Wikinvest Wire

The Age of Ignorance and Froth

Monday, August 11, 2008

With time comes perspective, or so they say, and despite a staunch and ongoing defense of his long tenure as CEO of the world's most important economy, former Fed Chairman Alan Greenspan just can't seem to tamp down the growing realization that he played a key role in creating the mess in which Americans now find themselves.

To some, this has been obvious for years now and the fact that so many continue to hold the man and his record in such high regard is one of the more disturbing developments of recent years, boding ill for a timely and long-lasting recovery.

Not long ago, Peter Schiff famously called "The Maestro" the "Ace of Spades" in an Iraq War-style deck of playing cards that had, as its purpose, identifying the most important and dastardly members of the Iraqi government.

Long-time critic Bill Fleckenstein re-named the former Fed chairman's book The Age of Ignorance when writing Greenspan's Bubbles.

In commentary at Bloomberg today, John Wasik picks up on the same theme, preferring the less direct "Age of Froth" to the original title, The Age of Turbulence.

One of the most humbling challenges we scribes face is to attach a meaningful name to an era.

How do you describe a time of obscenely easy credit; stock and housing bubbles; stratospheric Wall Street profits, outlandish banker salaries and general prosperity?

Now that the post-bubble age is prompting painful bailouts as the world economy reels from a credit crunch and writes down bad debts, it's time to consider what I call the Age of Froth.

Not only will the aftermath of this epoch be ripe with bankruptcies, foreclosures and bailouts, it will be a time of great reckoning. Building equity and saving will be vital.

I derive the concept of froth from former Federal Reserve Chairman Alan Greenspan, who told Congress on July 20, 2005, that "the apparent froth in the housing markets appears to have interacted with evolving practices in mortgage markets."

Greenspan's remarks coincided with the peak of the bubble, when U.S. median home prices hit $230,200 that July. We may not see house values reach that level for another decade or so.

More disturbing about Greenspan's observation is his acknowledgement that interest-only adjustable mortgages that were used "to purchase homes that would otherwise be unaffordable'' may leave "some mortgagors vulnerable to adverse events.''

As it stands now, that was the financial understatement of this young century. Greenspan and the Fed -- with the exception of former Governor Edward Gramlich, who wrote a prescient book about mortgage abuses -- did nothing to curb these "exotic" mortgages, hence the current crisis.
The financial understatement of the century indeed.

Wasik then goes on to discuss other financial market "froth", Fed complicity, and the fall-out from it all offering up a comparison to the Great Depression for the period ahead, concluding with, "Happy days may be here again, but it will take years."

Oh Dear, it must be Monday morning.

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