Sparks Meets w/ Greenspan and Bernanke

Well done, by someone who clearly understands Austrian economics and the fraud the Federal Reserve is.



(Thanks to F.M.)

Parallel Lives: Liberty or Power?

Lew Rockwell has written a must read article that contrasts the life of Murray Rothbard and Alan Greenspan.

Rockwell captures the essence of these two men. At one point, Rockwell writes:

As for Rothbard's own character, the contrast with Greenspan could not be starker. If Greenspan was the dreary undertaker, Rothbard was the happy warrior. Rothbard thrilled to spend time with students and faculty and anyone interested in liberty. When you spoke to him, he was glad to talk about the field of interest that was the other person's specialization. Whether it was history, philosophy, ethics, economics, politics, religion, Renaissance painting, music, sports, Baroque church architecture, or even the soaps on TV, he always made others feel more important.

I met Greenspan once at a conference in Berlin. His hand shake was like shaking a cold dead fish. There was no life to the man. He did not appear to hold any excitement in him about anything.  The undertaker, indeed. Rand nailed him.

I also had the opportunity to meet personally with Rothbard on two occasions (and saw him at perhaps three conferences.) What a contrast. He was full of life and you quickly learned that, with every laugh and comment he made, came an observation about the world that you realized no one else had ever pointed out.

I can recall a conference in California, where a bunch of economists and economics students were sitting around a bit bored when one of the economists blurted out, "Where's Murray?" Everyone knew that meant that with Murray around the excitement and energy would return to the room.

Rothbard seemed to carry around an incredible energy and knowledge that spewed from him like a volcano in full eruption.  

The Rockwell piece is here.

The Elite Have Been Given the Signal to Chew Up Alan Greenspan...

But in 1987, the press treated Greenspan as a near-god. Even years later he was hailed. In 2004, this is what Forbes had to say about him:

Comparing Greenspan, who took office in August 1987, to four other chairmen who served at least seven years--based on changes in the interest rate, the performance of the stock market and the level of interest rates--Greenspan is the man. Of course there are other factors--fiscal policy established by presidents and Congress, technology and luck being three--that play a large part as well, but the numbers during Greenspan's watch stand out.

Now they are all piling on, even Brooksley Born, who is usually trotted out for spin and cover up.

Bottom line, he's old and no longer useful so the power elite are chewing him up and spitting him out.
In 1987, there was only one man who understood who Greenspan was, and not afraid to write about it. In 1987, Murray Rothbard wrote, in what he had to call a "Minority Report":

I found particularly remarkable the recent statements in the press that Greenspan's economic consulting firm of Townsend- Greenspan might go under, because it turns out that what the firm really sells is not its econometric forecasting models, or its famous numbers, but Greenspan himself, and his gift for saying absolutely nothing at great length and in rococo syntax with no clearcut position of any kind.

As to his eminence as a forecaster, he ruefully admitted that a pension-fund managing firm he founded a few years ago just folded for lack of ability to apply the forecasting where it counted- when investment funds were on the line.

Greenspan's real qualification is that he can be trusted never to rock the establishment's boat. He has long positioned himself in the very middle of the economic spectrum. He is, like most other long-time Republican economists, a conservative Keynesian, which in these days is almost indistinguishable from the liberal Keynesians in the Democratic camp. In fact, his views are virtually the same as Paul Volcker, also a conservative Keynesian. Which means that he wants moderate deficits and tax increases, and will loudly worry about inflation as he pours on increases in the money supply.

And pour on the money, as we all now know, he did.

HOT: Peter Schiff Rips Alan Greenspan; Will Pay Greenspan to Debate Him

This video is must a see. Peter Schiff, especially in the second half of the tape, completely takes apart Alan Greenspan and his claim that no one saw the housing bubble.

The failed government operators like Alan Greenspan, and government apologists like Greg Mankiw are now postionning government failures and lies as though no one could see what was coming and that anyone who did was just lucky. Schiff's response is brilliant.

Even better, Schiff has offered to pay, out of his own pocket, Greenspan his speaking fee, whatever it is $100,000, $250,000, to debate Greenspan.

This is Schiff at his best. Go Peter!

Meet a "Statistical Illusion"

Iris Mack emails a link to an NYT Op-Ed from Michael J Burry, who made a fortune selling short sub-prime mortgages.

In the Op-Ed, which is an important read, he points out that his insights, that caused him to short the subprime sector, are being labeled  a “statistical illusion” by Alan Greenspan

Let me get this straight, somehow those like Greenspan and Greg Mankiw, who didn't see the subprime crash coming in the first place are now experts on why those who did see it were just statistical illusions?
Mack says because of Greenspan's comment she is not reading anymore news today since it is ruining her Easter.

Greenspan: I Was Clueless

I have long said that Alan Greenspan never had a theory about the business cycle. In his biography, he never touches on the topic. Thanks to a CNBC documentary, my belief is reinforced.

Greenspan told CNBC in an interview to be shown tonight that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.

Further, he said that, "...everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it.In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging."

Nobody knew it in 2004? M2 money supply grew at the then pre-Bernanke rapid rate of 5.2% n 2004. Anybody with an inkling of understanding as to how the business cycle works would have understood there were massive structural problems being created in the economy becasue of this money supply printing. If he had understood the business cycle, he would have known that he was creating a bubble.

Though, later in the interview, Greenspan seems to get that if he stopped printing money there would be severe problems, political and economic.

“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”

“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”

He knows that if he stops printing he will damage the economy, but he doesn't mention, or seem to get, the structural shifts caused in the economy, by his money printing. Fascinating.

Greenspan: Banks Are Going to Need Larger Capital Cushions

Alan Greenspan has written a guest column for The Economist and details what he expects to occur in the banking system.

Writes Greenspan:

For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.”

Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily.

Much more here.

Fed Chairmen I've Known (and Opposed)

Ron Paul speaks at the Mises Institute Supporters Summit, here.

Includes personal stories about Paul Volcker and Alan Greenspan.

Victor Niederhoffer's Take On Alan Greenspan's Testimony

One can't help but think that Alan Greenspan's confession that his belief in free markets was wrong is an example of the "Old Man Syndrome" a la Cyril Burt wanting to have the most identical twins in his study, combined with George Zachar's "your own man said you were out." -Niederhoffer

In a lot of people's eyes, Old Man Syndrome, is an easy way to let Greenspan off the hook for a long career as a government apparatchik.

Greenspan's one time girlfriend, Barbara Walters, in her autobiography, Audition, even pointed out that she contentiously debated with Greenspan over the fact that he took the position of Fed chairman. She wrote: "How Alan Greenspan, a man who believes in the philosophy of little government...could end up becoming chairman of the greatest regulatory agency in the country is beyond me..."

Greenspan Finds A 'Flaw' In Free Market Ideology, I Find A Flaw In Greenspan's Thinking

As I have pointed out many times before, former Fed Chairman Alan Greenspan has never understood business cycle theory, and now it appears he doesn't even understand basic free market theory.

"Yes, I found a flaw [in non-regulated banking markets]," Greenspan said today during testimony before the House Committee on Oversight and Government Reform. "That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well."

I have found a flaw, also. It is Greenspan's thinking.

The entire free market system is based on the fact that there is not perfect knowledge. Some people will be better at making a profit than others. Those who make losses, will be pushed to the side by those who do not.

The fact that some bankers believed in faulty econometric equations is not a failure of the free market system, anymore so than the failure of the Edsel, Nehru jackets and laser discs for movies, were failures of the free market system. The beauty of the free market system is that any nut job, who can scrape up the money can try, any wacko thing he believes in. Since, it is impossible to know in advance who is a complete nut job, and who has superior vision, it is a good thing, indeed, an important thing that this freedom exists.The great turn downs for funding that then ultimately find some funding and then turn into the great success stories is how legends are built. Likewise, the great failures are studied so that they are not repeated again.

The financial institutions that bought voodoo econometric securitized mortgages should fail. No regulatory intervention needed at all.

For Greenspan to think otherwise is Greenspan's flaw in understanding the basics of the free market system. No regulation is needed, and as I have asked many times before, just what makes anyone think that regulators have a crystal ball that can never be flawed?

With government regulators in charge, the entire economy will be directed in one direction. With free markets, many, many different possibilities will be tried.

The free market is all about options, flexibility and alternatives. Regulation is about straight jackets.

LaTi: Osama bin Laden Caused the Mortgage Crisis

That's what the Los Angeles Times wants you to think.

LaTi takes readers on a wild ride this morning.

First LaTi tells us that the FBI saw the threat of the mortgage crisis:

Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.

"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said

Of course, the mortgage crisis is a lot worse than a few bad brokers. The FBI may have spotted some bad seeds moving into the mortgage brokerage industry, but they always move into the hot areas. They are probably operating in the homeland security sector, now. The real criminals were the money pumpers, Greenspan and Bernanke.

But Lati wants us to think it was a few morally challenged brokers, so they proceed:

In 2007, the number of agents pursuing mortgage fraud shrank to around 100. By comparison, the FBI had about 1,000 agents deployed on banking fraud during the S&L bust of the 1980s and '90s...

The tepid response reflects a broad realignment of law-enforcement priorities at the Justice Department in which mortgage fraud and other white-collar crimes have been subordinated to other Bush administration priorities...

Of course, the new priorities are to snoop on Americans to see if any are candidates for waterboarding. So we end up with the resource and priority challenged FBI, going after the morally challenged brokers

Absent a major shift in priorities and resources...it is likely that the Justice Department and the FBI will continue on their current path of focusing on simple cases...

What does Lati want us to think other than it is all Osama bin Laden's fault, causing the reassignment of agents that were responsible for protectng us against the mortage crisis?

It's a nutty theory, but when you don't know basc economics, that's what you get.

Fireworks at Jackson Hole: Buiter Let's It Rip

At the Jackson Hole, Wyoming Federal Reserve conference, London School of Economics professor and former Bank of England and European Bank for Reconstruction and Development official, Willem Buiter, ripped into the manner in which the Federal Reserve, the European Central and Bank of England have handled the current financial crisis. His remarks were particularly critical of the Federal Reserve claiming the the Fed is too close to Wall Street:

Cognitive regulatory capture of the Fed by Wall Street resulted in excess sensitivity of the Fed not just to asset prices (the ‘Greenspan- Bernanke put’) but also to the concerns and fears of Wall Street more generally.

The Fed listens to Wall Street and believes what it hears. This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous.

He charged that all three banks went well beyond what was necessary to stabilise the financial sector:

All three central banks have gone well beyond the provision of emergency liquidity to solvent but temporarily illiquid banks. All three have allowed themselves to be used as quasifiscal agents of the state, providing subsidies to banks and other highly leveraged institutions, and assisting in their recapitalisation, while keeping the resulting contingent exposure off the budget and balance sheet of the fiscal authorities. Such subservience to the fiscal authorities undermines the independence of the central banks even in the area of monetary policy.

He listed three factors contributing to the Fed's poor performance in handling the crisis:

[T]hree factors contribute to Fed’s underachievement as regards macroeconomic stability. The first is institutional: the Fed is the least independent of the three central banks and, unlike the ECB and the BoE, has a regulatory and supervisory role; fear of political encroachment on what limited independence it has and cognitive regulatory capture by the financial sector make the Fed prone to over-react to signs of weakness in the real economy and to financial sector concerns.

The second is a sextet of technical and analytical errors: (1) misapplication of the ‘Precautionary Principle’; (2) overestimation of the effect of house prices on economic activity; (3) mistaken focus on ‘core’ inflation; (4) failure to appreciate the magnitude of the macroeconomic and financial correction/adjustment required to achieve a sustainable external equilibrium and adequate national saving rate in the US following past excesses; (5) overestimation of the likely impact on the real economy of deleveraging in the financial sector; and (6) too little attention paid (especially during the asset market and credit boom that preceded the current crisis) to the behaviour of broad monetary and credit aggregates.

All three central banks have been too eager to blame repeated and persistent upwards inflation surprises on ‘external factors beyond their control’, specifically food, fuel and other commodity prices. The third cause of the Fed’s macroeconomic underachievement has been its tendency to use the main macroeconomic stability instrument, the Federal Funds target rate, to address financial stability problems. This was an error both because the official policy rate is a rather ineffective tool for addressing liquidity and insolvency issues and because more effective tools were available, or ought to have been. The ECB, and to some extent the BoE, have assigned the official policy rate to their price stability objective and have addressed the financial crisis with the liquidity management tools available to the lender of last resort and market maker of last resort.

It is difficult to argue with Buiter on these points. Indeed, the Fed's reliance on the Fed Funds rate target as its chief monetary tool is currently ignoring the fact that there is little growth in the money supply. Ignoring money growth is also a charge Buiter makes of the Fed: "too little attention paid...to the behaviour of broad monetary and credit aggregates."

Unfortunarly, reports out of Jackson Hole suggest that rather than take Buiter's critque to heart and learn from it, members of the Fed and others have chosen to attack the analysis:

Fed Governor Frederic Mishkin said Buiter's paper fired ``a lot of unguided missiles,'' and former Vice Chairman Alan Blinder ``respectfully disagreed'' with his analysis of the central bank's crisis management.....Mishkin lashed out against Buiter's assertion that the Fed's rate reductions may cause higher consumer prices.``I wish he had actually read some of the literature on optimal monetary policy, because it might have been very helpful in this context,'' said Mishkin, who collaborated with Bernanke on inflation research in the 1990s. Mishkin, a leading advocate of the Fed's effort to sustain economic growth through rapid rate reductions, said research shows that ``what you need to do is act more aggressively.''

Greenspan Takes A Shot At Calling The Bottom In Housing

Alan Greenspan has taken a lot of heat for his role in creating the housing bubble and his attempts to paint a picture that removes him from the scene of the crime. Charges that Greenspan was a a major factor responsible for the housing bubble rest on a strong factual basis of Fed money printing during the Greenspan Era at the Fed. However, the dissing of Greenspan has gone well beyond his role in the housing disaster. If Greenspan were to pronounce that the moon circles the earth, there would be critics today. This leads us to new pronouncements from Greenspan with regard to his analysis of when the housing crisis might bottom.

We contend that Greenspan is one of the best analyzers, in the country, of economic data, and when he doesn't have a political agenda or agenda to protect his disintegrating reputation, he can provide insights into economic numbers that few can. There's no obvious agenda, outside of being accurate, for Greenspan's recent comments to WSJ's David Wessel, on the housing market. Thus, it makes sense to carefully consider these Greenspan comments made to Wessel:

Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009...he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond...

His desk, couch, coffee table and conference table are strewn with print-outs of spreadsheets and multicolored charts of housing starts, foreclosures and population trends siphoned from government and trade association sources.

An end to the decline in house prices, he explained, matters not only to American homeowners but is "a necessary condition for an end to the current global financial crisis" he said.

"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities. We won't really know the market value of the asset side of the banking system's balance sheet -- and hence banks' capital -- until then."...

Mr. Greenspan's housing forecast rests on two pillars of data. One is the supply of vacant, single-family homes for sale, both newly completed homes and existing homes owned by investors and lenders. He sees that "excess supply" -- roughly 800,000 units above normal -- diminishing soon. The other is a comparison of the current price of houses -- he prefers the quarterly S&P Case Shiller National Home Price Index because it includes both urban and rural areas -- with the government's estimate of what it costs to rent a single-family house. As other economists do, Mr. Greenspan essentially seeks to gauge when it is rational to own a house and when it is rational to sell the house, invest the money elsewhere and rent an identical house next door.

"It's the imbalance of supply and demand which causes prices to go down, but it's ultimately the valuation process of the use of the commodity...which tells you where the bottom is," Mr. Greenspan said, recalling his days trading copper a half century ago. "For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. It'll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level."

Here's another interesting insight Greenspan made during the Wessel interview:

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."

Clueless Corrigan

As a former president of the New York Fed, Gerald Corrigan is a firm believer in the key role the central bank should play in oversight of the financial sector, writes WSJ. “Central banks are the only institutions of public policy that literally operate in financial markets every day of the week,” they quote Corrigan as saying. “If that doesn’t give you some kind of advantage, I don’t know what does.”

Corrigan left the Fed to become, surprise, a managing director at Goldman Sachs.

This guy has a very short memory if he thinks the Fed should supervise things because they have an "advantage" since they "literally operate in the financial markets everyday of the week" .

It was at the New York Fed in 2004 that New York Fed economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No". At the time we wrote that when the housing crash did finally hit that we thought their analysis would prove as embarrassing as Irving Fshers 1929 forecast:

They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."

Now, we are certain of it. And, Corrigan wants the markets regulated by these type characters?

Alan Greenspan was correct when he recently wrote:

We may not easily confront or accept the price dynamics of home and equity prices, but we can fend off cries of political despair which counsel the containment of competitive markets. It is essential that we do so. The remarkably strong performance of the world economy since the near universal adoption of market capitalism is testament to the benefits of increasing economic flexibility.

It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs. Since early this decade, central banks have had to cede control of long-term interest rates to global market forces. Previously heavily controlled economies – such as China, Russia and India – have embraced competitive markets in lieu of bureaucratic edict. The danger is that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs. If that becomes widespread, globalisation could reverse – at awesome cost

Further, during a recent interview on CNBC, Greenspan was even more specific of the dangers of the Fed becoming regulator of the financial sector. We reported on his comments this way:

He very perceptively warned that the plan Treasury Secretary Paulson is pushing to put the Federal Reserve in the role of regulator of the financial sector is foolhardy and such a role by the Fed would end in failure by the Fed as all factors are never known in advance and thus it is impossible to regulate them in advance. Hear, hear!

There is downright danger in Corrigan thinking he can micro-manage the economy, or a significant sector in it. These guys really don't believe in free markets, and simply are incapable of doing Hayekian deep thinking that will result in their understanding how the economy really works and why it can't be successfully controlled. It was with a pessimistic understanding of Corrigan type thinking that resulted in Friedrich Hayek titling one of his books The Fatal Conceit, in which he described the fatal dangers and conceit of those who think they can control and regulate an economy better than free market interactions can.

Greenspan, Again

Former Fed chairman Alan Greenspan has a commentary on the current financial crisis, over at FT.

He doesn't say anything different from what he sad in his interview last week with Maria Bartiromo, that the end of the financial crisis will not occur until the housing oversupply clears.

We found this comment by Greenspan interesting since it proves our point that Greenspan doesn't get the business cycle:

The cause of our economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has provedcapable of suppressing without severe hardship.

This is Keynes' old 'animal spirits' explanation for the business cycle. In fact, there is nothing inherent in the economy, or the nature of man, that suggests that the business cycle is an inevitable consequence of market activity. The business cycle is caused by Federal Reserve manipulation of the money supply. When the Fed increases the money supply, it distorts the direction of economic activity towards the capital good sector, when the Fed stops printing money the economy re-adjusts to the pre-money manipulation economy. Greenspan has a blind spot that prevents him from even recognizing this theory.

Greenspan Talks and You Should Listen

In a wide ranging interview on CNBC with Maria Bartiromo, former Fed Chairman Alan Greenspan provided one of the best overall analyses of the current economic situation.

As we have pointed out in the past, Greenspan studies the details of economic data better than any other economist. The one weakness Greenspan has is that, amazingly, he doesn't have a business cycle theory. This weakness displays itself briefly in the interview, but for the most part it is top notch commentary by Greenspan.

Significantly, as we have pointed out also, Greenspan understands that the current crisis is housing and housing finance crisis, rather than a full-fledged recession.

But,Greenspan does not, and this is where his lack of a business cycle theory comes in, discuss the current slowdown in money supply that could throw the economy into a full-fledged recession.

From his data digging, he points out that currently there are some 12 million homeowners that have negative equity in their homes. Of course, homes with negative equity are homes very susceptible to foreclosures and walk aways. It is these kind of numbers that cause Greenspan to say that the US is “nowhere near the bottom” of the housing slump.

Greenspan also warned that "Fannie and Freddie are a major accident waiting to happen," and speculated that the two may eventually have to be nationalized.

He very perceptively warned that the plan Treasury Secretary Paulson is pushing to put the Federal Reserve in the role of regulator of the financial sector is foolhardy and such a role by the Fed would end in failure by the Fed as all factors are never known in advance and thus it is impossible to regulate them in advance. Hear, hear!

He also very perceptively pointed out that the financial crisis shall ultimately pass, but the real long-term problem will be inflation and stagflation.

In a moment of complete honesty, he pointed out that during his reign as Fed chairman productivity growth suffocated inflation problems, but that now the tide has turned and inflation is a much bigger problem than when he was Fed chairman.

Part 1 of the interview is here.

Part 2 of the interview is here.

Last Play at Shea

Blly Joel closes out Shea Stadum with the last concert scheduled to be played there.

"They're gonna be tearing this place down, but I wanna thank you ... for letting me do the best job in the world," said Joel.



Billy Joel inspired the lyrics to EPJ's July 2003 song, Greenspan, The Slasher.

Let The Show Trial Begin!

Billions upon billions in mortgage losses, and the Feds bust these two poor saps, Matthew Tannin and Ralph R. Cioffi--subprime fund managers at the defunct Bear Stearns....

While the real criminals, Alan Greenspan and Ben Bernanke, get away...


...and the counterfeiting, that will really take out the middle class, goes on to this day!

Last look Bernanke is printing new money (M2NSA) at a 10.0% plus rate...and you wonder why prices are climbing? When the inflation rate hits 20%, and it will, can you imagine the price collusion show trials we will have?

To the execs reading this blog, keep in mind what the show trial expert of all-time, Eliot Spitzer, said, before he got busted for his own (heh, heh) private shows:

Never write when you can talk. Never talk when you can nod. And never put anything in an e-mail.

How To Monitor The Economy

This column is not about theory. It is about the practical methods of observing the economy. Obviously, the more you understand correct theory, such as business cycle theory, the more meaningful will be the data you observe.

Data about the economy can be segmented into the three separate categories, market price data, non-price raw data and processed data.

Each of these three categories offers different insights about the economy,some more valuable than others.

The key to understanding an economy is to monitor as much data as possible, not in the sense of creating "economic models" that spit out forecasts that fail to account for the complex ever changing nature of the economy, but by looking at the minutiae of economic data so that you can begin to understand what is really going on.

We have significant disagreements with the theoretical economic beliefs of Alan Greenspan, but he gets it right when he studies the minutiae.

The most valuable information about the economy comes from actual market price data. Market price data is unique in that it is not "assembled" data, but is the data of actual pricing going on in the markets. Watching actual prices results in receiving pure data untouched by human hands.

By watching actual prices, one can often notice trends in the economy that are not broadly acknowledged. For example, the price of the dollar vis a vis other currencies is for all practical purposes in an early stage free fall. Over the last five years the dollar is down against most currencies by greater than 30%. There is scant media coverage of this free fall, but by watching actual prices, this trend becomes obvious. Likewise, watching actual prices will clue the individual watching the economy to, for example, the current rising costs of many goods including wheat, gold and oil.

Watching interest rates can also clue the observer in, as to when the Fed is in a easing mode. If short-term interest rates are lower than long-term rates, then the Fed is in an accommodative mode because banks can profitably borrow short-term and lend long-term.

The more prices you watch, the more you will understand about the economy.

After market prices, the best source for information about the economy is raw data. In the raw data camp, we put such items as auto sales, newspaper advertising, money supply numbers etc. This information, often on an industry by industry basis, or better yet when it is obtained on a company by company basis, generally is private sector data.

If one watches the data minutiae in news releases by various corporations,one will began to understand what is occurring in the economy: if sales of autos are up or down, if layoff announcements are spreading across a broad spectrum of industries, or are limited to a specific sector such as the subprime industry, if money raised in the securities markets is increasing or decreasing.

The more raw data you watch, the more you will understand about the economy.

But, because this data is assembled data, there is the possibility of human error or distortion. A particular industry group may have incentive to assemble data in a way that benefits its agenda. Thus this data is not as pure as market price data and the more "assembled" it is, the more one has to be careful for distortions.

Government data and industry association data both have the potential to be finessed. Specific company data may sometimes be finessed but because there are so many separate data points when looking at a multitude of individual company pieces of data, an outlier piece of data will be more quickly spotted. With association and government data, the data is already assembled so even that check of looking at individual pieces of data is gone.

Money supply data assembled by the Federal Reserve appears to be data that is fairly accurate, but the further one travels from the United States the more one has to be careful of even central bank data.

In his book, The Age of Turbulence, Greenspan relates this story about the
Fed's dealing with the Asian currency crisis of 1997:

Korea's central bank was sitting on $25 billion in dollar reserves--ample protection against the Asian contagion, or so we thought.

What we didn't know, but soon discovered, was that the government had played games with those reserves. It had quietly sold or lent most of the dollars to South Korean commercial banks, which in turn had used them to shore up bad loans. So when Charlie Siegman, one of our top international economists, phoned a Korean central banker on Thanksgving weekend and asked, "Why don't you release more reserves?" the banker answered, "We don't have any." What they'd published as reserves has already been
spoken for.

The third category of data is processed data, this is data that is not only assembled, but assumptions are added because of lack of raw data. Most often this data comes from government and includes such data as price indexes, unemployment figures, gross domestic product numbers and productivity numbers. In addition to being extremely dangerous data because of assumptions that are made to create the data, there is also, for some of the data, political pressure to finesse the data. Of all the data, we find the processed data to be the least useful data in getting a true grip on the economy. Unfortunately, it is some of the most widely followed data,
which thus causes it to be important data in the sense that markets will react to it on a short-term basis--even though it is probably the least reliable information about the economy.

In most situations, this data is skewed to a positive reading on the economy, but during a period of the 1990's productivity numbers were actually skewed dramatically negative. This probably happened because not as many eyes are focused on productivity numbers as they are on, say,inflation numbers or employment numbers. No one put pressure on the productivity people to make them more positive--or, for that matter, to notice how out of whack they were with true productivity gains in the
economy.

Greenspan, however, spotted the inaccuracies in the numbers. He caught this because of his detailed studies of economic numbers. He tells the story in his book:

The data we were getting from the Commerce and Labor departments showed that productivity (measured as output per hour worked) was virtually flat in spite of the long-running trend toward computerization. Icould not imagine how that could be. Year in and year out, business had been pouring vast amounts of money into desktop computers, servers,networks. software, and other high-tech gear...This became evident as early as 1993 when new orders for high-tech capital began to accelerate after a protracted period of sluggish growth. The surge continued into 1994suggesting that the early profit experience with the new equipment had been positive.

There were other, even more persuasive indications that the official productivity numbers were awry. Most companies were reporting rising profit margins. Yet few had raised prices. That meant their costs per unit of output were contained or even falling. Most consolidated costs (that is, for business considered as a whole) are labor costs. So if labor costs per unit of output were flat or declining, and the rate of growth of average hourly compensation was rising, it was an arithmetical certainty, that if these data were accurate, the growth of output per hour must be on the rise; productivity was truly accelerating.

Bottom line, the statistics gatherers and econometricians at the Commerce and Labor departments missed the productivity gains of the personal computer!

Recent examples of problems with processed government data include consumer price index data and unemployment data.

Bloomberg's John F. Wasik had this to say about CPI numbers:

The U.S. consumer price index continues to be a testament to the art of economic spin.

Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.

Yet your real cost of living -- what you keep after taxes, medical bills, college expenses and other household costs -- is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.... The single-largest expense for most Americans is housing, accounting for as much as a third of household outlays. Yet the Labor Department's Bureau of Labor Statistics only tracks ``owner's equivalent rent,'' or what a home would yield if it was rented out. Rental units and homes are two very different animals, though, and the government casts a
blind eye to total home ownership expenses.

Most recently, CPI numbers have been declining, because of lower energy costs over the past three months. Anyone watching real price data knows this won't last given that oil is trading at all-time highs! But the CPI distortions continue.

As far as unemployment numbers, on September 7 we commented on the much weaker than expected payroll numbers released at the time:

An odd outlier was employment in local government education which fell by 32,000 in August, as seasonal hiring was less than usual. This unusual education jobs number accounted for approximately 30% of the difference between consensus forecasts and the actual payroll number. This would be the first time in history that a recession was led by summer school teachers!

Almost a month later, with the masses looking for the next distorted piece of government data, WSJ comments on the outlier we discussed on the day of the release:

Many economists suspect the drop in August payrolls was exaggerated by a fluky fall in local government payrolls, and new data from the Bureau of Labor Statistics supports that.

On Tuesday the BLS released state payroll data for August. If you sum up the changes across the 50 states and the District of Columbia, the total rose 159,000, compared to the decline of 4,000 in the national data.

That doesn’t mean the national tally is wrong; sum-of-the-states data are hampered by differing response rates by states and the fact the BLS seasonally adjusts each state separately, notes Ray Stone of Stone&
McCarthy Research Associates.

That said, he says the difference is unusually large. In part that may simply be catchup, since the sum of the states total has lagged the national total for some time. But he says the principal source of divergence in August appears to be in government payrolls. The national tally of government jobs fell 28,000, while the sum-of-the-states tally rose 88,000.

Mr. Stone takes this as evidence that the national data have been distorted by quirky seasonal adjustment, which is made difficult by “the timing issues
surrounding academic years, and the inconsistency in how teachers are paid over the summer. Some get paid on a 12-month basis, others on a 9- or 10- month basis. Any shift from year to year in the relative incidence of “months-paid” will play havoc with the seasonally adjusted teacher payrolls.”

In short, prices are prices, they are the most accurate data out there. Raw data is the second most valuable data, the closer to the source the better. Government processed data not only suffers from political pressures but also faces the difficulty of being assembled data where assumptions are made about all sorts of things, from the quality of product from period to period, to estimates on data not yet received, to seasonal adjustment factors which can greatly impact final data.

The fact that the media, investors and traders focus on the processed data provides an edge to any trader or businessman willing to do the work and look at real prices and raw data. The real prices, raw data minutiae observations, we'll call it the Greenspan Approach, is conducted in depth by very few. There are literally millions of prices and raw data out there that no one is looking at from an analytical perspective. There is room for industry specific analytical economists to do this work and also for economists at the national and international macro-economic level to do so. All that needs to be done is for economists to throw away their near useless processing equations, take a look at the economy from a non-processed framework, and use the Greenspan Approach of just looking at and studying the
minutiae.

In The Age of Turbulence, Greenspan explains the philosophy of the
approach this way:

I have always argued that an up-to-date set of the most detailed estimates for the latest available quarter is far more useful for forecasting accuracy than a more sophisticated model structure.

The fact that this, Greenspan Approach, is not being used, and that most economists tend to build forecasting model structures which suck the life out of data, indicates that true analytical work on the economy is still in its infancy.

The Truth About Alan Greenspan and the Real Estate

Alan Greenspan continues to warn about problems in the real estate markets and other parts of the economy. But with every warning, Greenspan paints a picture that suggests the problems have nothing to do with his irresponsible money management during his reign at the Fed. In truth, if one man can be blamed for today's problems in the real estate markets, it is Greenspan. He flooded the home mortgage market with trillions of dollars during his watch.

Here are the cold hard facts:

When Greenspan took over at the Fed in 1987, total outstanding US home
mortgages stood at only $1.82 trillion.

By 1999, total outstanding mortgages in the US stood at $4.45 trillion.

By 2004, US home mortgages stood at $7.56 trillion.

In 2005, Greenspan's final full year as Fed chairman, home mortgage debt
outstanding amounted to $9.1 trillion.

Here is some of the jawboning Greenspan conducted while he was Fed
Chairman.

In 2003, he called the refinancing of housing, "support" for the economy:

The outsized dollar volume of these refinancings--by our estimates, $1-3/4 trillion net of cash-outs--was an all-time record and represented almost
one-third of the value of all regular home mortgages outstanding at the
beginning of last year...An even greater support to the economy than cash-
outs last year was the extraction of home equity associated with a record
6.4 million existing home sales, including condos, at record prices.

And he basically advised not to worry about a housing bubble:

...any bubbles that might emerge would tend to be local, not national, in scope... In evaluating the possible prevalence of housing price bubbles, it is
important to keep in mind that home prices tend to consistently rise relative
to the general price level in this country...A sharp decline, the consequences of a bursting bubble, however, seems most unlikely...Here is Greenspan spinning things now, as though he had nothing to do with the problem.

On March 15 of this year, he said:

You can't take 10 percent out of mortgage originations without some
impact...

In October 2006, he blamed the entire thing on the Berlin Wall coming down:

I dont think that the boom came from a 1 per cent Fed funds rate or from
the Fed’s easing. It came from the collapse of the Berlin Wall.

The Berlin Wall??

In 2003, while discussing refinancings, he came closer to the truth:

Owing largely to the lowest mortgage interest rates in more than three
decades and rising home prices, close to 10 million regular home mortgages were refinanced.

There are massive distortions in the economy right now, caused by
Greenspan's low interest rate monetary policies when he ruled the Fed.
Many different sectors could implode: further problems in real estate, the
carry trade, the hedge fund industry, etc. Greenspan knows this. He sees
that the economic tsunami wave is about to hit. His warnings should not be
taken lightly. He created the mess ahead. He knows it and understands how
bad things can get.