Trader’s Narrative

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.

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.