Greenspan’s Legacy

I am traveling today, but filling in today with a special guest post is Jack McHugh:

Stocks took some positive news on the credit front and rallied Thursday, though efforts to run away to the upside were thwarted in the afternoon (see below).

The Bank of England, while not cutting rates or providing the type of "emergency liquidity" on offer at the Fed or ECB, nonetheless did ease some restrictions on its member banks this morning. LIBOR fell a bit, swap spreads came in, and financial stocks everywhere jumped.

Boosting the financials even further was word from Countrywide that it had secured even more funding.  The 14% rise in CFC’s stock price set the tone for what started out as a moonshot to the upside for most equities.

But enough of an undertow developed in technology stocks that some profit-taking set it before the bell.  The major averages finished with gains ranging from 0.3% (Russell 2000) to 1% (Dow). Treasury prices broadly retreated, which was unsurprising given the action in stocks and given that credit spreads narrowed. The dollar enjoyed a nice rebound, as it advanced against every major currency except the Canadian dollar. Commodities were mixed to down, and most major sectors saw some components rally while others declined (e.g. gasoline was up nicely, natural gas was down hard). The CRB index shed 0.25% by day’s end.

Alan Greenspan seemed larger than life during his tenure; some (like Congress) even worshiped him. But the impending release of his book (The Age of Turbulence) is causing him (or his publisher) to cast his long shadow just as Chairman Bernanke girds for his most important FOMC meeting yet. An interview with the Maestro will be aired this weekend on 60 Minutes, but excerpts found their way to media outlets this morning (see below). While giving Chairman Bernanke some moral support, Mr. Greenspan acknowledged that he misunderstood the housing bubble, the lax lending practices that supported it, and its potential negative effects on the rest of the U.S. economy.

Speaking of the poor mortgage underwriting practices that he lifted not one finger to fix, Greenspan said the following:

"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,” Greenspan said in the 60 Minutes interview. "I really didn’t get it until very late in 2005 and 2006,” as he was about to leave office…"It was nothing to look into particularly because we knew there was a number of such practices going on, but it’s very difficult for banking regulators to deal with that,” Greenspan said in the interview, CBS said. 
-Bloomberg, Greenspan Says He Failed to Foresee Subprime Rout

I’m sorry, Mr. Greenspan, but bank lending practices are EXACTLY what the Fed can and should regulate. Under Mr. Bernanke, for example, mortgage lending regulations have recently been tightened. It’s probably not entirely fair for me to castigate the former Chairman until I view the entire interview, but these snippets seem like revisionist history at best and the height of disingenuity at worst.

That he is trying to hog the headlines just as his successor is trying to deal with a mess of his creation will certainly not burnish the Maestro’s legacy. Paul Volcker used to just say "no comment" when asked about monetary policy after he left office. I wish Mr. Greenspan would have the class to follow his lead. His legacy was tarnished in my eyes long ago, but perhaps recent events will cause others to see that he was anything but omniscient.

It’s high time investors realized that central bankers are not gods; they are fallible, just like you and me.


Good stuff, Jack.

Note: Greenspan’s book — The Age of Turbulence — gets released Monday . . .   


Global Stocks, Dollar Rise, Bond Risk Falls on Improved Credit Outlook
Michael Patterson
Bloomberg, Sept. 13 2007

Greenspan Says He Failed to Foresee Subprime Rout
Craig Torres 
Bloomberg, Sept. 13 2007

Bernanke Spurns Greenspan’s Quick Fix, Seeking Data
Craig Torres 
Bloomberg, Sept. 13 2007

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