Greenspan vs Greenspan

[EJ]

Greenspan vs Greenspan

Most investors are comfortable considering asset bubbles as excesses of stupid investors, greedy CEOs, over-paid bankers. After a bubble is over, a few appointed sacrificial lambs are slaughtered, such as Goldman Sachs analyst Abby Joseph Cohen after the stock bubble and National Association of Realtors Chief Economist David Lereah after the housing bubble.

Few are as keen to explore the idea that an asset bubble is a kind of racket start to finish. Your average Joe on the street suspects as much, as when his central banker tells him "bubbles are only perceptible after the fact" at the top of a historic stock market bubble, and eight years later, when the same now ex-central banker is out on the book and lecture circuit, bubbles become more easily perceptible and he warns of the potential for a crash in China's inflated stock market. Joe becomes even more curious when the same central banker suggests Joe take out an ARM when interest rates are at a 40 year low. What? Joe thinks. Does he think interest rates are going to stay near 40 year lows for the term of a 30 year mortgage? Joe's suspicions are further aroused when a little more than three years later the same ex-central banker at a conference says he is surprised that interest rates have remained so low for so long, as if he’d expected them to rise all along.

All this "inconsistency" as Martin Mayer politely put it in our interview with him, gives the average Joe the sense that the trusted guardians of the financial system not only do not behave as independently as one might expect, but appear at times to be on the sales team trying to pawn the latest over-priced financial product on him, public or private. Not good for the system in the long run, if you ask me. A disaster already except for Joe’s amnesia; Joe seems to retain the painful memory of his last fleecing for about six months, after which he can be reloaded with the promise of a new quick road to riches.

The price drops are a big surprise to Maryland homeowner Rick Boardman. When the tech bubble went bust in 2000, Boardman took his money out of the stock market and put it in something he thought would be safer, real estate. “We thought it was a good investment, but also something we could enjoy and might change our lifestyle too,” says Boardman.

He and his wife bought 20 acres of valuable waterfront property in Maryland confident it would turn an easy profit. Boardman remembers the summer of 2000 as a time when "everything was just boom, boom, boom, especially on the eastern shore.”

Boardman built two homes; one to sell, which would finance the other, his dream home. But the $2 million home has been on the market for over a year, and Boardman can’t make the mortgage payments anymore. Work on his dream home stopped. “What was our dream has become a financial nightmare. Our goal now is just to get out with something to pay off the debt,” says Boardman. “We’ve come to the absolute end of the road.” Mortgage Mess: Foreclosures On The Rise (CNBC)

Speaking of pawning overpriced product off onto suckers, Greenspan said today that despite the recent spike in Treasury yields caused by weakness in the market, he is not worried that China is going to dump treasuries and crash the US bond market and dollar. Will China be reluctant to sell treasuries because the U.S. is such a good investment? No. He explained that China will not sell treasuries because China does not have anyone to sell them to.

Proving once again that playing Joe for a sucker is only part of the game. The USA sometimes plays entire nations for suckers. For those who have forgotten the Guidotti-Greenspan rule.

Opening the Fistfuls of Treasury Bills
April 29, 2006 (economistsview.typepad.com)

Altogether, by the count of the International Monetary Fund, international reserves held by developing countries doubled in just three years, reaching $2.9 trillion at the end of 2005, equivalent to almost one-third of their total gross domestic product. Much of this money is languishing at low rates of return in American government bonds.

There is a logic to this investment strategy, unprofitable as it is. The Treasury bond binge by China is part of a policy of exchange-rate management to keep the value of its currency competitive against the dollar ... For most other developing nations, these reserves are simply insurance against financial disaster. A long list of developing countries have experienced devastating crises in the last 15 years: Mexico in 1994; Thailand, Indonesia and other Asian countries in 1997; Russia in 1998; Brazil in 1999; and Argentina in 2002.

The crises followed a more or less standard path. Investors pulled money out of the country; the country ran out of foreign currency and devalued its own currency; if it had a lot of short-term foreign debt, it defaulted; and interest rates soared.

As the dust settled over the ruins of many former "emerging" economies, a new creed took hold among policy makers in the developing world: Pile up as much foreign exchange as possible.

These days, many poor countries are guided by what is known as the Guidotti-Greenspan rule — named after Pablo Guidotti, a former Argentine finance official, and Alan Greenspan, who called for developing countries to amass enough foreign reserves to cover all their foreign debt coming due within the next year.

Whether duping Joe or Wen, eventually neither gambit is going to work out for the USA.