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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
March 31, 2010
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Alan Greenspan presented a paper today at a Brookings Institution conference titled “The Crisis.”  His paper is 45 pages, and I haven’t yet had a chance to dive fully into it.  But what I’ve read thus far is deserving of some Friday afternoon comments. 

Mr. Greenspan:  “In short, geopolitical events ultimately led to a fall in long-term mortgage interest rates that in turn led, with a lag, to the unsustainable boom in house prices globally.”

The historical fact of the matter is that the Greenspan Fed mistakenly accommodated both the Bubble in U.S. mortgage Credit and the resulting unprecedented Current Account Deficits.  Somehow, Mr. Greenspan, Dr. Bernanke and others will still argue that the massive outflow of dollar liquidity to the world – that was largely monetized by foreign central banks – was not the primary catalyst for the destabilizing decline in global market yields.  And perhaps they would argue that Federal Reserve policy – including rapid rate cuts and telegraphed baby-step increases and talk of “helicopter money” and “unconventional measures” - didn’t entice speculative leveraging throughout the market for GSE and “private-label” MBS.  And I doubt Greenspan will concede that his position as the leading proponent for derivatives, hedge funds and contemporary Wall Street finance, more generally, was a major factor promoting their fateful runaway expansion.  Clearly, Greenspan and Bernanke refuse to acknowledge that they looked the other way as the GSEs ran completely out of control.

It’s just hard for me these days to stomach the same flawed dogma that the financial crisis was caused by some nefarious “global saving glut.”  It was caused by a Credit Bubble whose epicenter was in Washington and New York.  The crisis was all about the consequences from a historic government-induced mispricing and inflation of Credit.  At its core, the crisis manifested from a massive inflation of financial obligations by the Credit system commanding the world’s reserve currency.  There is plenty of blame to go around, but the ongoing saga will surely be viewed as a case of monumental central banking mismanagement.

Mr. Greenspan:  “We had been lulled into a sense of complacency by the only modestly negative economic aftermaths of the stock market crash of 1987 and the dot-com boom.  Given history, we believed that any declines in home prices would be gradual. Destabilizing debt problems were not perceived to arise under those conditions.”

I don’t buy it.  After the 1987 stock market crash, the 1994 bond market crisis, the 1995 Mexican meltdown, the 1996/97 Asian crisis, the 1998 Russian collapse and LTCM debacle, Brazil, the Y2K scare, Argentina, the technology stock collapse, the corporate debt crisis, and the 9/11 disaster – how on earth could there have been a shred of complacency anywhere within the Federal Reserve system?  Clearly, major changes in the nature of contemporary finance had increased risk-taking and systemic fragilities.  I believe the opposite of complacency was likely at work.  Fragile underpinnings and Bubble dynamics throughout mortgage finance had the Fed hamstrung to baby-step timidity – and it was this submissive approach to financial regulation that really fed the U.S. and global Credit Bubble.

I do agree with Mr. Greenspan when he writes that pricking Bubbles does not come without economic pain.  But the key to monetary management – certainly not recognized by Greenspan - is to ensure that Bubble risk doesn’t inflate to the point where policymakers are afraid to employ restraint and discipline the instigators of excess.  There must be rules of the road that work to restrain excessive risk-taking rather than promote it.

It appears Mr. Greenspan has, again, missed his opportunity to come clean and admit that the Greenspan/Bernanke doctrine of ignoring Bubbles and focusing instead on “mopping up” strategies was fundamentally flawed and a historic disaster in monetary management.  Don’t blame complacency.  The issue was flawed central banking doctrine and a dogmatic hands-off approach to monetary (mis)management.

Mr. Greenspan:  “The primary imperative going forward has to be (1) increased regulatory capital and liquidity requirements on banks and (2) significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades…”

It is not clear to me how increased capital standards coupled with liquidity and collateral requirements is going to restrain global central bank balance sheets and contain fiscal deficits.  I don’t see how these measures will counteract the deep distortions in the market pricing and allocation of finance today throughout the global financial system.  This “primary objective” will have no meaningful impact on the unfolding government finance Bubble or upon structural economic imbalances.  A focus on private-sector Credit is fighting the last war.

Mr. Greenspan:  “Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible.  Assuaging their aftermath seems the best we can hope for.”

This is the best we can hope for?  As we have witnessed for (at least) the past 18 months now, there is not a more powerful apostle for central planning than the hardship and confusion associated with the bursting of a major Credit Bubble.  Cannot Mr. Greenspan today at least question the danger to free markets occasioned by central banks’ manipulation of market interest rates and their repeated market interventions? 

I wish we could implement a gold standard.  Global Credit systems and economies are in dire need of a mechanism that would work to promote at least a semblance of stability.  Regrettably, at this stage of massive global debt and synchronized global inflationism, a gold-based monetary regime is implausible.  As such, I am a proponent of sound central banking – the kind that doesn’t exist today.  It’s our last resort.  And it’s in this vein that I am so frustrated with Mr. Greenspan.  He just refuses to address the dangerous flaws of contemporary central banking. 

So we learn so little from the past and set course for another historic Bubble – The Global Government Finance Bubble.  Flawed central banking doctrine leads to mistake after bigger mistake.  The consequences of previous government market interventions ensure only more intrusive interference.  And Alan Greenspan, the seeming free-market ideologue, works to ensure he goes down in history as the father of modern inflationism.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is