Recession will be worst since 1930s, Greenspan says.
In a speech on Tuesday, Feb. 17th to the Economic Club of New York, former FedHead Alan Greenspan offered a few notable chestnuts:
“To stabilize the American banking system and restore normal lending, additional TARP funds will be required…” and
the financial system needs to be stabilized before any economic stimulus program will have a positive impact.
He also points out that the housing market must stabilize in order for an economic recovery to begin.
There is absolutely no doubt in my mind that Greenspan, as the economic policy architect of the last 20 years, is almost singlehandedly responsible for the collapse we are enjoying, and like any self-respecting auto executive who has driven his company into the ground, Greenspan continues to offer counsel to the overlords of the economy HE drove into the ground.
It was Greenspan who created the conditions in the credit markets that enabled our nation to turn our illiquid assets (the equity in our homes) into money we spent on sneakers and plasma TVs. Then we Americans further leveraged that equity, much like the banks leveraged subprime loans through exotic derivatives, using credit cards. This pumped trillions of dollars into the economy in an invisible hyperinflation, and we spent our way through a 1920s-esque period of excess during which we traded our American citizenship for global consumerism.
Few people noticed. Or rather, few people had the courage to say anything. Ron Paul did, but was handily dismissed as a crank even though he was absolutely right.
No society or person can live on leverage. Eventually the bill comes due, and needs to be paid.
Yet Greenspan based his entire approach to our economy on a fundamentally flawed premise: that real estate always goes up in value.
To be fair, this is true – from the perspective of an economist. Over time, real estate will reliably increase in value. But anything in nature that goes up will also encounter periods of correction where a temporary pullback occurs.
The actual real-world implementation of his plan never accounted for that aspect of real estate’s perpetual climb, and what works well for an economist or statistician does not work quite as well for a banker or mortgage borrower who has grown accustomed to relying on the equity in his home for spending cash.
While it’s true that real estate boomed until it busted, real inflation-adjusted wages in the US have flatlined since George W. Bush became President.
This presents a quandary. What happens during this period of correction, when stressed homeowners see energy prices reach historic highs, and it costs a mortgage payment to commute to work?
On (Greenspan’s) paper, said homeowner can dip into his home equity ATM and cover expenses that way.
Oops. That equity went *poof* in June 2007, and along with a few trillion dollars in derivatives, the downward economic spiral began.
At that, Greenspan hustled out the door. Said he wanted to spend more time with his family, or some such nonsense.
Now Greenspan is back to tell us that the housing market must “stabilize” in order for an economic recovery to begin. But there’s a problem with that. The radical increase in housing prices was not accompanied by a similar increase in wages, meaning the homebuyer’s ability to repay his loan did not increase commensurately. This would imply that housing prices, in order to become “stable”, must return to 2001 prices!
I’m a firm believer in free markets, though by this, I do not mean markets totally unfettered by government regulation. I believe every game needs a referee, but it is a ref’s job to make sure nobody cheats. It is not the ref’s job to play in the game. The same goes for government and financial markets. The government’s role should be one of oversight, to ensure that market players don’t cheat by doing things like creating exotic derivatives and colluding with bond rating agencies to represent them as something other than worthless assets.
Yet here is unrepentant Capitalist Greenspan telling us that “more TARP funds will be needed” and that we must bring stability to the “financial system” before economic stimulus will work.
But, government intervention in the financial markets is the last thing we need. Government is inherently reactive, and usually by the time the government has reacted, it’s already too late – particularly when the “solution” is to exacerbate already out of control inflation. How long can the government sell Treasuries to overseas investors before those overseas investors realize that every bond they buy represents further dilution of the money they will be repaid with?
As it is, government created a new problem in its efforts to spur lending by the banks. While it provided hundreds of billions of bailout dollars, it simultaneously increased margin requirements, forcing banks to maintain higher cash reserve to outstanding loan rations, effectively giving banks money to lend that they could not lend.
Government can not be the invisible hand, bringing force to bear against the holism of the financial markets. The only way to return to stability will be to let market forces do their work; to let failing companies fail, even if they’re too big to fail. Equilibrium can not be bought, it must be achieved through natural forces, or we will be perpetually providing TARP money and bailing out a sinking ship.
To say that real estate goes up is at this point only true in the sense that the price of a big mac always goes up. the first thing i learned in economics class is that price is the result of supply and demand.
Probably for the next 20 years at least, the demand will be less for six figure and above housing simply because people will not be given credit or mortgages by banks to anywhere near the same degree. moreover, the supply will be plentiful because of all these houses that have been built under the greenspan philosophy in florida and phoenix and the like that are currently unoccupied or perhaps still under construction. large supply with small demand equals low price, and that looks to be the case for a long time.
1. Heard an economist on NPR talking about how the Japanese tried fixing their economy back in the 80’s and 90’s by trying to bail to bail out banks so they’d lend to consumers and that didn’t work. What did was doing the banks job until the economy stabilized. Of course, now they’re completely screwed because the global economy has tanked en mass.
2. I’m an anti-globalization-ist so I have to say… DOWN WITH FREE MARKET CAPITALISM! Isn’t this what got us into this situation? First off, the value of stuff doesn’t actually increase, slowly or otherwise. It is what it is. The value of a thing is based on the materials and the labor required to make it. Everything else is a socially agreed fiction.
As far as there ever being a level playing field, I think that’s a pipe dream. As long as there’s real inequality – in education, in wealth, in access – the theoretical equality we hope for will also remain nothing more than another socially agreed upon fiction.
Re 1: Japan experienced a decade or more of stagflation because of the central bank’s intervention in the popping of their credit bubble. The cure was worse than the disease for sure, but the banking system was never totally nationalized, and Japan has never really recovered from the 80s. Now it’s getting disastrously worse.
Re 2: Free market capitalism is not in and of itself inherently evil. What IS evil is wanton deregulation for the sake of deregulation. I’ve used this line before: freemarkets are great, but every game needs a referee to keep the players honest. What was wrong with the Clinton era globalization efforts, that we worsened under Bush, was that everyone was gaming the system at some level, and our own country’s leaders sold us out for short term gains, thereby creating an utterly inequitable, exploitative and unsustainable system of global commerce. We alone were not globalizing – it was an effort by every nation with cash to spend.
Today, of course, those nations are hoarding cash – that is becoming progressively worth less and less (relatively).
The values of “things” do change, even as merely a measure of time and materials, which was Adam Smith’s fundamental argument.
But values are related to scarcity, and if skilled labor is scarce in Ohio, but plentiful in NY, then those goods produced in Ohio will cost more, while those produced in NY will cost less. As long as every individual’s time is valued differently, there will be differences in values of goods produced. But you’re right about the pipe dream. An hour of a heart surgeon’s time will never equal an hour of a Wal Mart greeter’s time, so there will never be true ‘equality’ in the purest sense.