Wednesday, March 26, 2008
This blog is three years old today! Time sure flies when you're having fun! The terrible twos are now history and, before you know it, I'll be asking for the keys to the car.
According to Wikipedia, the phallic-oedipal phase follows right on the heels of the "terrible twos" and this new period is "object-centred, characterized by possessiveness of the parent of the opposite sex and jealousy and rivalry with the same sex parent. The child becomes aware that there are aspects of the relationship between the parents from which he is excluded."
Excluded? ... Me? ... Waaaaah!!
The Mess is in the News
Apparently this humble little "blog with a birthday" was mentioned on American Public Media today (hat tip SL). Will Wilkinson, an obviously uptight research fellow at the Cato Institute (the tip-off was that he still refers to Alan Greenspan as "the Maestro" in a manner completely devoid of sarcasm), thought maybe the Time Magazine's Blame-O-Meter wasn't the best tool to help understand why we are in such a mess these days.
Many people point the finger at former Fed chief Alan Greenspan, the Maestro himself. He kept interest rates low, and encouraged techniques to make mortgages accessible to more people. By doing so, the argument goes, Greenspan practically blew the housing bubble with his own breath and should have seen it coming.Hmmm... financial analyst... me-likey.
One financial analyst has created a blog devoted exclusively to blaming Greenspan. It's called "The Mess that Greenspan Made."
But Monday morning quarterbacking is a bit too easy, isn't it? If Greenspan really should have seen it all coming, shouldn't Wall Street have seen it coming, too? But instead of getting rich from their foresight, they got crushed under their "collateralized debt obligations."
Maybe I should take back that part about Will being uptight ... Nah!
Actually, it was good timing that this issue was raised again today - as part of this three-year anniversary post - because there is an all-too-common impression that Wall Street is run by mature individuals.
I've never been there or met anybody who works there but, as far as I can tell from what I read in the newspapers, it's just a bunch of three-year olds who run the place. A bunch of three-year olds who will run their tricycles straight into the side of the house if their parents don't keep an eye on them.
In this analogy, the parents are the Federal Reserve and other regulatory agencies that were apparently not paying much attention to junior and his hot new wheels.
Oh well, enough of that. It's time for the obligatory re-reading of the very first post, the Stephen Roach classic It Didn't Have to be this Way. Here it is in its entirety:
An appropriate first post - Stephen Roach hits another home run with his latest missive "The Test". The last paragraph serves as an excellent premise for this blog:Yes, three years ago - March of 2005 - the problems were painfully clear to some of us while nearly everyone else was going Ga-Ga over real estate and marveling at how wealthy we had all become while the Fed chairman was extolling the virtues of "financial innovation" as it relates to mortgage lending.
"It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy." Yes, it's easy on the way up. Ever increasing liquidity to meet every emerging problem and everyone gets rich - not rich in the old sense, of course, with higher real income and savings, but through higher asset prices for stocks and homes.
"Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? " All aquiver, that's right. Paul Volker must be so proud of his successor ... about to bring down the whole house of cards with quarter point increases to the Fed Funds rate in the low single digits.
"I still don’t think America’s central bank is up to the task at hand. In the face of disruptive markets or growth disappointments, this Fed has repeatedly opted to err on the side of accommodation. I suspect that deep in its heart, the Federal Reserve knows what’s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. " This is my central belief on this issue, and the motivation for this blog - that given the choice of some economic pain and a long slow death by inflation, the Fed will opt for the latter. It will never be able to raise interest rates like Paul Volker did, in order to put this fiat currency system back on a track that is sustainable for another generation or two - instead, we will continue to swim out to the deep water and hope for the best.
Dan? You commented on this first post three years ago. Are you still around?