The Worldwide Investor

A media war recently has pitted the former “guru” of central banking against pundits who claim that he is to blame for the current housing crisis. Mr. Can-Do-No-Wrong of the 1990s is now being accused of sacrificing the long term to save the short term crisis that existed when the tech bubble burst. How much of an effect did long lasting low interest rates have on the housing bubble in America, that is now threatening to throw the economy into a recession, or possibly worse? And is Greenspan’s argument that the run-up in housing being a worldwide phenomenon exalt him of any wrong doing in this matter? Those issues are discussed below.

During the late 1990s, when the US economy was growing at breakneck pace, “Bubbles” Greenspan was reluctant to raise rates to cool the economy and prick the bubble before it got out of control. While even he himself in 1996 quoted the phrase ‘unbridled enthusiasm’ to describe 6 years of positive stock market gains, he did nothing to stop it. Rather, a few years later, he found justification that we are in a “new economy,” being the reason for such tremendous growth. He was a fool then, he handled the situation poorly, and the excuses he made are laughable. Did someone actually hire this guy to run a hedge fund? He himself said he doesn’t know what a bubble when he sees one. That’s funny, cause I can see one….and I’m certainly not alone.

With the tech bubble bursting, the US economy hit a recession that was far deeper and far longer than the economists would have you believe. If government-massaged numbers went back to reality, it is likely that the recession would be seen as lasting about 16 months as opposed to 8 months, as they currently claim. The stock markets 2.5 year drop is far more correlated my number than theirs. The Fed’s response to the situation was to drive rates down to 1%, giving people almost no incentive to save, and his loose monetary policy flooded the system with liquidity giving rise to an inflationary spiral. At first it effected mostly housing prices, but now it has swung into energy, metals, and most recently, agriculture.

With interest rates so low and inflation climbing, savers began to lose out on purchasing power. They were forced to play their hand and put money into real assets that could potentially appreciate with inflation, instead of losing power in a bank account or equities. A similar story played out in the 1970s, another high inflationary environment. This time, however, the pace of building began to rise in tandem with escalating prices, and the crowd that followed pushed prices up to unreasonable levels. Poker became a national pastime, and the consumer gambled their future on rising house prices. A nation of gamblers isn’t necessarily Greenspan’s fault, but he certainly did not help the situation by killing savers and investors with such low interest rates.

Greenspan counters arguments that he is to blame by citing the worldwide rise in house prices. While he certainly makes a good argument in that sense, it must first be known that until now (thanks to Greenspan and Bernanke) the rest of the world did whatever the United States did. Interest rates across the world were low because of the global fallout from the tech boom, and while you didn’t pull the trigger on other central banks, you were driving the getaway car, Mr. Greenspan.

In addition, the other countries that went through a housing boom in many cases were undergoing structural changes that led to justifiably higher prices on assets. The boom in commodities has jolted the Australian economy, sending a large amount of additional money in that direction and giving Australia its lowest unemployment rate in 30 years. Similar situations hold true for Canada and New Zealand, while Britain and Spain have been freeing up their economy to a more market oriented philosophy than they have been in decades. London is now the world’s financial capital thanks to all the stupid red tap imposed upon public first in America. The financial center was the United State’s to lose, and we certainly have lost it. Of the biggest IPOs in the world last year, less than 10% of them were done in the US, compared to 90% of them just 10 years ago. This is mostly a result of Sarbanes-Oxley, which is a law passed after the tech bubble burst in 2000. “Bubbles” unwillingness to prick the bubble before it got out of control is the reason this law was passed and the reason the United States lost its economic dominance. Many years from now, when history is studied in Chinese economics classes Smoot-Hawley and Sarbanes-Oxley will be uttered in the same breath.

You may not have pulled the trigger, Mr. Greenspan, but you drove the getaway car.