More finger pointing

Geez. Figuring out who was to blame for a mess that few people even saw coming wasn't so hard to do here more than two and a half years ago.

Now, an ever-increasing number of observers find their index finger veering back toward what should have been the obvious source of the current credit and housing market problems - the Greenspan Fed.

Last week the Brits took their turn in The Economist points a finger at central bankers.

Yesterday, long-time Fed watcher Greg Robb at MarketWatch filed a report that leaves little doubt about the direction of another finger - Roots of credit crisis laid at Fed's door:

In the wake of the financial market turmoil that arose over the summer and even now threatens to push the U.S. into recession, there has been a remarkable lack of finger-pointing so far over the cause of the crisis.

But one observer, Tom Schlesinger, the founder and executive director of the Financial Markets Center, a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of "regulatory foot-dragging" that has harmed the public.

Schlesinger maintains the Fed's prevailing regulatory philosophy has shifted from that of 20 or 25 years ago, which in essence was "here is the line between right and wrong, don't cross it," to a current underlying policy that "anything and everything that might be called financial innovation ought to be embraced."

"This is a very faulty premise that deserves debate and reflection and ultimately, in my opinion, a changed perspective," Schlesinger said in an interview with MarketWatch.

He points specifically to the opposition to government regulation that flourished at the U.S. central bank under former Fed chief Alan Greenspan and has continued unabated under his successor Ben Bernanke.

Also appearing yesterday was Housing flameout; California falls into the sea by Mike Whitney where a superb choice of words for a section heading appears about half-way through the article.

Is it really fair to blame one man for destroying the US economy?

Probably not. But Alan Greenspan is still tops on our list. After all, Greenspan "presided over the greatest expansion of speculative finance in history, including a trillion-dollar hedge fund industry, bloated Wall Street-firm balance sheets approaching $2 trillion, and a global derivatives market with notional values surpassing an unfathomable $220 trillion." (Henry Liu, "Why the Subprime Bust will Spread," Asia Times) Greenspan is also responsible for slashing the real Fed Funds Rate so that it was negative for 31 months from 2002 to 2005. That decision flooded the housing market with trillions of dollars in low interest credit, creating the largest equity bubble in history. Now that that bubble is crashing, Greenspan has hit the road. He now spends his time leap-frogging from city to city, hawking his revisionist memoirs of how he steered the ship of state through troubled waters while fending off protectionist liberals. Look for it in the Fiction section of your local bookstore.

Still, can we really blame "Maestro" for what appears to have been a spontaneous flurry of "free market" speculation in real estate?

To a large extent, yes.
...
The mess that Greenspan made

The ruinous effects of Greenspan's housing bubble can't be fully appreciated unless one spends a bit of time studying some of the charts and graphs that are now available. These graphs are the best way to dispel any lingering suspicion that the housing bubble may be some left-wing conspiracy theory. It's not, and these links should provide ample evidence to the contrary.

bubbleinfo.com/statistics-2007/2007/3/15/arm-reset-schedule.html
static.seekingalpha.com/uploads/2007/9/7/amortization_1.jpg
static.seekingalpha.com/uploads/2007/9/7/amortization_2.jpg

The next thing you know, economists will be trying to figure out how to get asset prices into the inflation statistics in order to avoid this sort of a mess in the future.

Well what do you know?

It looks like that's already happening - the Wall Street Journal Economics Blog is already trying to Help the Fed Target Asset Prices and has the following chart ready to aid in the effort.

It looks like we're making progress.