged speculating community ever since, if not orchestrating at least presiding over the greatest financial Bubble in history. Over the years he has become an expert in spin, obfuscation and, most of all, fueling speculative excess. He may rarely utter the word "Credit," but Greenspan has invariably coveted the financial sector (at the expense of the manufacturer), appreciating full well the credit mechanism as the engine for spending growth and perceived prosperity.

It has always been perfectly clear to the financial community that he stands ready to act aggressively to forestall what has developed into recurring financial crises, and they have certainly played it accordingly. We see again this week the phenomenon that heightened financial stress only incites Pavlov impulses of more rate cuts. After all, each time the system has found itself at the edge it was Greenspan who fostered the "recoil" and led the stampede re-igniting both the credit system and speculation, much to the delight of Wall Street and Washington. Well it’s been quite a 14 years, but it’s catching up to him. Mr. Greenspan doesn’t have much room left to stimulate on the interest rate front, and he’s running out of Bubbles to inflate. It also appears the leveraged speculating community has already placed its bets, so his ability to incite their speculative impulses for his pursuits is largely exhausted. Moreover, his GSE partners have pushed the extremes of reckless credit excess for three years now, creating what has become a conspicuous real estate Bubble. Further mortgage credit inflation will do anything but resolve the severe structural imbalances impairing the U.S. economy and financial system. And it just doesn’t appear our foreign partners are all too sympathetic to the cause of the American Bubble. Boom-time comradery is today being awkwardly superceded by a sense that unfolding circumstances dictate a focus on individual interests. So, it is today a case of pondering how long we can expect the consumer and mortgage Bubble to continue inflating; that is, without the resulting gross distortions puncturing the vulnerable dollar Bubble.