Still "The Maestro" to some

A voluminous piece of writing by Steve Matthews is up at Bloomberg this morning on the subject of Fed Chairman Ben Bernanke - his background, his predecessors, and the challenges he faces today.

It's funny that one could write something like this without casting aspersions toward his immediate predecessor.

Ben Bernanke, the son of a small-town drugstore owner, has been preparing his entire adult life for the fight against what Greenspan has called the "most wrenching" economic crisis since World War II.
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During Greenspan's 18 years in charge of the Fed, the U.S. endured only two recessions, both lasting less than a year, and enjoyed the longest economic expansion in U.S. history.

"He has a legitimate claim to being the greatest central banker who ever lived," wrote Princeton economist Blinder, who spent 19 months as the Fed's No. 2 in the mid-1990s, in a paper presented in August 2005 at a Fed conference devoted to the "Greenspan Era."

As hard as it might be to believe, former sycophant Blinder has since changed his tune a bit when it comes to assessing the former Fed Chief's legacy.

With all the Greenspan critics that have surfaced lately, it's not clear why the author had to go to Bill Fleckenstein for a contrary view - well, aside from the fact that he "wrote the book" on the subject. And it was a mild opposing view at that.

Critics say Greenspan was also partly responsible for speculative bubbles, first in tech and Internet stocks in the late '90s, then in housing prices. The housing bubble swelled as Greenspan kept the fed funds rate at 1 percent in 2003 and '04.

"One of the reasons we are in this particular predicament is because for 20 years the Fed has been trying to suppress the downside of the business cycle and has been proposing bailouts and easing money whenever money needed easing," says William Fleckenstein, president of Fleckenstein Capital Inc. in Seattle, Washington, and co-author of "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve."

My copy is sitting here waiting for me to give it some attention - it should be good.

If you worked at Bloomberg, all you really had to do put the Greenspan era in its proper light was to search the company archives (which someone over at Patrick.net apparently did), and you'd find some of the most incriminating evidence available, this report coming over four years ago in March of 2004.

U.S. homeowners have amassed a record $6.82 trillion of mortgage debt as real estate values jumped in the past decade, and have borrowed against their homes for spending money. Federal Reserve Chairman Alan Greenspan, the nation's guardian of financial stability, is supporting them.

"We know that increases in home values and the borrowing against home equity likely helped cushion the effects of a declining stock market during 2001 and 2002," Greenspan said in a Feb. 23 speech in Washington.
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Rising home prices contributed to a 12 percent jump in household net worth last year to a record $44.4 trillion in the fourth quarter, according to the Fed.

That helped convince Greenspan that Americans can continue to accumulate debt. If households run into trouble, they can use their home equity to get out of it, the argument goes. The 78- year-old central banker also has said that rising real estate values are supported in many markets by a shortage of land and by immigration.

"Without an examination of what is happening to both assets and liabilities, it is difficult to ascertain the true burden of debt service," Greenspan told the Credit Union National Association Feb. 23 in Washington. "Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress."

Translation: "As long as house prices continue to go up - no problem!"

You don't hear too much about "equity cushions" anymore - they were all the rage just a couple years ago. Here's how they were viewed in a September 2005 speech from the former Fed chairman:

In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.

Not such a vast majority anymore and not so sizable a cushion.