Thursday, March 12, 2009

"Easy Al"'s FooFooDust

Alan Greenspan, the Ayn Rand-ite and ex-Fed Chair, sprayed a lot of foofoodust around the room in yesterday's Wall Street Journal, mostly in hopes that it would obscure his (leading) role in the mortgage bust.

It might for some. But not Eggster, not Boockvar, and not me.


What the Fed did under his stewardship and with great influence from Bernanke in response to the 2001-2002 recession was cut rates from 6.5% in Dec ’00 to 1% in June ’03 and left them there for one year even as the economy was averaging 4% growth (including 7.5% in Q3 ’03 alone) before raising rates in June ’04 to 5.25% over time through June ’06. The 1% rate was predicated on the belief that deflationary pressures were strong and thus gave the Fed leeway to be extremely accommodative with its policy. This deflation forecast which reached its pinnacle in mid ’03 was in the face of the CRB index having already rallied by 26% off its Oct ’01 lows. [The CRB index measures the price of commodities; an increasing CRB denotes INflation, not DEflation.]

Why did Easy Al do that?

The more goods Americans bought from overseas where the US trade deficit exploded, the more foreign money was parked in US Treasuries. In addition, Greenspan’s debasement of the US$ with his rate cuts...[inter alia] led to the rise in commodity prices which buoyed all commodity producing nations, who then parked more money in US Treasuries, thus keeping a lid on longer term interest rates even in the face of the Fed raising rates beginning in June ’04 and thus giving the housing market further rope. Foreign holdings of US Treasuries rose 21% in ’04 and 23% in ’05.

Which fits with my very short criticism of Al's piece: we know that the price of any commodity is low when there is plenty of that commodity available. Interest rates are the "price" of money (assuming the value of money is relatively stable.) Thus, we can infer that the drop in long-term rates was at least partially driven by an excess of the commodity--the USDollar.

Al never 'splained where all those USDollars came from--but it was the Fed, folks.


If I put Al’s defense into straight English it would looks something like this:

Between 2002 and 2005 home price increases were driven by low mortgage interest rates. However, the low mortgage interest rates were not caused by the low fed-funds rate. Rather, mortgage rates had always been driven by short term interest rates.

My first response is Huh? Has Al finally crossed into the final mental frontier? What does Al believe drives short term rates? You guessed it, Fed-fund rates or a proxy for them, the prime rate.

[That's followed by a fairly dense section outlining rates, including a neat-o chart, during the period in question.]

Sorry Al. Just because you didn’t see the same trend as the historical trend doesn’t make it untrue. While I didn’t always agree with your actions, I do believe you were a public servant in the best sense of that phrase. Stop with the attempt at revisionism. You had a number of years of great success but in this case Al, you blew it

Al is retired in great comfort. He should retire his pen, too.

1 comment:

Josh said...

Well put.