Trader’s Narrative

Talk about deleveraging. Markets all around the world are getting spanked. Brazil hit the circuit breakers after a 10% drop. Argentina’s MERVAL dropped 18%. Iceland is basically a very large crater by now.

But the real contagion that no one is talking about is the busting of the seaweed bubble:

No one has any idea what happened, eh?

Hmm… didn’t Alan Greenspan take a vacation in Indonesia recently?

Former Federal Reserve head honcho Alan Greenspan said today that he was “shocked” at the breakdown of the financial order.

Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity — myself especially — are in a state of shocked disbelief.

Shocked, SHOCKED! I tell ya! … which inevitably gave me this flashback from Casablanca:

Greenspan was putting in a performance for the House of Representatives Committee on Oversight and Government Reform. He was badgered into giving a lukewarm mea culpa, saying that maybe, sorta, he was, you know, “partially” wrong about blocking any and all attempts at regulation.

It is quite simple really. And it should be even clear to the politicians sitting in front of Greenspan by now. He flooded the world with too much liquidity as an attempt to save the US from the consequences of the tech bubble imploding. He created the carry trade, the “Greenspan put” and will undoubtedly do down in history as the worst Fed chairman in history.

Well, to be charitable to Alan, as a Fed chairperson, I think he was a very good politician.

With the subprime hitting the fan, a lot of acquaintances, friends and family are asking me to explain how we got into this mess. This video does a very good job of that - or as good a job as you can do in about 10 minutes:

The most important point they miss is that the crisis is a confluence of many separate mistakes that have come together to create the perfect financial storm. It begins with Alan Greenspan overseeing the creation of the excessive liquidity which flowed into the stock market and through excessive speculation created a bubble which popped in 2000. This was further exacerbated by the subsequent attempt to create another bubble in real estate to save the US from the consequences of the stock market implosion.

Greenspan was specifically asked and prodded about both bubbles as they were forming under his stewardship of the US monetary policy. In each instance, publicly, he was insistent that everything was fine. That there was no bubble. That there couldn’t be a real estate bubble because real estate is not fungible. He even went as far as recommending ARMs!

That set the stage for everything else that followed. So it is unfortunate that the role of the most damaging Fed Reserve chairman in the history of the US is not given its proper context.

I also wish 60 Minutes had more Jim Grant, he is a very smart guy - highly recommend you check out the Grant Interest Rate observer. What was Robert Pickel thinking in agreeing to this interview? He comes across as a total douche. Which he probably is.

If all this gets you depressed, here is an alternative explanation of the subprime mortgage mess.

Paul Krugman writes in today’s New York Times:

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.

But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.

We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

I agree. Although it doesn’t absolve the millions of Americans who got mortgages which they did not understand for houses which they could not afford, using a system of valuation rigged to artificially pump up prices… the bulk of the blame has to be liberally heaped on the previous Fed chairman.

He poo-poo’ed repeated concerns about derivatives and who refused to acknowledge a full-blown real estate bubble even as it inflated under his nose.

Of course, now he not only agrees that there is and was a bubble, he now even calls it by that name and goes as far as calling it a “global housing bubble”. But just to be clear, it isn’t his fault in any way whatsoever.

Retirement does wonders for the brain.

Last night Alan Greenspan appeared on the Daily Show with Jon Stewart to promote his new book: “The Age of Turbulence”.

Jon Stewart asks him a very intelligent question that I never would have guessed he would broach. Greenspan’s answer is as surprising in its candour.

If you haven’t already, read “Gold and Economic Freedom”, an article Greenspan wrote in his younger days and which was published in Ayn Rand’s “Capitalism, the Unknown Ideal” in 1966.

Oh and regarding his forecast abilities, Greenspan is too modest. In all his time as a private econometric consultant as well as his tenure as Fed chair, he was among the best contrarian indicators. Ever.