Tuesday, September 9, 2014

02/03/2006 The Essence of the Greenspan Era *

Earnings disappointments and higher rates… For the week, the Dow declined 1%, and the S&P500 slipped 1.5%. The Transports were down 1%, and the Utilities were hit for 2.4%. The Morgan Stanley Consumer index declined 1.6%, and the Morgan Stanley Cyclical index fell 2.4%. The broader market continued to outperform. The small cap Russell 2000 declined 1%, and the S&P400 Mid-cap index dipped 0.35%. Technology stocks were under pressure. The NASDAQ100 declined 2.7%, and the Morgan Stanley High Tech index dropped 3%. The Semiconductors fell 4%, and the Street.com Internet Index lost 2%. The NASDAQ Telecommunications index declined 1.7%. The Biotechs fell 1.5%. Financial stocks were mixed. The Broker/Dealers were little changed, while the Banks dropped 2.3%. With bullion up $9.30 to $568.90, the HUI gold index added about 2%. 

January 31 – Bloomberg (Alison Fitzgerald): “The U.S. government plans to borrow $188 billion from January to March, the most ever for a single quarter, as the Treasury sells 30-year bonds for the first time since 2001 to meet demand for longer-term debt.”

Slumping productivity and rising wage costs… For the week, two-year Treasury yields jumped 8 bps to 4.575%, the highest level since February 2001 (2-wk gain of 22 bps). Five-year government yields rose 4 bps to 4.485%, and bellwether 10-year Treasury yields added one basis point to 4.52%. Long-bond yields actually declined 6 bps to 4.63%. The spread between 2 and 10-year yields moved 7 bps to an inverted 5 bps. Benchmark Fannie Mae MBS yields rose 4 bps to 5.8%, this week underperforming 10-year Treasuries. The spread (to 10-year Treasuries) on Fannie’s 4 5/8% 2014 note was little changed at 32.5, and the spread on Freddie’s 5% 2014 note was unchanged at 33. The 10-year dollar swap spread increased 0.4 to 51.7. Investment-grade spreads narrowed slightly and junk bonds again outperformed. The implied yield on 3-month December ’06 Eurodollars jumped 9.5 bps to 4.95%.
February 3 – Bloomberg (Caroline Salas): “Banco Santander Central Hispano SA,
the largest lender in Spain, and Ineos Group Holding Plc helped push corporate bond sales in the U.S. to $97 billion in January, the most since at least 2001 as company borrowing costs fell relative to government debt… High-yield bond sales totaled $15.4 billion in January, the most in at least 11 years…”

For the week, investment grade issuers included Textron $400 million, Huntington National $250 million, Alabama Power $200 million, and TCF Financial $75 million. 

Junk bond funds reported inflows of $27 million (from AMG). Junk issuers included HCA $1.0 billion, Sanmina-SCI $600 million, Chesapeake Energy $500 million, Indalex $270 million, Covalence Materials $265 million, Copano Energy $225 million, and Rathgibson $200 million.

Convertible issuers included DRS Technologies $300 million and AAR Corp $150 million.

Foreign dollar debt issuers included Santander $2.0 billion, Ineos $750 million and CMA $300 million. 

Japanese 10-year JGB yields rose 4 bps this week to 1.58%, as the Nikkei 225 index gained 1.2% (up 3.4% y-t-d).  Emerging markets were generally resilient. Brazil’s benchmark dollar bond yields added 3 bps to 6.53%. Brazil’s Bovespa equity index declined 1.5%, reducing 2006 gains to 11.4%. The Mexican Bolsa slipped 0.5%, with y-t-d gains declining to 6.0%. Mexican 10-year govt. yields rose 5 bps to 5.45%. Russian 10-year dollar Eurobond yields jumped 9 bps to 6.51%.  The Russian RTS index fell 4.3%, reducing 2006 gains to 16.2% (one-yr gain of 100%). 

Freddie Mac posted 30-year fixed mortgage rates jumped 9 bps to 6.23% (up 60 bps in a year) to a six-week high. Fifteen-year fixed mortgage rates were unchanged at 5.70% (up 67 bps in a year). One-year adjustable rates were unchanged at 5.20%, with an increase of 110 basis points from one year ago. The Mortgage Bankers Association Purchase Applications Index dropped 8.0% last week. Purchase Applications were down 2.3% from one year ago, with dollar volume up 2.6%.   Refi applications fell 1.5%. The average new Purchase mortgage rose modestly to $230,600, while the average ARM slipped to $335,500.

Broad money supply (M3) jumped $20.1 billion (week of Jan. 23) to a record $10.274 Trillion. Over the past 36 weeks, M3 has inflated $649 billion, or 9.7% annualized. Over 52 weeks, M3 has expanded 8.0%, with M3-less Money Funds up 8.4%. For the week, Currency added $1.8 billion.  Demand & Checkable Deposits jumped $17.2 billion. Savings Deposits declined $4.1 billion, while Small Denominated Deposits rose $4.6 billion. Retail Money Fund deposits slipped $0.2 billion, and Institutional Money Fund deposits declined $10.7 billion.  Large Denominated Deposits dipped $2.2 billion. Over the past 52 weeks, Large Deposits were up $267 billion, or 23.6% annualized. For the week, Repurchase Agreements gained $3.8 billion, and Eurodollar deposits increased $9.9 billion.     

Bank Credit surged $47.6 billion last week (3-wk gain of $93.6bn) to a record $7.582 Trillion. Over the past 52 weeks, Bank Credit has inflated $728 billion, or 10.6%. For the week, Securities Credit rose $16.9 billion. Loans & Leases were up 12.6% over the past 52 weeks, with Commercial & Industrial (C&I) Loans up 14.3%. For the week, C&I loans gained $8.1 billion, and Real Estate loans rose $7.6 billion. Real Estate loans have expanded at a 9.2% pace over the past 20 weeks and 14.4% during the past year. For the week, Consumer loans were about unchanged, and Securities loans rose $8.4 billion. Other loans increased $6.4 billion.  

Total Commercial Paper added $0.5 billion last week to $1.697 Trillion. Total CP is up $47.7 billion y-t-d (5wks), while having expanded $289 billion over the past 52 weeks, or 20.6%. Last week, Financial Sector CP borrowings rose $5.1 billion to $1.558 Trillion, with a 52-week gain of $291 billion, or 23.0%. Non-financial CP fell $4.7 billion to $139 billion, with a 52-week decline of 1.7%. 

At $49 billion, January asset-backed securities (ABS) issuance was down about 25% from January 2005, although expectations call for a strong February (from JPMorgan). 

Fed Foreign Holdings of Treasury, Agency Debt rose $3.2 billion to a record $1.558 Trillion for the week ended February 1st. “Custody” holdings were up 14.4% annualized over the past 20 weeks and $193.5 billion (14.4%) over the past 52 weeks. Federal Reserve Credit gained $2.4 billion to $814.4 billion. Fed Credit has expanded 4.5% annualized over the past 20 weeks and 3.8% over the past 52 weeks. 

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $461 billion, or 12.5%, over the past 12 months to a record $4.142 Trillion.  Taiwan reserves were up 6% y-o-y to $257.3 billion.

Currency Watch:

January 31 – Bloomberg (Daniel Kruger): “The Canadian dollar rose to a 14-year high on speculation that strong demand for Canada's natural resources such as oil and metals supports the currency’s value.”

The dollar index added 0.6% for the week. On the upside, the New Zealand dollar gained 0.9%, the Indonesian rupiah 0.9% and the Philippines peso 0.8%. On the downside, the Iceland krona declined 1.5%, the Israeli shekel 1.4%, and the Japanese yen 1.1%.   

Commodities Watch:

February 2 – Bloomberg (Simon Casey): “Copper, zinc and lead prices rose to records in London on demand from pension systems and mutual funds seeking returns unavailable in the stock and bond markets. ‘In recent months we have seen a whole different type of fund come in,’ said Angus MacMillan, an analyst at Bache Financial in London. ‘Myself and a number of my colleagues who have been in this business for years have never seen anything like this.’”

This week saw copper, zinc and lead trade at new record highs. Gold traded to a 25-year high and sugar to a 24-year high. March crude oil fell $2.39 to $65.37. March Unleaded Gasoline dropped 7% this week, while March Natural Gas rose 2.5%. For the week, the CRB index slipped 0.5%, reducing y-t-d gains to 4.2%. The Goldman Sachs Commodities index fell 1.9% this week, with a y-t-d decline of 2.1%. 

Asia Boom Watch:

January 31 – Bloomberg (John Brinsley): “Japan has a job for everyone who wants one for the first time in 13 years. The job-to-applicant ratio in December advanced to 1 from 0.99 in November, the labor ministry said today, adding to evidence the nation’s expansion will be sustained after more than a decade of sputtering growth.”

February 1 – Bloomberg (Cherian Thomas): “Indian Prime Minister Manmohan Singh said the economy expanding as much as 10 percent a year is ‘distinctly possible.’”

January 31 – Bloomberg (Kartik Goyal): “India revised the economic growth rate for the fiscal year ended March 31, 2005, to 7.5 percent from the previous estimate of 6.9 percent as mining and construction grew faster than earlier forecast, the government said…”

February 2 – Bloomberg (Seyoon Kim): “South Korea’s service industries expanded for a 10th straight month and at the fastest pace in three years in December, adding to signs that consumer spending is picking up in Asia’s third-largest economy. Transportation companies, insurers and other service providers increased output 6.5 percent from last year…”

February 2 – Financial Times (John Burton): “Singapore said on Wednesday its unemployment rate last year fell to a provisional 3.2 per cent, the lowest since 2001…”

January 30 – Bloomberg (Jun Ebias and Francisco Alcuaz Jr.): “The Philippine economy grew at the fastest pace in more than eight years as record remittances from the nation’s 7 million overseas workers spurred consumer spending and production. Fourth quarter gross domestic product, taking seasonal factors into account, grew 2.7 percent from the third quarter…”

Unbalanced Global Economy Watch:

February 1 – Bloomberg (Walden Siew): “Global company default rates for junk and investment-grade bonds held near all-time lows in 2005, according to a report from ratings company Standard & Poor’s. The number of defaults, 37, was the lowest since 1997 and the default rate fell to 0.55 percent, from 0.73 percent in 2004…”

February 3 – Bloomberg (Matthew Brockett): “Demand for loans to businesses rose ‘remarkably’ in the fourth quarter of 2005 as companies increased inventories and stepped up investment, the European Central Bank reported in a survey of bank lending published today.”

January 31 – Bloomberg (Laura Humble): “The number of home loans approved by U.K. mortgage lenders rose to the highest level in 21 months in December, the Bank of England said, as a pickup in Britain’s $6 trillion property market strengthened.”

February 1 – Bloomberg (Brian Swint): “Orders for German plant and machinery rose 12 percent in December from a year earlier, led by demand from within the country, the VDMA industry association said. Orders placed by companies located in Germany rose 28 percent while those from companies abroad advanced 6 percent…”

February 2 – Bloomberg (Ben Sills): “Inflation in Spain, Europe’s fifth-largest economy, accelerated in January at the fastest pace in at least nine years led by higher energy costs. Consumer prices rose 4.2 percent from a year ago…”

February 3 – Bloomberg (Ben Sills): “Spain’s industrial production rose at its fastest pace in more than five years in December. Production at factories, farms and mines rose by 4.1 percent from a year earlier…”

January 31 – Bloomberg (Trygve Meyer): “The pace of borrowing by Norwegian households and businesses in December advanced to the fastest in 18 years, increasing pressure on the country’s central bank to raise interest rates… Credit growth for households, companies and municipalities accelerated to an annual 13.3 percent, from 12.3 percent in November…”

January 31 – Bloomberg (Fergal O’Brien): “Irish mortgage lending grew at a record pace in December as an increasing population and rising employment boosted demand for property. The amount lent to homebuyers rose by 2.6 billion euros ($3.15 billion)… Mortgage lending grew 29 percent from a year earlier…”

February 1 – Bloomberg (Halia Pavliva): “Russian economic growth slowed to 6.4 percent in 2005 from 7.2 percent the previous year, as the pace of growth in oil production eased and manufacturing faltered.”

Latin America Watch:

February 1 – Bloomberg (Romina Nicaretta): “Brazil car sales in January rose about 20 percent compared with a year earlier, Gazeta Mercantil newspaper reported, citing industry estimates.”

January 31 – Dow Jones: “Argentine building activity ended 2005 on a strong note, with December’s construction index posting one of the largest year-on-year expansions seen all year…Building activity was up a seasonally adjusted 24.1% from the year-earlier month and rose 3.6% on the month. For the entire year of 2005, the index was 14.6% higher.”

Bubble Economy Watch:

December Average Hourly Earnings were up 3.3% from the year ago period, the strongest y-o-y increase since February 2003. 

February 2 – EconoPlay.com (Gary Rosenberger): “Recruiters are reporting a pop on the job front in January as companies squeezed the hiring trigger following a cautious December, with anecdotal accounts covering a range from modest, steady growth to “fun times are back.”  Taken together, the comments suggest January job formation took something beyond a modest bounce higher, with all recruiters interviewed reporting increases in permanent placement. In some high-skill categories, like accounting, employers are running into a tight labor pool and increasing wage pressures…” (Gary Rosenberger’s new econoplay.com provides his excellent work now on a subscription basis!)

February 3 – Bloomberg (Daniel Goldstein): “Joel Schwarz, a 35-year-old attorney from New York, still parties after work at hip spots such as Rosa Mexicano and Bobby Van's. He's just doing it in Washington, D.C., now, where the Manhattan watering holes have set up shop. ‘D.C. isn’t catering to the stodgy, cigar-smoking crowd anymore,’ said Schwarz, who works for the U.S. Department of Justice’s cyber-crime unit and bought a $500,000 condominium in Washington’s Chevy Chase neighborhood a year ago. ‘D.C. now has a New York feel to it.’ The Manhattanization of the nation’s capital, where until 1999 the subway quit at midnight, hasn’t stopped at bars and restaurants. Real estate prices are soaring, driving the cost of office space beyond New York levels, and department stores and hotels better identified with Manhattan are adding glitz…”

“Project Energy” and Crude Liquidity Watch:

January 30 – Bloomberg (James Cordahi and James Hertling): “Kuwait, Abu Dhabi and Qatar plan to channel more of their revenue from oil sales into Asian countries such as China to boost returns and strengthen ties with their fastest-growing customers. Officials from the Persian Gulf monarchies, which sold about $300 billion worth of oil last year, said in interviews at the World Economic Forum’s annual meeting they intend to tap economic expansion in India and China. Kuwait’s government investment fund is ‘realigning’ investment from countries in the Organization for Economic Cooperation and Development to emerging markets, said Bader Mohammad Al-Saad, managing director of the Kuwait Investment Authority, whose assets exceed $100 billion.”

February 3 – Financial Times (Chris Flood): “The nuclear energy industry looks set for significant expansion with the price of oil surging and concerns about the environment increasing. However, there is a problem in that demand for uranium is outstripping supply. Uranium prices have risen sharply in the past three years, attracting new risk capital and speculators and promising significantly higher earnings growth for existing players. Nuclear energy accounts for 16 per cent of global power generation but capacity is increasing. There are 441 commercial reactors operating worldwide with 23 reactors being built in 11 countries. China plans to build two new reactors each year while India has eight reactors under construction. Japan and Korea are also committed to strong growth in nuclear capacity… Consumption has outgrown primary (newly mined) supply for the past 10 years but the deficit has been satisfied by secondary supplies (existing stocks), mainly from Russian sources. The perceived abundance depressed uranium prices before 2001 and led to a lack of new mine development. However, the maximum available secondary supply covers only eight years of current reactor requirements, according to the World Nuclear Association.”

Mortgage Finance Bubble Watch:

February 2 – Dow Jones (Dawn Kopecki): “Freddie Mac Chief Operating Officer Eugene McQuade told investors Wednesday that he sees the private-label mortgage market as a big source of growth for the company in 2006. ‘The private label security market has grown quite a bit with a high percentage of subprime mortgage securities. We generated most of our retained portfolio growth last year in that sector… Given the richening we’ve experienced in our funding levels, and the continued low credit risk environment, we believe we can continue to invest in attractive (option-adjusted spread) levels and achieve solid fair value returns in this asset class. This investment should contribute to continued growth throughout the year.’”

The Essence of the Greenspan Era:

Eighteen years is too long. Our Activist chairman Greenspan attained boundless power, and the greater the uncertainties that unfolded over this long boom the more intense the system’s desire to create a mythical commander with masterly control at the helm of the Federal Reserve. I am a reluctant proponent of the necessity for discretionary monetary policy, although I repudiate discretion placed interminably in the clinched hands of a single policymaker – especially in this age of unbridled global finance and leveraged speculation. There’s too much at stake and too much for society to lose from a period of runaway monetary instability. Undoubtedly, there have been profound financial, economic and social developments during Greenspan’s term, and this unelected official held extraordinary sway in orchestrating how things developed.  

Greenspan championed financial liberation and a bastardized market and securities-based Credit system dependent upon myriad government assurances, guarantees, supports and bailouts. Under his watch, GSE holdings and guarantees exploded to surpass $4 Trillion. Over the same period, a small cadre of enormous financial institutions amassed unprecedented power and influence (market, financial, political and otherwise). With Greenspan’s blessing, global derivatives markets ballooned to unfathomable dimensions with unknowable risks. The “repo” market has mushroomed to the several trillion.

Greenspan’s discretion has availed incredible wealth upon the leveraged speculating community and their wealthy clients. Throughout the system, the aggressive borrower and speculator have done exceptionally well, at the expense of the prudent saver. Predictably, speculating has flourished and saving has foundered. And in the ultimate escapade of “trickle-down” economic management, the working class has been forced to lever up in real estate and gamble their retirements in the markets in a futile effort to not fall further behind. I consider the Greenspan Fed’s activist incitement of household mortgage Credit excesses for the purposes of post-technology Bubble reflation a despicable act.  As always, Major Credit Bubbles are incredible mechanisms of wealth redistribution, in the process snaring the stalwart middle class in the slippery slope of Bubble Economy Wealth Illusion. The scope of injustices is masked until the bust.

Under his stewardship, the U.S. economy radically de-industrialized. This dovetailed too smoothly with an enterprising asset-based Credit system that was keen to (over)finance real estate and securities markets. Unparalleled Credit expansion assured a flourishing services-based economy and booming asset markets, in the process engendering profound structural distortions upon the real economy. Booming Asian investment and trade (“globalization”) assured a supply deluge of low-cost manufactured goods. Not unlike the U.S. in the Roaring Twenties and Japan during their eighties Bubble, disinflation in goods prices detracted from the paramount issue of highly destabilizing Credit and asset Bubbles. Greenspan could not have been oblivious to these dynamics. 

The nature of U.S. economic output changed profoundly (less goods manufacturing, more services and tech), as did the character and scope of lending and asset speculation. It is my view that our astute chairman had a firm grasp on these developments. Yet he impetuously adopted an ideology that a secular surge in productivity gave the Fed greater leeway to accommodate loose financial conditions. A disciplined and less activist central banker would have approached these monumental changes with circumspection and caution. 

I believe that Alan Greenspan fully appreciates the relationship between U.S. financial excesses, asset inflation, over-consumption, mal-investment and our now untenable Current Account Deficits. He has nonetheless been too content to leave the Pollyannas blathering on that our Deficits have been the consequence of unending foreign capital flows and investment. I have a difficult time believing that Greenspan didn’t recognize the evolving inflationary dynamics – more specifically, the newfound predominance of asset inflation and Current Account Deficits. Yet he resolutely adhered to the archaic dogma that core consumer prices were paramount inflation barometers, when they clearly no longer functioned as reliable indicators of general price stability or the appropriateness of monetary policy. Why so inflexible?

Alan Greenspan was known to say in private during the sixties that the Great Depression was the consequence of the Federal Reserve repeatedly placing “coins in the fuse box” during the twenties. Greenspan clearly understands Credit, Credit Booms and Credit Busts, yet he too assiduously avoids discussion of these key issues. From Tuesday’s Wall Street Journal editorial: “The paradox of Alan Greenspan’s achievement as he leaves office today after 18 years as Chairman of the Federal Reserve is that nearly everyone is praising his performance but no one seems to know exactly how he did it.” Well, the chairman fashioned his mystique by dazzling with his mastery of the complexities of the ways of the economy and markets, along with his genius with contrived ambiguity. 

But the Secret of His Success was that he was - for 18 years and five months - able to keep new Credit flowing, the financial sector expanding, the “structured finance” mechanism enlarging, and speculators increasing the size of speculations. The pools of marketplace liquidity and speculative finance, despite a few scares, only expanded and never contracted. Indeed, chairman Greenspan was able and more than willing to repeatedly administer "coins to the fuse box."  His acclaimed “risk management” approach to monetary management was centered upon the framework of avoiding potential debt collapse – that is, perpetuating the Bubble - at all costs. He clearly will never articulate the true nature of his modus operandi or analytical framework.

While his tenure as Fed chief has finally run its course, The Greenspan Era is very much still in play. We’re in the late stage of the protracted Greenspan Credit Cycle, and this predicament today offers little flexibility when it comes to monetary management. Chairman Bernanke will enjoy little discretion (and less room for error) outside of efforts to cautiously guide and, most importantly, sustain The Greenspan Boom. Mr. Greenspan relished in extraordinary flexibility throughout his term, while professor Bernanke will surely be hamstrung by a backdrop much less accommodative in many respects domestic and international, economic and financial. 

The confluence of the bursting Japanese Bubble and the collapse of the Soviet economic “system” unleashed robust international disinflationary forces during much of the nineties. At home, the collapse of the S&L industry and a faltering banking system provided strong Credit system and economic headwinds early in the decade. And recurring spectacular Credit booms and busts from Mexico to SE Asia to Russia and then on to Brazil and Argentina reinforced the disinflationary backdrop, while also nurturing speculative excess in the U.S. dollar. The fledgling leveraged speculating community was predominantly dollar-based during much of the nineties, quickly retreating back to the safe haven of U.S. debt markets (“home bias”) at the onset of the next bursting Bubble (at home or abroad). This extraordinary backdrop gave chairman Greenspan an unusual capacity to repeatedly “re-liquefy”/“reflate” the U.S. Credit system with little risk of a dollar or bond market rout. Current Account Deficits, with resulting global liquidity immediately recycled right back to U.S. securities markets, were seemingly benign and largely irrelevant – then but certainly not today.

The backdrop that Greenspan has bequeathed to his successor could not contrast more markedly from that which he operated within during much of his term. Crude prices averaged less than $25 during his term ($21 excluding the past 3yrs) and natural gas $3 ($2.5 through 1/31/03). Gold prices averaged about $360 and the CRB commodities index 230 (today’s close 344). Consumer prices and unit labor costs were generally trending lower and productivity trending higher, the mirror image of that confronting the Bernanke Fed. The global disinflationary shock has fully run its course, and a distinctly inflationary global backdrop has reemerged. As oppressive as global financial flows were to “emerging” Credit systems during much of the previous decade, they are today stunningly accommodative and stimulative. The leveraged speculator community has evolved to be very much global in its locus, point of view and pursuits, today with a strong bias to venture away from the dollar to global markets and commodities in pursuit of superior returns. And while massive U.S. Current Account Deficits must still be recycled back to the U.S. financial system, they are today making this return trip only after flowing through global energy, commodities and securities market complexes. 

Under Greenspan’s watch, the true Federal deficit (including future obligations) became untenable; the GSE’s became a major risk to system stability; healthcare cost inflation skyrocketed; and pension obligations ballooned. The surging cost of higher education forced millions to take on heavy debt loads. Historic real estate Bubbles in California, the East Coast, and elsewhere forced tens of millions more into wagering their financial futures on their residences. The Greenspan Fed subsidized an historic boom in large suburban home construction and gas-guzzling SUV manufacturing. During Greenspan’s term, our nation’s dependency on Middle East oil crossed the point of no return. With respect to our energy and manufactured goods requirements, we sacrificed any hope of self-sufficiency. At the same time, New Paradigm Perceptions had it that we could afford guns and butter and heaps of pork. Of course, such a profligate environment cultivates fraud, corruption and malfeasance, the vast majority to be unearthed during the downside of the Greenspan Credit Cycle.

Moreover, liquidity to sustain our enormous debt markets became dependent upon foreign central banks and global speculators.  Liquidity created in the process of leveraged asset market speculation evolved into a prevailing source of liquidity for the financial markets and Bubble Economy.  Under the chairman’s watch, a highly corrosive strain of “Financial Arbitrage Capitalism” took command of the creation and (mis)allocation of both financial and real resources throughout our economy (and, more recently, globally). Under Greenspan’s stewardship of the world’s reserve currency and dominant Credit system, global imbalances went to unparalleled and unmanageable extremes. Nonetheless, The Crowd today showers Alan Greenspan with praise and glorifies his accomplishments. To be sure, any chief central banker universally lionized at the end of his term most certainly ran a very loose ship. 

I don’t believe Credit cycles should or can be prolonged indefinitely, so I naturally scoff at notions of Greenspan’s greatness.   To nurture a system of unrestrained Credit and speculation is to jeopardize the market pricing mechanism. To abrogate the business cycle is to undermine a capitalistic system. To accommodate and prolong Credit booms is to ensure a problematic evolution of risk assessment and Embracement, not to mention deep structural economic impairment. To actively reduce uncertainty is to inflate expectations, and to guarantee liquidity is to promote market excess. From Main Street to wall street, there is too much faith in the capabilities - and too little appreciation for the limitations - of monetary policy. From the corporate board room to the Halls of Congress, there is a mistaken belief that recessions can and should now be avoided. 

Throughout the financial markets, there is overwhelming conviction that the Fed has the capacity and determination to ward off financial dislocation and crisis. There is also a troubling view, championed by Mr. Greenspan, that derivatives markets actually reduce systemic risk, when they most certainly promote greater leveraging and risk-taking (in the process prolonging the Greenspan Credit Cycle). For the system as a whole, there is strong conviction that the Fed controls system liquidity and will always act to underpin asset prices. This is not a legacy to canonize.

There is the expectation today that most Americans are accumulating sufficient wealth to retire comfortably, although the U.S. system in aggregate is borrowing and consuming too much to have the economic wealth creating capacity to live up to inflated expectations. Now that the U.S. Credit Bubble has gone global, there are expectations in China that their recent tremendous gains in wealth can be extrapolated, while rising expectations in India and elsewhere envision their economies following similar growth paths as to that of the Chinese. The oil producing and commodity-based economies now have expectations of great future prosperity. Never have so many had their expectations rise to lofty levels – the type of elevated expectations that leads to disappointment and disillusionment. For now, we have global competitors for limited energy and commodity resources liquefied like never before.

In his Tuesday farewell comments to Federal Reserve Board staff, chairman Greenspan stated, “We are in charge of the nation’s currency, and the central bank, because of that, is involved in everyone’s daily lives. We are the guardians of their purchasing power.” Similar to much of Greenspan’s tenure, I cannot accept his parting words of inspiration at face value. The Greenspan Fed ceded the keeping of the value of our currency to Wall Street, to the money center banks, to the GSEs, to the hedge funds, to the derivatives markets, to mortgage companies, to subprime lenders, to the securitization marketplace, to the captive finance companies, to foreign central banks - to the Financial Sphere generally. I have in the past referred to Alan Greenspan as the Great Inflationist – a modern day John Law. The Essence of The Greenspan Era is one of unprecedented “money” inflation, Credit inflation, asset inflation, financial wealth inflation, expectations inflation and obfuscation.  The Essence of the Ongoing Greenspan Era is one of an historic Credit Bubble. His legacy should be based upon future circumstances and developments with respect to this Bubble and not how things appeared the afternoon he paraded out the door.