February 10, 2006

While his tenure as Fed chief has finally run its course, The Greenspan Era is very much still in play. We’re in the late stage of the protracted Greenspan Credit Cycle, and this predicament today offers little flexibility when it comes to monetary management. Chairman Bernanke will enjoy little discretion (and less room for error) outside of efforts to cautiously guide and, most importantly, sustain The Greenspan Boom. Mr. Greenspan relished in extraordinary flexibility throughout his term, while professor Bernanke will surely be hamstrung by a backdrop much less accommodative in many respects domestic and international, economic and financial…

Throughout the financial markets, there is overwhelming conviction that the Fed has the capacity and determination to ward off financial dislocation and crisis. There is also a troubling view, championed by Mr. Greenspan, that derivatives markets actually reduce systemic risk, when they most certainly promote greater leveraging and risk-taking (in the process prolonging the Greenspan Credit Cycle). For the system as a whole, there is strong conviction that the Fed controls system liquidity and will always act to underpin asset prices. This is not a legacy to canonize.

There is the expectation today that most Americans are accumulating sufficient wealth to retire comfortably, although the U.S. system in aggregate is borrowing and consuming too much to have the economic wealth creating capacity to live up to inflated expectations. Now that the U.S. Credit Bubble has gone global, there are expectations in China that their recent tremendous gains in wealth can be extrapolated, while rising expectations in India and elsewhere envision their economies following similar growth paths as to that of the Chinese. The oil producing and commodity-based economies now have expectations of great future prosperity. Never have so many had their expectations rise to lofty levels – the type of elevated expectations that leads to disappointment and disillusionment. For now, we have global competitors for limited energy and commodity resources liquefied like never before.

In his Tuesday farewell comments to Federal Reserve Board staff, chairman Greenspan stated, "We are in charge of the nation’s currency, and the central bank, because of that, is involved in everyone’s daily lives. We are the guardians of their purchasing power." Similar to much of Greenspan’s tenure, I cannot accept his parting words of inspiration at face value. The Greenspan Fed ceded the keeping of the value of our currency to Wall Street, to the money center banks, to the GSEs, to the hedge funds, to the derivatives markets, to mortgage companies, to subprime lenders, to the securitization marketplace, to the captive finance companies, to foreign central banks - to the Financial Sphere generally. I have in the past referred to Alan Greenspan as the Great Inflationist – a modern day John Law. The Essence of The Greenspan Era is one of unprecedented "money" inflation, Credit inflation, asset inflation, financial wealth inflation, expectations inflation and obfuscation. The Essence of the Ongoing Greenspan Era is one of an historic Credit Bubble. His legacy should be based upon future circumstances and developments with respect to this Bubble and not how things appeared the afternoon he paraded out the door.