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<DIV><FONT face=Arial><FONT size=1>March 7, 2000<BR><B>Alan Greenspan: friend or
foe?</B> </FONT></FONT></DIV>
<DIV><FONT face=Arial><FONT size=1>Author, William Fleckenstein</FONT></DIV>
<P>
<P><FONT size=1>Alan Greenspan outdid himself in his speech Monday in Boston. He
entitled it, "The Revolution in Information Technology," although I call it "An
Ode to Technology." Quite frankly, in my opinion, it completely embraced the new
era and what wonderful things technology could do for us. I found myself
disagreeing with many different points that he made, and agreeing with very few,
other than the obvious that technology is wonderful and it's made our lives
better. </FONT>
<P><FONT size=1>In my opinion, in his speech Greenspan has confused technology
with the bubble, the very same bubble that he has created. He has in essence
been reading the stock prices and doesn't realize what he has wrought. In a Rap
<A
href="http://www.siliconinvestor.com/insight/contrarian/index.gsp?date=2000/01/03";>I
wrote in early January</A>, I had a piece about Alan Greenspan inventing the
Internet. I noted that since the fall of 1998 he printed copious amounts of
money, and then last year when he should have been tightening, he panicked and
printed even more money because of Y2K concerns. </FONT>
<P><FONT size=1>This fomented a bubble and money naturally flowed to the stocks
with the most imagination. That centered on the Internet and other
Internet-oriented ideas, as there was a lot of imagination potential and few
facts. Those stocks did the best and the leaders of those companies were deemed
to be visionaries, and whatever they proclaimed was therefore to be the future.
What Greenspan has basically done is believe the action on the tape and the
proclamations by the companies, and has decided that the Internet and technology
have truly revolutionized everything in the most unique way. </FONT>
<P><FONT size=1>The flaw in this analysis is that technology has been
revolutionizing the world for a very long time, and that does not allow one to
pay absolutely stupendous prices to sales ratios, price-to-earnings ratios, etc.
The Fed has fomented a bubble, and now the Fed has used the results of that
bubble to justify the fact that things are more or less on course. </FONT>
<P><FONT size=1><B>Al's less-than-perfect predictions...</B> Rather than try to
refute point by point all of the claims that he made, I thought it might be more
instructive to illuminate for readers the fact that poor Alan Greenspan has been
no better and in fact quite a bit worse than many other prognosticators over the
past 20-25 years. Let me first say that we all make mistakes, being human, and
the future is never quite as clear as the past. But having said that, I think
it's important for folks to know that Greenspan has missed many inflection
points. This is especially important since so many people have placed their
faith - not to mention their net worth and a good deal of borrowed money - on
the fact that a) he's going to pick the right interest rate to make everything
work just spectacularly and b) he's going to know exactly what to do when we
have a problem in the stock market. </FONT>
<P><FONT size=1>So the question really is, should folks let everything ride on
his ability to divine the future and to always do the right thing? Does his
track record suggest that he is the man to bet on and is he the national
treasure that so many congressman have said that he is? I say no. His record is
littered with absolutely terrible calls at different inflection points, so I'd
like to reprise a few of his past predictions and even some of his revisionist
history of his past calls. </FONT>
<P><FONT size=1>My purpose is not to be mean or vindictive. I'm sure that folks
could have fun with some of the things that I've said in the past. However, I am
not the Fed chairman, nor do I believe that I know the future and know how to
control the outcome of things as well as the Fed appears to think it does.
Furthermore, folks do not believe that I can, which is not the case with
Greenspan. </FONT>
<P><FONT size=1><B>On the 1973 recession...</B> I'd like to start off with a
quote from Jan. 7, 1973. <STRONG><FONT color=#ff0000>"It is very rare that you
can be unqualifiedly bullish as you can be now," </FONT></STRONG>Greenspan
commented to the New York Times when he was president of Townsend Greenspan.
That was two days after the 1973 stock market peak, when the market was on its
way to declining 50 percent over two years, and we endured the worst recession
since the Great Depression. </FONT>
<P><FONT size=1><B>On the S&L industry...</B> The last thing that Alan
Greenspan did before he left Townsend Greenspan to become Fed Chairman, was to
opine on the S&L industry, and more precisely Charlie Keating's S&L.
What follows is a vignette from the book "Inside Job," written by Steven Pizzo,
about an encounter in 1984 between Greenspan and Ed Gray, who was the Federal
Home Loan Bank board chairman. </FONT>
<P><FONT size=1>"Gray received a letter from respected economist Alan Greenspan
telling him he should stop worrying so much. Greenspan wrote that deregulation
was working just as planned, and he named 17 thrifts that had reported record
profits and were prospering under the new rules. Greenspan wrote the letter
while he was a paid consultant for Lincoln Savings & Loan of Irvine, CA,
owned by a Charles Keating, Jr., company. Four years after Greenspan wrote the
letter to Gray, <FONT color=#ff0000><STRONG>15 of the 17 thrifts he'd cited
would be out of business and would cost the FSLIC $3 billion in losses."
</STRONG></FONT></FONT>
<P><FONT size=1>In addition, in 1985, Greenspan pronounced specifically that the
management of the Keating thrift enterprise was "seasoned and expert" with a
"record of outstanding success in making sound and profitable direct
investments." For that quote I'm indebted to Jim Grant's terrific book, "The
Trouble with Prosperity," which we will quote from again later. </FONT>
<P><FONT size=1>So those quotes provide a peek into the thinking of Alan
Greenspan while he was still in the private sector. By the time the 1990
economic downturn rolled around, largely as a result of unsound banking
practices and most especially the S&Ls, he was the Fed chairman. And I think
it is most instructive to look at what he thought as we entered that recession
and what he later claims to have thought about that. </FONT>
<P><FONT size=1><B>On the 1990 recession...</B> For that bit of insight, I would
like to quote extensively from Jim Grant's book, because he did a superb job of
capturing what Greenspan said at the time and his later recollection of what he
said. </FONT>
<P><FONT size=1><B><I>His 1994 version...</I></B> "In testimony before the
Senate Banking Committee in May 1994, Alan Greenspan all but claimed that the
Fed had acted alone. `In the spring of 1989,' Greenspan led off, `we began to
ease monetary conditions as we observed the consequence of balance-sheet strains
resulting from increased debt. Households and businesses became much more
reluctant to borrow and spend, and lenders to extend credit - a phenomenon often
referred to as the `credit crunch.' In an endeavor to defuse these financial
strains, we moved short-term rates lower in a long series of steps through the
summer of 1992, and we held them at unusually low levels through the end of 1993
- both absolutely, and, importantly, relative to inflation. These actions,
together with those to reduce budget deficits, facilitated a significant decline
in long-term rates as well.' </FONT>
<P><FONT size=1>"Students of the Greenspan record, listening to the chairman
claim credit for the restoration of American solvency, were left to wonder what
they had missed. Interest rates had fallen, of course, and the broken financial
economy had knitted. However, it was the first they had heard of this
commendable and forehanded course of action by the Federal Reserve. </FONT>
<P><FONT size=1>"It was not until October 1991 that the phrase `economic
headwinds' entered the Greenspan repertory. He used the metaphor to describe the
unprosperous gusts that were buffeting the aircraft GNP, the source of which he
identified as the debt predicament. However, it was a <U>historic</U>
observation rather than a <U>predictive </U>one. Bank stocks had reached low ebb
fully one year before Greenspan favored a Rhode Island audience with this
apercu; the stock market-assisted recapitalization of the banking system was
already long under way. In the midst of the overbuilding of real estate and the
overleveraging of corporate balance sheets in 1988-90, Greenspan had been
inclined not to dwell on the issue of credit, possibly because it had not yet,
to him, become an issue. In remarks titled `Innovation and Regulation of Banks
in the 1990s' before the American Bankers Association in October 1988, for
example, he did not mention the excessive lending against real estate that was
being carried out by members of his audience even as he spoke to them, and that
would be featured as one of the great regulatory issues in the decade under
examination. </FONT>
<P>
<P><FONT size=1><B><I>His 1990 version...</I></B> "In testimony before the Joint
Economic Committee in January 1990, on the eve of the failure of Drexel Burnham
Lambert, a signal event in the credit contraction of 1989-92, Greenspan did not
dwell on junk bonds, junk loans, failing banks, or in general on `the
consequence of balance-sheet strains resulting from increased debt,' as he would
put it in 1994. Although he did mention commercial real estate, among other
macroeconomic trouble spots, he did not let on that interest rates would be
progressively lowered to reduce the `financial strains' he would see so clearly
four years later, while looking backward: <B>`But such imbalances and
dislocations as we see in the economy today probably do not suggest anything
more than a temporary hesitation in the continuing expansion of the economy,' he
wound up in that 1990 appearance.</B> The messy default by Washington Bancorp on
its unrated commercial paper came only one week after a pronouncement by the
Federal Reserve Board, also based in Washington, D.C., that no generalized
credit contraction was under way." </FONT>
<P><FONT size=1>The purpose of this exercise is to point out that Greenspan has
historically NOT had a strong grasp of the banking system or the financial
markets. (For the sake of brevity, I have not used rosy scenario quotes from him
just prior to the LTCM debacle.) He has, however, been willing to ease, and ease
aggressively, thereby creating the right financial conditions for a mania. For
this he is revered, but yet printing money should not be confused with knowing
what you are doing. Greenspan is no Paul Volcker.
<BR><BR><BR></FONT></P></FONT></BODY></HTML>
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Subject: [RT] Re: Good post!
Date: Tue, 7 Mar 2000 22:06:37 -0600
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Status: RO
The analogy between stocks that go up and those that go down in the market,
and voting in the polls for your favorite candidate or delegate on "super
Tuesday" seems interesting. Perhaps a Realtrader could write a viable and
profitable system using techniques of Gore or Bush or McCain pollsters?Or
perhaps these same pollsters could learn a little Edwards and Magee and
improve their forecasting? A political "cup and handle" pattern formation,
for example. Food for thought.
Russ
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