Greenspan on 60 Minutes - I call BS

[DcifrThs]

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He doesnt say he didnt recognize that it COULD happen. He says he didnt realize the EXTENT to which it happened. It isn't suprising that he wasnt focused on it then, since it was in only in late 2005 and early 2006 that subprime originations took off, and at the time he was busy handing off the job to BB.

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That's quite the clever dodge. He had to know the amount of cheap money sloshing around, he was head of the organization that was printing, for crying out loud.

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riiight, and the trillion dollars invested by foreign governments did nothing to push interest rates down artificially on the long end of the curve. the fed obviously played a major role, but other factors are at play here.

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He has to understand that the only way to make money with money is to lend it, so it stands to reason that the banks are going to push this cheap money to lenders in any way they can.

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the debacle we're in now isn't so much the result lending to subprime borrowers as it is the securitizing of those loans to be sold round the world. this distributing of risk was thought to be great, but a few problems arose. 1) nobody knew exactly where the risk was headed, and most importantly 2) those who were ORIGINATING the risks (the lenders) had an incentive to simply loan as much as possible since they could remove those loans from their books via securitization.

without the increased complex financial derivative demand, the lenders would have had much more self imposed discipline in their lending practices since they'd be on the hook.

further, without the financial derivative demand (and subsequent use), the credit crunch we're innow would almost surely not have occurred. the reason is, as mentioned above, those who made poor loans (and kept those loans on their books) would be solely responsible and go bankrupt.

what greenspan knew was that loans were being made in record numbers to those who are a larger than normal credit risk. what greenspan didn't know was the extent to which the financial derivatives that were gobbling up those loans were shopped by salesmen all around the world to hedge funds and some less sophisticated investors.

furhter, greenspan certainly didn't know that the ratings agencies were giving AAA ratings to unworthy securities.

those two factors are the main cause of what we see today (ted spread, liquidity crunch, commercial paper (especially ABCP) "crisis"). the actual lending wasn't so much a problem since there is usually a negative feedback loop in bubbles: you make bad loans, you lose your shirt, you don't make bad loans anymore.

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Maybe his models were off. Perhaps he should talk to the global warming folks on how to make better models (sic).

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yea, that would solve the above problems i outlined.

excellent work.

Barron

[Orlando Salazar]

TY for the article link. VNR.

[Orlando Salazar]

Good post.

[Zygote]

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you make bad loans, you lose your shirt, you don't make bad loans anymore.

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So you think bailouts are a bad idea too, right?

[Copernicus]

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Taxation has alot to do with the business cycle.

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Obviously. It falls under the first input..the availability of profitable investments changes with the tax impact.

[DrunkHamster]

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Every single business cycle in history has followed an inflation of the money supply. Not empirical enough for you?

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Do you have a source for this? I'm not saying it's wrong, just would be nice to see the evidence.

[adios]

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However, with regard to to inflation and the moderating the valleys of the business cycle the Fed has demonstrated a growing ability to reduce the variance you are so worried about. Economic theory that isnt supported by empirical data is worth just about the cost of the paper and ink it took to write it down.

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Every single business cycle in history has followed an inflation of the money supply. Not empirical enough for you?

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This is something I've been wondering about lately (maybe someone could link me to a thread, if there is already one on this topic). Why wouldn't investors adjust to the artificially low interest rates if they know from past evidence that they will come back up? If successful business people are good at predicting and dealing with market induced fluctuations why can't they do the same with government induced?

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What makes you believe investors don't adjust to artificially low interest rates? What makes you believe that business people aren't good at predicting and dealing with government induced fluctuations?

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First, I have no formal education in econ and have not studied it extensively on my own. I was working under the assumption that the business cycle is caused by people making bad investments based on an interest rate lowered by Fed caused inflation. The idea, as i have come to understand it, put forth by AC, is that these cycles wouldn't occur in an unregulated market. If investors do adjust, why does the cycle occur? Are there bad investors that cause these cycles?

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Well you didn't answer my questions but that's ok.

You wrote above in part:

If investors do adjust, why does the cycle occur?

To me this comes across as you stating that your idea is correct unless someone can prove otherwise. That's not exactly answering the questions I posed so I assume you really don't have an answer to those questions. I could give you lot's of plausible reasons for fluctuations in business activity.


Here's an article you may find interesting:

Real Business Cycles: A Legacy of Countercyclical Policies

From the article:

However, total output could also change if the effectiveness of the workers and equipment used in production changes. For instance, suppose a manufacturer of plastic products figures out some mechanical modification that reduces wastage of plastic, i.e., the modification allows the same quantity of products to be manufactured using less plastic. In that case, value-added at any given level of hours worked and equipment used will be higher. Economists refer to this change in the effectiveness with which workers and machinery generate value-added as a change in total factor productivity (TFP).

The most important reasons TFP changes over time are improvements in the technology for producing goods and services (as in the example above) and improvements in workers' skills. However, TFP could also change for other reasons. For example, TFP rises when new products are invented and sold by firms or when the price of an imported input (such as oil) falls. TFP may fall when the government imposes stiffer environmental protection laws or when a drought reduces crop yields.5

According to real-business-cycle theory, an above-average rate of growth of TFP means that more than the usual opportunities exist for the gainful employment of labor and machinery. ....


and


To summarize, real-business-cycle theory uses fluctuations in the growth rate of TFP to explain business cycles. The theory gives a good account of the cyclical behavior of major U.S. macroeconomic variables during the postwar period. Still, since the theory leaves about 30 percent of the cyclical fluctuations in U.S. output unexplained, it doesn't offer a complete explanation of business cycles.


and

Real-business-cycle theory simply calculates the optimal response to random variations in TFP growth for an economic model that resembles the U.S. economy in important respects. Prescott presented these calculations as a prediction of how the U.S. economy would actually behave when faced with erratic TFP growth. He made this connection by invoking a general principle of economics, namely, that competition tends to produce economically optimal outcomes.7

In other words, Prescott proceeded on the assumption that for the purposes of business-cycle analysis, the actual workings of the U.S. economy are well approximated by a model economy with perfect markets, that is, a model economy in which all markets are highly competitive and all markets function smoothly without any need for government regulation. Since, according to economic theory, a perfect-markets economy will generate optimal economic outcomes, Prescott simply calculated the optimal response of his model economy to fluctuations in TFP growth and took these responses to be a prediction of how the actual U.S. economy would behave with respect to those same fluctuations. The close match between predictions and fact means that his assumption was not far off the mark; somehow, the U.S. economy manages to mimic a perfect-markets economy.

italics added for emphasis.

[ShakeZula06]

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This was buried a little way down the left column on Drudge.

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Greenspan says he knew about the questionable subprime lending tactics that gave loans to homebuyers and investors with low adjustable interest rates that could rise precipitously, but not the severe economic consequences they posed. "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," he tells Stahl. "I really didn't get it until very late in 2005 and 2006."


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I'm sorry.

BULL - F____ING - S__T !!!!!

Like the head of the Federal Reserve had no clue that over-gassing the US money supply would lead to poor lending practices to people who have no financial sense or a history of not paying back what's loaned to them.

I guess the next thing he is going to say is that he had no idea that printing money would lead to inflation.

I guess it might be no suprise if that was the case as his successor thinks that the answer to inflation is more inflation.

I guess this kind of blows the theory of the hyper competant banking conspiracy.....

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Fwiw, Greenspan was a supporter of the gold standard...until he got the power to manipulate the system.

[DcifrThs]

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you make bad loans, you lose your shirt, you don't make bad loans anymore.

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So you think bailouts are a bad idea too, right?

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yes. and i've said in many posts that the fed has a real tough spot rightnow. they have to manage the economy while not bailing out investors.

i've also stated that i don't thinkt he fed should lower rates more than 25bps at all rightnow. the real economy has only exhibited small signs of weakness (-4k jobs, weak retail sales) that could be argued to require a 25bp reduction.

anything larger than that though is edging towards that bailout, which we clearly don't want if we were thinking in what is in our best interest (well, and by we i mean myself and presumably the rest of the economy)

Barron

[DcifrThs]

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However, with regard to to inflation and the moderating the valleys of the business cycle the Fed has demonstrated a growing ability to reduce the variance you are so worried about. Economic theory that isnt supported by empirical data is worth just about the cost of the paper and ink it took to write it down.

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Every single business cycle in history has followed an inflation of the money supply. Not empirical enough for you?

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this is a very different statement than "every single inflation of money supply has lead to a business cycle"

and it implies that "there have never been any business cycles that have arose without an inflation of the money supply"

since the statement you made (and its implication) is extremely strong in the mathematical sense, i think you should provide some data to back up this claim, or simply reword your claim failing the provision of the data.

Barron