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IT’S TIME TO SAY

“GOODBYE MR. GREENSPAN”


Update: January 31, 2006

Well, he's finally gone. 

Goodbye Mr. Greenspan. 

I won't miss you.

During his 18 years and 6 months as the Chairman he found it necessary to move the interest rates 87 times.  The "Prime" rate stood at 8.25% when he was confirmed on August 11, 1987 and it stands at 7.50% when he retired today.  That's an awful lot of activity, uncertainty and interference with the financial markets for a net change of only 3/4 of 1%.   For some reason, critically important to him I'm certain, he deemed that his constant intervention in the financial markets was necessary for the survival of the nation.

January 14, 2000 the prime rate stood at 8.50% and the Dow Jones Industrial Averages closed at 11,722.98.  Greenspan's fear of "irrational exuberance" and the stock market "bubble" prompted him to increase the interest rates three times over a three month period to 9.50% influencing the DJIA "bubble" to fall 16.48%  by March 7, 2000.  On January 3, 2001, Greenspan made the first of 13 straight interest rate reductions lowering the prime rate to 4.00%, the lowest rate I have seen in the 34 years I have been recording such rates.

After a full year of the prime rate sitting at 4.00%, Greenspan discovered a "bubble" even more pernicious than the stock market.  A "housing bubble".

June 27, 2004 Greenspan made the first of 14 straight interest rate increases in an attempt to protect the country from this incidious "housing bubble".

Twenty-seven interest rate changes in a 6 year period.  Thirteen straight reductions and fourteen straight increases.  Net change 0.75% 

Than's an awful lot of activity for such a brief period and such a minor net change.  An awful lot of confusion for long term planners of corporate expansion, research and development, retirement planning, home purchasing and other investment decisions.  This straight-line up and down rate adjustments suggests to me that Mr. Greenspan either possess an uncontrolable passion to impose his insights on the rest of us, or, he may be just a little confused.

Today, on his last day, Greenspan raised the interest rate for his final time intending to protect us from the ravages of the terrible "housing bubble".

Is he right? 

We will know within a year.

Personally, I'm glad he's gone.

David


October 2, 2001
 
Today, the Federal Reserve Board, Federal Open Market Committee, (Fed) cut the discount rate for the 9th time this year.  The rate was lowered by 50 basis points (A basis point is 1/100 of a percentage point) taking the rate from 6.50 at the beginning of the year to 2.50 today representing a 39-year low dating back to the Cuban Missile Crisis in 1962.
 
This interest rate reduction is welcomed by all since the U. S. economy has been declining for nearly a year.  Which brings us to another question.  Why is the economy failing?  Factors to consider include, the world-wide economy is weakening, the economy really is cyclical, and, I’m sure there are other undermining factors which are outside the thrust of this article and I really don’t wish to address.

However, let’s take a look at Mr. Greenspan’s personal viewpoint of his role in steering the U.S. economy.   We all remember his famous December 5, 1996  “...irrational exuberance...”  comments.  I don’t wish to post the entire speech here, but a fuller account of his meaning reads as follows:  (bold emphasis is mine)
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?  We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability.

Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.”
What?

At the time Mr. Greenspan made those comments, the Dow Jones Industrial Averages, (DJIA) stood at 6,500.  For some reason, this really bothered him.  “..irrational exuberance....”  “Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.”   The DJIA was, in HIS personal opinion, too high.  He didn’t like it.  Even though Inflation was low, unemployment was low and production was high, he didn’t like it.  By May of 1999, the DJIA had risen to record levels of 11,000 and higher.  Mr. Greenspan had enough and began to raise interest rates.

The purpose, powers and role of the Fed is conducting open-market operations in the Treasury, of setting the discount rate for commercial bank borrowing of reserves, of establishing reserve ratios on demand and time deposits, and of controlling margin requirements governing the purchase of corporate stock.  This is a very narrow and limited role.
 
The Fed have no legal authority to intervene in the stock market, but he has been doing just that.   (Dr. Greenspan is the Fed.  The additional board members rubber-stamp his decisions) “...evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.
 
So, in response to his interpretation of his duties,  June 30, 1999 Greenspan raised the discount rate 25 basis points.  The first of 6 interest rate increases he would make over the next year in an attempt to inhibit the growth of balance sheets, both corporate and personal.  January 14, 2000, the DJIA closed at an all time high of 11,722.98 and May 16, 2000 Greenspan raised the discount rate a huge 50 basis points to 6.50%.  No one recognized exactly how determined he was or to what lengths he would go to suppress the markets and he broke the momentum, the will and the appetite of the investors.  In addition, he drove the cost of capital so high, corporations ceased expansion, acquisitions, research and development, and significantly, the terribly high interest rates placed an enormous stress on the earnings of all business both large and small.

We are now, most everyone agrees, in a full recession.  In my opinion, it was engineered intentionally and in total by miscalculations of Alan Greenspan.  In all fairness, I’m certain he didn’t intend his restraints to be this severe, nonetheless, he has made a number of monumental mistakes in judgement since June of 1999.  He imagined a problem (shifts in balance sheets) which required his solution (higher interest rates), irrational exuberance, attempting (successfully) to influence the financial markets, and assuming authority far beyond the scope of the Fed to control corporate and personal assets resulting in the destruction of trillions of dollars of wealth.

Today's 50 basis point reduction is the 9th reduction in 10 months, since January 3, 2001.  The Fed adjusted interest rates only 21 times during the previous 11 years of relative stability, .  This "stability" permits corporate planners to make intelligent decisions regarding growth, benefit plans, research & development and all other areas involving sound financial planning.   Now, we have had 12 rate adjustments in less than 2 years.  This uncertain and volatile capital cost environment disrupts all manner of financial planning and corporations and individuals alike become reluctant to make financial commitments for new or additional office space, factories, product lines, homes or automobiles. 

Greenspan’s scheme to lower interest rates and encourage capital investment has not worked.  Most monies currently being supplied by new debt is being used to satisfy older debt with higher rates

In the past, Dr. Greenspan has governed the Fed, and the economy, with a true and even hand.  The sustained economic success we have enjoyed since Ronald Reagan's 1982 tax cuts (only a few economic speed bumps) has been a direct result of his steady hand on the wheel of our financial ship of state.  But, like all living things, he cannot last forever.  He is slipping.  We are currently suffering a severe financial crisis with which he cannot cope and doesn’t have a clue where the solution lies.
 
The time has come for Dr. Greenspan to announce his retirement and step aside.  Since September 11, 2001 this country has seen many changes with many more to come.  The timing is right.  At 76 years old, he can declare his passionate concerns for the survival of some presumably endangered lower species and allow President Bush to appoint a fresh chairman.  The guiding light which once shined so bright is now growing dim.
 
It’s time to say, Goodbye Mr. Greenspan.

That’s the way I see it.

David
October 2, 2001




Notes:

Dr. Greenspan was born on March 6, 1926, in New York City. He  received a B.S. in economics (summa cum laude) in 1948, an M.A. in economics in 1950, and a Ph.D. in economics in 1977, all from New York University. Dr. Greenspan also has performed advanced graduate study at Columbia University.  He originally took office as Chairman and to fill an unexpired term as a  member of the Board on August 11, 1987.

I have always enjoyed listening to the linguistically gifted Dr. Greenspan.  He has developed what everyone alludes to as “Greenspeak”.   Read this:
 
"After eight years of economic expansion, the economy appears stretched in a number of dimensions, implying considerable upside and downside risk to the economic outlook.  We are ready to move quickly in either direction."

What the hell does that mean?  Also:  
 "The same forces that have been boosting growth in structural productivity seem also to have accelerated the pace of cyclical adjustment.  The hastening of the adjustment to emerging imbalances is generally beneficial.”
What the hell does that mean?

And to prove “Greenspeak” is alive and well, while speaking before the Senate Banking Committee June 20, 1995:  
"If I say something which you understand fully in this regard, I probably made a mistake."
Mr. Greenspan won’t go away.  He’ll go on and on and on just like the Energizer Bunny and Michael Jordan.


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