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That leads me to Alan Greenspan -- the very man who created the conditions for the stock bubble and the housing bubble -- who (1) claimed that real estate couldn't experience a bubble, (2) actually suggested that folks obtain adjustable-rate mortgages as short-term rates were making their lows, and (3) has been unable to realize that the Fed should have been warning banks about their imprudent lending standards.
But if you can't see a problem, you can't try to head it off at the pass -- just as he was oblivious to the bad real-estate loans and junk-bond "investments" that helped precipitate the 1990-91 S&L collapse.
Ironically, in 1985, as a paid consultant to Charles Keating's Lincoln Savings & Loan, Greenspan proclaimed that its management was "seasoned and expert" -- with a "record of outstanding success in making sound and profitable direct investments." He later wrote a letter to Edwin Gray, then-chairman of the Federal Home Loan Bank Board, telling Gray to "stop worrying so much," and "that deregulation was working as planned." Greenspan noted 17 S&Ls that had just reported record profits. Within four years, 15 of those 17 institutions were out of business, costing the Federal Savings & Loan Insurance Corp. $3 billion.
Just as the masthead of my daily column says "All roads lead to inflation," by my reckoning all financial problems lead back to Greenspan. I have not penned a Greenspan rant in some time. Given all the focus on his speech last week -- and the fact that he's getting ready to ride off into the sunset -- I will have a special follow-up column tomorrow to reprise his comments. Stay tuned.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money.
Wow, there are some really good points that have been made and also some interesting questions from BobCousins & crew. I have to start with the quote by Mr.Bean.
An unbalanced world is getting caught up in the blame game. As the IMF and World Bank gather in Washington this weekend for their annual meeting, the risk of finger pointing is high. There are two sides to this increasingly contentious dispute: The United States is pinning the blame for its massive trade and current account deficits on the rest of the world -- bemoaning sluggish growth in Europe and Japan, along with unfair trading practices in China. The rest of the world holds the saving-short US accountable for a disproportionate share of the global economy's unprecedented imbalances. Where should the blame be placed?
Context is key in framing the answer to this question. In 2005, our estimates suggest that the US will account for fully 70% of all the current account deficits in the world economy (see my 16 September dispatch, Asymmetrical Risks of Global Rebalancing). That's more than double America's 28% share in world GDP as measured at market exchange rates and more than three times the US weight of 21% as gauged by the IMF's purchasing-power parity metrics. By contrast, Japan's surplus -- the world's biggest -- accounts for only 17% of all the current account surpluses in the world. In fact, it takes ten economies -- Japan, Germany, Russia, Saudi Arabia, China, Norway, Switzerland, Canada, Singapore, and the Netherlands -- to make up the same 70% share on the surplus side of the equation that America accounts for on the deficit side. In my view, there can be no mistaking the highly disproportionate share that America plays in fostering overall imbalances in the global economy.
But that still begs the key question of blame. Many continue to view America's outsize deficits as simply a by-product of chronic growth and return deficiencies elsewhere in the world. That's pretty much the party line in Washington these days. US politicians and policy makers argue that America is doing the world a huge favor by playing the role as both a powerful engine of growth as well as a magnet for returned-starved capital. This has prompted Washington's (and Wall Street's) triumphalist explanation of global imbalances -- that the US capital account surplus is effectively driving the current account deficit. The other side of the debate is the tale of a saving-short US economy. With America's net national saving rate hovering at a record low of 1.5% of GDP since early 2002 -- and likely to get considerably worse over the next 12-18 months -- the United States is putting enormous pressure on the rest of the world to fund its economic growth.
For financial markets, the implications are profound: The longer the world continues to play the blame game, the more the imbalances will build, and the greater the likelihood of a hard landing for the global economy and world financial markets. America's failure to own up to its major role in fostering global imbalances is especially disturbing. By refusing to address its ever-mounting imbalances, the US flirts increasingly with a classic current account adjustment. That underscores downside risks to the US dollar and upside risks to real US interest rates. America's lack of leadership in resolving global imbalances is hardly commensurate with its dominant position in the world economy.
To answer the question about whether the US' twin trade and current account deficit is sustainable.
First as this article points out it is clearly about size. Some people mentioned Canada, Norway and Finland. Okay, fair enough, but their economies simply are not big enough to counteract the structural weaknesses of the US. Countries like China, India and the US matter because of their size. China does not have the GDP per person, but they have 1.3 billion people. The US does not have the GDP per person of Luxembourg for example, but we are talking about a relatively high GDP per person and 295 million people. As this article pointed out, the US accounts for 70% of the world's current account deficit. Is it sustainable?
The US currently has a very low rate of taxation. If it rose to pan-European levels or Canadian levels that would wipe out the US' budget deficit (sorry, I don't have time to do the math). Also, currently the US is one of the few countries that does not have a fuel surcharge. Retail gasoline is around $3 per gallon, if taxes rose to pan-European levels, so that it costed closer to $6 per that would raise a lot of money considering the US uses 3.285 million gallons of gasoline per year (excluding other products 4.015 million gallons equiv). Add in road taxes and other surcharges seen elsewhere and it is clear that the US has a as yet untapped sources of revenue. That would be a huge shock to the world economy, but it would cure US deficits. I am not advocating higher taxes, I am just saying this would address the budget deficit leaving aside the obvious solution of also cutting back on discretionary spending.
The article is also interesting for me because I invest in emerging markets. You literally have investment bankers running around the world looking for smart investments. Places to invest money. If we saw an opportunity, like the narrowing interest rate spread between central european countries and European Union (convergence) we all piled on and made lots of money. If there were investment opportunities in Africa, you can bet investment bankers would be there. Money knows no color. It flows to the highest return for any given amount of (perceived) risk. It begs the question, why do Asian central banks accept such a low rate of return? Risk adverse? Unimaginative? Fingers burnt in the Asian crisis? Here is an interesting article from The Economist. http://www.economist.com/finance/displayStory.cfm?story_id=4401162
(if you cannot access it, I can post it)But, it appears that central bankers and many others prefer the size and liquidity of the US treasury market to more lucrative investments. That is their choice, but I think they are leaving money on the table that could fund useful projects elsewhere. For example, a lot of ME oil money is flowing into Turkey right now. This is a good play. It is in the pan-Arab world; it is close by, but not far from Europe; Turkey looks like it is moving closer to the European Union in its reforms (whether it ever actually gets an accession date?), so it is another convergence play; and Turkey has a young population and is growing quickly. However, it is unrealistic to assume that all global savings can pile into these smaller markets without chasing diminishing returns.
Mr.Bean, I did not say interest rates in Europe were too high. I said, interest rates in the European Union were too high for Germany who have 5.216 million unemployed workers, 12.6% unemployment and anemic economic growth of just 1.0% in 2005. The Bundesbank can issue debt, but obviously monetary policy (interest rates and money supply) are the domaine of the ECB. Yes, German exports are high. I said that. But, so are Japan's. High exports do not necessarily translate into high domestic demand or growth. The costs to subsidize the former eastern Germany are not insignificant. EUR 1.24 trillion between 1991 and 2003 (and, no, not all of it has been recycled back into the west German economy).
And, neither is Germany's EUR 13 billion per year payment to the EU budget. By far the largest of any EU member.
Together these costs can be seen like a tax on growth. If I have a profitable business, but I am forced to subsidize other unprofitable businesses, my business suffers from underinvestment. Either I could borrow more money, pledging my profits against repayment, or I could grow faster organically. So, yes, it does make a difference and it is not the talk of neo-con press. I have lived and worked 7.5 years in Germany and my wife's family is German, so I guess I have a pretty good idea about what is going on in Germany and the problems it is currently facing. Which, ironically, also add to America's external inbalances getting back to the original question. If Japan and Germany, which are the 2nd and 3rd largest economies after America are growing at below trend then there is excess capacity which is deflationary. Correct the structural imbalances in Japan and Germany and less capital would flow into the USA and China or the risk weighted return would be higher to reflect the risks, which would be more efficient. When capital is cheap, it is poorly allocated, just like cheap oil. The organized state is a wonderful invention whereby everyone can live at someone else's expense.
pstarr wrote:doesn't anyone here or anywhere ever want to deal with the obvious simple truth? we humans are redundant. our toys our computers our automobiles are accessories. they are marketing devices to maximize the sale of real valuable products--petroleum, timber, clean water, fiber, agricultural products, and minerals. these are those only things that have intrinsic value and are the sole materials of our industrial world.
your food is grown by machines. your houses are built by machines, you are the final assembly. you are redundant.
your jobs typing on keyboards and talking on the phone and pushing paper around and pushing people around and even driving vehicles and loading trucks and repairing machines are not real jobs. they just feed the industrial machine.
we are so done this year or next year or soon after the rest is jabber.
there are just too many of us and too little of everything else we need to live
don't have kids for your own piece of mind.
Since you're redundant can my kids and I have your stuff? We want to sell it and buy a farm before everything "buys the farm".
Can't sleep clowns will eat me!
"Greenspan the man has screwed up big time, just like Colin Powell the man screwed up. "
Actually it's the American people who have screwed up. I always find American history full of ironies. You kicked out the king in 1776 yet quickly returned to the cult of the personality. The President has become a king-like being and other movers and shakers (Powell, Greenspan, Madonna) are worshipped for who they are and not what they do.
Powell never was much of a leader. Greenspan hums and haws and doesn't have any direct line to God's financal advisor. George junior is a regular guy despite the fancy house and Airforce One. None of these guys have superhuman powers or insights.
Thomas Jefferson and Thomas Paine would be aghast that you play 'Hail to the Chief' and stuck George Washington's image on the dollar bill. Greenspan is no more than i 'image'...a cult of personality who has his tea leaves read. His only power is that given to him by a society that wants to believe in the magical power of the King's sorcerer.
Ohhh, BTW, the Euro has taken a hit against a strengthing dollar the last two days....
The US is not done.....
If you make something idiot proof, someone will invent a better idiot.
Pfish wrote:Ohhh, BTW, the Euro has taken a hit against a strengthing dollar the last two days....
The US is not done.....
Today on the financial channel over here they showed some figures of the money growth.
Money growthrate (per year):
England 11,3 %
Australia 10,8 %
Canada 10,4 %
EU (Euro) 8,1 %
US 5,0 %
The ECB has a rule that money growth is not allowed to be more than 4,5 %, and that is only allowed when the economy grows at least 3 %. But after the dot.com bubble the money growth has been higher than that. It seems they are all fighting a recession. (Maybe the ECB is preparing for a shift to the euro as the world reserve currency/petroeuro). So the US$ going up a bit against other currencies like the euro, doesn't mean the US is not done, just that others are having problems as well (Say it in another way, those sitting on US dollars will not be the only ones to switch to gold, so even more demand for gold). The gold price is rising against a falling $ and also rising against a falling €! The money growth of the US$ might not be as bad as the money growth of the other currencies in the list, but the US has another big problem: the Twin Deficits.
(BTW does someone know what the growthrate of gold is?)
Greenspan the man has screwed up big time, just like Colin Powell the man screwed up. They are traitors to themselves and to humanity.
However these people are both servants of a greater master than themselves and they do what they are ordered to.
As those servants neither of them have made the slightest mistake.
Colin Powell a respected general with years and years of experience presented what he knew to be a pack of lies to congress and the UN justifying a war.
Greenspan has massively inflated the money supply, completely against his own ethos against FIAT currency, which he wrote about back in the 1960s.
This massive inflation of the money supply causes huge inflation. A dollar is not worth a dollar anymore it's worth about 20cents if that. THe US is in a state of bankrupcy and what follows is a recession / depression, as the assett bubbles deflate and the whole shithouse goes to hell, just like it has always done since Rome, The Tulip bubble in Holland, The South Sea Bubble, The French Revolution etc etc etc Too much free money creates rampant assett price inflation which eventually lead to a huge bust.
There is no way around this, just like there is no way around getting sunburn if you lie unprotected in the sun for days in a row. It is a simple fact. It has been delayed in arrival somewhat because of a more complex and so called robust financial system with many derivative markets and risk being shuffled around, but just like Enron and WorldCom you can only shuffle that debt for so long before the house of cards collapses. THe longer you shuffle it actually the worse it gets, so if people think 1929 was bad, they aint seen nothing yet. All the warning signs are out there, it's plain to see. It may come next year it might drag on in this mess for 5 years more but it is coming.
Whether the depression is caused by high oil prices, loss of oil production (the so called peak theory) or simply a breakdown in the financial system is not important and I think this is the point that many peak oilers are missing.
We all know the shit is going to hit the fan soon enough. I like this site for that reason, because it has accepted that hard times are on the horrizon. But At this moment in time I think you'll find if you research it well, it's more likely to be the madness of unbacked paper money printing and rampant high risk low interest rate credit that causes the problem enmass and not loss or problems with oil production. That is more of a handy rouse for oil companies to inflate their prices.
High oil prices are much more a function of this loss of dollar buying power and manipulation than they are caused by any supply problems or massive demand increases.
Anyway, read the Greenspan article, it's from the horses mouth. It's shame for all of us that he didn't read it a few more times in the last 10 years and try taking at least a hint of his own advice.
You have to understand that no matter what any politican or government official says they actually want to create a large global depression every so often to consolidate the power of the elite. Who get's hurt in a depression ?? ? A few politicans get a bad name and lose elections, the general population suffer, the middle classes most of all, are pratically wiped out. This is obviously important in maitaining power since the middle classes are a right pain in the ass with far too many opinions and complaints for your average power broker to tolerate. First you sedate them with easy money, then you load them up with massive debt, then you wack them with a recession, depression and repossess their house, car furniture, stocks etc etc etc
It's a very simple system explained in this article by Alan Greenspan himself
There is loads of other stuff on this, just google for inflation, gold, fiat currency etc etc.
Economics are a little tricky to understand, but once you get the picture of what is going on it is pretty shocking and you'll want to batten down the hatches, burn those credit cards and pay off that mortage pronto. Sell the home enteratinment system, cancel the order on the fancy curtains, the bathroomrefit and the swiming pool extension, those are middle class debt traps......... and make sure you are ready for the coming storm and your mortgage is paid off in full because pretty soon their aint gonna be a hope in hell of finding a cent anywhere.
I am not some evil filthy righ oil trader like some people seem to think. I am just another guy in the street who sat down 8-9 years ago and started looking that things closely. After spending 18 hours a day on the computer glued to the ticker of the financial futures markets and reading everything from conventional foxnews.com / msnbc.com to the the off the wall but well researched http://www.dailyreckoning.com and http://www.zealllc.com/
and also after reading a lot of history back 2000 years and seeing how these situations played out in the past I think if you find you spend the time you'll end up drawing the same conclusion as me.
Let's hope for the sake of everyone that we just get some protracted drawn out recession / deflation like they did in Japan over the last 10 years. Sadly I think that the shithouse is going to crack apart alla 1929, it's hard to see any other way. It has a certain ring to it "The Great Depression of 2009".
You can almost see the movies about showing in cinemas in 2250AD, with our 20th Century metropolis cities mixed in with some high tech hope for the future, degenerating into dreadfully polluted slums of crime and police oppression alla bladerunner.
Last edited by richardmmm on Tue Sep 27, 2005 4:13 pm; edited 1 time in total
Today on the financial channel over here they showed some figures of the money growth.
Money growthrate (per year):
England 11,3 %
Australia 10,8 %
Canada 10,4 %
EU (Euro) 8,1 %
US 5,0 %
That would explain why, amongst all my coins, I've been finding a s***load of post 2002 coins. (I kid you not, they've got to be churning out the coins like there's no tomorrow...
In the USA M1 has increased just 2%, M2 4% and M3 6% year on year as the total US economy expanded 4.1% in 2004 and 3.5-3.6% in 2005. Meanwhile headline inflation (CPI) is running around 2.2-2.3%. Obviously we have seen a large increase in the supply of credit linked to higher housing prices and negative personal savings rates.
Storing up inflation for the future? Well if the US does not raise taxes or cut expenditures to pay for Iraq, Katerina/Rita, the energy bill, the highway bill, and any other entitlement programs, plus their budget deficit, then my guess is, yes, inflation will creep higher and the FEd will have to adjust their 4.0-4.5% target (neutral) rate higher as well.
However, the money supply growth is not nearly as inflated as you make it out to be.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
MrBill wrote: However, the money supply growth is not nearly as inflated as you make it out to be.
What happens when the lending stops? We find out who doesn't have a chair to sit on.
Quote: ebt traps
Yeppp, this is the heart of the problem. The element that gets a lot of people in trouble from the word GO.
Here in Poland I recently saw an ad for Nike shoes. These came directly from heaven. Guarenteed. Well the humble price of these slick shoes is $100 ( using US currency equiv. ). Now the average wage here is around $300 - $600. Yet I see quiet a few kids wearing them!!!! Amazing
Thus even here the youth are learing how to set their priorities that will make sure they have empty pockets in the future
Men argue, nature acts --
Dissent is the highest form of patriotism.
Quote: What happens when the lending stops? We find out who doesn't have a chair to sit on
If? But also when? And for what reason?
Tell me, who will buy gold peak oil? I assume someone will only buy gold if they have something of value to trade for it? It seems to me that fresh water and food will be far more valuable to the masses than accumulating gold?
In a doom scenario, we also have the problem that most food is perishable and can only be transported very short distances. Where is your nearest salt mine? Do you possess the means to salt & preserve your own food? Are you planning to eat your gold or exchange it for food? You better hope someone needs gold more than food.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
pstarr Re: Greenspan: US "has lost control" over its bud
Quote: I said, interest rates in the European Union were too high for Germany who have 5.216 million unemployed workers, 12.6% unemployment and anemic economic growth of just 1.0% in 2005.
of course unemployment is high. It should be. What are Germans to do with a lower lending rates? Buy reeds to weave baskets with? Dig for more coal? Doesn't anyone get it here or anywhere. Work is redundant. Toys are redundant. Machines produce food. Machines produce housing. Machines produce energy. Machines produce water. Machines produce fiber. And the machines are getting hungry. We are running flat up against a basic thermodynamic truth. There is nothing for people to do except finger paint and get stoned and until we learn to live with that hideous truth the better.
Judgment Has Been Critical in The Greenspan Era
It must be a nearly unmanageable challenge to a man's humility to stand before a multitude of his peers, assembled for the purposes of reviewing his record of accomplishment and conceding that he is a giant among them. But, as with virtually every other challenge he has faced, Alan Greenspan carried it off with grace and apparent ease.
The 2005 Economic Symposium conducted by the Kansas City Fed in Jackson Hole, WY was devoted to assessing the Greenspan Era of economic history. The man with naming rights to that era was accorded an early opportunity to get his licks in.
He was able to recite a list of the triumphs of his time – the Crash of 1987 managed "with little evidence of subsequent macroeconomic stress", the credit crunch of the early 1990s and burst stock market bubble of 2000 "were absorbed with the shallowest recessions in the post-WW II period", and the severe economic weakness in reaction to September 11, 2001 "evident for only a few weeks".
He might be forgiven for bragging about such a record, but he attributed much of the credit for it not to himself or his colleagues but to the "flexibility of our market-driven economy". Fair enough. If the American economy had not reinvented itself to the degree it has done over the period of Greenspan's tenure, his most adroit moves would have brought outcomes much less beneficial in terms of inflation containment, job creation and profit expansion.
He deserves all the atta-boys he will get at the various valedictories of his final five months on the job, but the real heroes of the Greenspan Era, apparently by his own lights, are in "the segment of our workforce that interfaces day by day with our rapidly changing capital stock". These are the people who got downsized out of what had once been secure jobs in financial institutions, public utilities, and once-dominant corporate enterprises, people who then went on to acquire new skills and find work in different occupations in changing industries. They are the ones who continue to tolerate, however grumpily, the constant change that is the price of competitiveness in a market-driven world.
Look at Europe or Japan for contrast: they face the same challenge that Americans do from the emergence of new economic giants in Asia, but through an unwillingness to confront change, their economies have performed much less well for their own citizens and for the world. And nobody's talking about naming a Tietmeyer or Sakakibara Era.
We'll soon be in the post-Greenspan Era and, in an echo of the worries that arose when Paul Volcker's time was up in 1987, many now are concerned that it won't be possible for anyone to fill the great man's shoes. It worked out pretty well last time, though, and by law we have no choice but to risk it again.
These worries are support for a criticism offered by Alan Blinder, Princeton professor and former Fed vice-chairman, that Greenspan has allowed a "cult of personality" to grow around him. In an otherwise highly complimentary review of the Chairman's tenure – "the greatest central banker who ever lived" – Blinder criticized him for becoming bigger than the Fed itself and for serving as "the nation's unofficial economic wise man – on just about any subject". Regarding the upcoming transition, Blinder pointed out that Mickey Mantle ably replaced Joe DiMaggio, but the Yankees haven't had center field covered so well since. (Who knows? Bernie Williams might make a great central banker.)
Greenspan's cult of personality might be attributed to the fact that he doesn't trust simple rules as the basis for conducting monetary policy. In his remarks, he outlined what he sees as shortcomings of model-based, or single indicator-based, rules for adjusting policy stances. Given such weaknesses, "policymakers have been forced to fall back on an approach that entails the interpretation of the full range of economic and financial data". No massive macro model, and no magic bullet indicator – such as M1, or M2, or the price of gold – can be a substitute for a careful analysis of all the available evidence and the best exercise of judgment possible on the basis of that evidence.
Human judgment is, unfortunately, fallible and so there is a school of thought that holds, in effect, that we should not rely upon it. Greenspan's success was, by implication of this line of thinking, anomalous. A more reliable approach, some argue, is to construct a good set of guidelines, or rules, and stick to them with discipline through thick and thin.
But the world seems to be changing, ever more dynamically, in our own image and likeness. What the French call "the Anglo-Saxon model", a hard-edged, take no prisoners form of market-based economic competition, is in the ascendancy. Among those who are proving to be very capable players of the game we once could consider to be our own, are such giants as China and India. The flexibility of the U.S. economy, of American society, is a critical advantage, as Greenspan emphasizes. If the world changes, we'll have to change with it.
And if a rules-based policy regime doesn't recognize those changes – as Alan Greenspan did, to his everlasting credit – then a future Fed chairman will preside over a hide-bound response to a future policy challenge, at great cost to the economy. If that's what we get in the post-Greenspan Era, I suspect we will come to miss the man before too long.
The Prophet Greenspan Steal a little and they throw you in jail;
Steal a lot, and they make you king. - Bob Dylan
In Confessions of an Economic Hitman, John Perkins reflects on the World Trade Center during his first visit to New York City following their destruction on September 11:
I went on around the block, to Pine Street. There I came face-to-face with the world headquarters of Chase, the bank David Rockefeller built, a bank seeded with oil money and harvested by men like me. This bank, an institution that served the Economic Hit Men and that was a master at promoting global empire, was in many ways the very symbol of the corporatocracy.
I recalled reading that the World Trade Center was a project started by David Rockefeller in 1960, and that in recent years the complex had been considered an albatross. It had the reputation of being a financial misfit, unsuited to modern fiber-optic and Internet technologies, and burdened with an inefficient and costly elevator system. Those two towers once had been nicknamed David and Nelson. Now the albatross was gone.
One of the most important lessons of 9/11 was that we should never take our eyes off the money. Billions were made in the destruction of the towers, without even accounting for the uptick in oil and arms that followed. (See here for the account of what happened to the WTC data recovery to "unlock the truth behind an unexplained surge in financial transactions," according to a hopelessly naive report of December, 2001.) Follow the money is a cliche because its truth became trite by matching an overly-familiar pattern. Like the scorpion that jabs the turtle carrying it to shore, the power elite can't forego an opportunity to make a sting. "It's in my nature."
"Does Alan Greenspan have some explaining to do?" begins a provocative analysis of the actions of the Federal Reserve in the hours before the London bombings by The Cunning Realist - an "executive in the financial industry" who describes himself as a "lifelong conservative with a strong independent streak." (And judging by his blogroll, which includes links to Andrew Sullivan, The National Review and Talking Points Memo, I'd say he pegged himself pretty well.)
It is difficult to overestimate the importance to the financial markets of Fed-created liquidity. In a paper from August 2003, researchers at the Federal Reserve Bank of St. Louis wrote, "Open market operations are not another weapon in the Fed's arsenal, but the only weapon in its arsenal."
With that in mind, what happened last week is fascinating. Here are two charts of the Fed's recent level of activity. The first shows the expanding and shrinking daily size of the temporary liquidity pool. The date (ending on July 8th) is indicated on the bottom of the chart, and the size of the pool in billions is on the left:
The second graph represents the Fed's injections of permanent liquidity:
The Cunning Realist adds:
"The terrorist attacks in London took place on Thursday. The Fed dramatically increased the pool of liquidity available for stocks to a multi-year high 48 hours before that---an ideal amount of time for that liquidity to filter into the market---and kept it elevated for the next few days. And indeed, it worked. The stock market saw heavy buying right at the opening bell on Thursday and has shot straight up since then.
"Why did the Fed do this? Was it just another coincidence in our financial markets that somehow managed to immediately precede a major geopolitical event?"
Fintan Dunne of breakfornews.com has also picked up the story, and writes that the Federal Reserve "has previously supported financial markets by increasing liquidity to boost the stock market - as happened after 9/11. But... the Fed had already hugely increased liquidity 48 hours before [the London attacks], just in time for that liquidity to filter into the market."
I found it interesting that the Cunning Realist writes "financial professionals generally consider this 'man behind the curtain' stuff. Those who are aware of it don't like to discuss it, because it implies that stocks rise and fall based on something other than fundamentals and their own acumen."
They say you have to be lucky to be good, but they would say that. After all, they're the carnies calling the suckers into the tent of the marketplace. You pay your money and you take your chance. And if you play the game, you might get lucky, but you don't get to roll with Rockefeller and Greenspan. Because maybe to be good, more than being lucky, you need to be bad.
posted by Jeff at 1:00 AM
Wizard of Bubbleland By Henry C K Liu
- Part 1. Greenspan, the Wizard of Bubbleland
As Alan Greenspan's term as chairman of the US Federal Reserve Board of Governors nears its end, it is a good time to look back on his tenure - and predict his legacy. (Sep 13, '05)
- The repo time bomb
Repurchase agreements are contracts for the sale and future repurchase of a top-rated financial asset, and they have become a greater and greater feature of the risk-based US financial system that has evolved on Alan Greenspan's watch. But where there are big risks there are big losers - and the system goes out of its way to protect them from their own excesses. (Sep 28, '05)
- PART 3 How the US money market really works
The repo market has experienced astronomical growth in the US banking system, yet this phenomenon carries with it systemic risk, not only to the banks but to the whole US economy. Why has this happened? The repo market is where banks and other market participants can seek to free themselves from the Fed's control of the Federal Reserve. (Oct 26, '05)
[Oct 19, 2005] Asia Times Online Asian news and current affairs US stocks: The visible hand of Uncle Sam
Introduction by Japan Focus
John Embry and Andrew Hepburn provide a valuable entry into the world of finance. The two analysts illuminate the shadowy trail of the "Plunge Protection Team" in its apparent mission to rig the American stock markets.
Their account is backed up by considerable indirect evidence, as well as statements by credible insiders. If their account is correct, it means that US markets look a lot like the Japanese markets that were long derided for being subject to repeated official manipulation. A more important conclusion may be that US markets are even shakier than many believe.
The trail that the two analysts follow is long, dating to just after Black Monday, October 19, 1987. On that day, the US stock market abruptly crashed. The Dow Jones average dropped by 508 points, to 1738. It threatened to do even worse the next day when, after a brief rally, it went into reverse.
The markets seemed on the edge of a meltdown, but the abyss failed to open up. This lack of a meltdown has generally been attributed to the Federal Reserve Board's (FRB) steady hand and promises of liquidity. But sophisticated research on the events of those two days indicates that a sudden and unprecedented rise in the Major Market Index (MMI) sparked a recovery across the board. There is good reason to suspect that this recovery was the result of concentrated buying by a few firms.
It was after this crash that the President's Working Group on Financial Markets was put in place to prevent destabilizing declines. The Plunge Protection Team was institutionalized in 1989 as a follow-up from this working group, and originally included the top public-sector financial authorities.
Its role was apparently tested with the Friday, October 13, 1989 stock crash. In this case, too, a sudden rush of aggressive buying of index futures contracts via the MMI saved the day. There appear to have been a considerable number of interventions in the wake of that, with the group expanding to include the heads of major banks.
Thus, for example, the markets after September 11, 2001, received a heavy dose of intervention. The need for this intervention was so great that its outlines emerged quite clearly in the press.
The Japanese, not surprisingly, appear to be part of the scheme as well. The authors show that there was plenty of consultation between Japanese financial authorities and their American counterparts in the lead-up to the Iraq War. There are also strong indications that the markets were not left unfettered to render their own verdict on the wisdom of the war, in the anxious days leading up to its outbreak.
There is abundant evidence adduced in the article. It is important to note that the authors are not against intervention per se. They note that letting plunging markets fix themselves could result in economic chaos. But they do warn that the secrecy and growing involvement of private-sector actors threatens to foster enormous moral hazards.
Major financial institutions may be acting as de facto agencies of the state, and thus not competing on a level playing field. There are signs that repeated intervention in recent years has corrupted the system.
This aggressive manipulation of the system took place on Alan Greenspan's watch as chairman of the FRB. The authors don't discuss the fact that Greenspan is to retire at the end of next January and the White House is having trouble finding a replacement in whom the markets will believe.
It may be that no credible candidate wants to take the baton from Greenspan at a time when it seems likely that the market will implode. Observers note that earlier changes of the FRB chair have generally been followed by much buffeting in the markets as they test the new maestro.
Market drops are common. Present risks include the American housing bubble blowing out, oil prices exploding, and inflation blowing in, at a time when the twin deficits of trade and budget are already in the troposphere.
This situation points to the likelihood that the Plunge Protection Team will be working overtime early next year.
For the full report, in pdf format, please click here
(The introduction, and the report, are republished with permission from Japan Focus)
August 9, 2005 Bill Murphy Speech at GR21 The Price Of Gold Should Be Hundreds Of Dolirman, Gold Anti-Trust Action Committee Inc. at Gold Rush 21 Dawson City, Yukon Territory, Canada Tuesday, August 9, 2005
There is one particular point I would like to hammer home at this conference and that is the price of gold should be many hundreds of dollars per ounce higher than it is now, and would be if not for the shenanigans of The Gold Cartel.
For simplistic reference why:
- The historic norm of the gold/oil price ratio is 15 to 1, which puts gold above $900 per ounce.
- In the past when the CRB was over 300, which it is well above today, the price of gold was usually above $600.
- From economist Paul Van Eeden: "According to work I have done, I estimate thad have been about $51.22 an ounce in 1959 and, if you assume that that is more or less correct, you can calculate what the gold price should be today. Compounding $51.22 at 6.07% for 46 years results in a current value for gold of $770 an ounce."
- Then there is the stunning comment made a year ago June at the LBMA conference in Moscow by Oleg V. Mozhayskov, Deputy Chairman of the Central Bank of Russia:
Many have heard of the group of economists who came together in the society known as the Gold Anti-Trust Action Committee and started a number of lawsuits against the U.S. government, accusing it of organising an anti-gold conspiracy. (This will be the first and last time in my life I will ever be referred to as an economist). They believe that with the assistance of a number of major financial institutions (they mention in particular the Bank for International Settlements, J.P. Morgan Chase, Citigroup, Deutsche Bank, and others), some senior officials have been manipulating the market since 1994. As a result, the price dropped below US$300 an ounce at a time when it should, if it had kept pace with inflation, reached US$740-760."
There are a number of clueless pundits out there who will lamely come up with poppycock reasons why the price of gold is not where it should be. They are a stretch to put it kindly.
It is right here where GATA hits its home run, garnering total silence from those in the mainstream gold world who still refuse to acknowledge the manipulation of the gold price by The Gold Cartel.
The reason the price of gold is hundreds of dollars per ounce below where it should be is because The Gold Cartel has clandestinely lent out more than 16,000 tonnes of gold from the coffers of the central banks to keep the price from rising. This means the central banks have less than half the gold they say they have in their vaults. The total gold loans/swaps (including central bank gold sales in recent years) could now even be as high as 20,000 tonnes.
How can GATA make this claim and how do we support our revelations?
For me it all goes back to a year I spent working with Frank Veneroso when he compiled the gold loan numbers. I saw how he did it, who he talked to, etc. Back in 1998 Frank thought the gold loans could be as high as 10,000 tonnes. The annual supply/demand deficit is 1500+ tonnes per year. Without going into all the detail, it is easy to surmise how GATA could come up with a total gold loan number exceeding 16,000 tonnes.
Using two completely different methodologies a few years ago, Reg Howe and James Turk came up with guesstimates that supported Frank's findings. Reg used BIS derivatives numbers and James used Bank of England stats.
The BIS derivatives numbers are a smoking gun. As long as GATA has been in existence, the World Gold Council and Gold Fields Mineral Services have linked the huge gold derivatives on the books of the BIS to what the gold producers were up to. Yet, when the hedgers reduced their positions by around 2500 tonnes, and the gold derivatives stayed the same, or went up, they went totally silent, refusing to respond to GATA's charges that these huge derivatives numbers were linked to a clandestine Gold Cartel lending operation.
How could this have happened without creating a fuss? Simple, the IMF instructed the central banks to lie about the true disposition of their gold reserves, which I brought to your attention yesterday. The IMF has central banks accounting for their gold loans as gold reserves in their vaults. Ironically, these central banks now have a major problem. Because of the size of the annual supply/demand deficit, they cannot get this gold back without driving the price to the moon.
Why the extraordinary resistance to GATA's findings? Simple again. Not that long ago most of the geography experts thought the world was flat. When it was discovered the world was round, all their prior work was discredited. In similar fashion the mainstream gold world – the bullion dealers, WGC, and GFMS – won't deal with what GATA has to say because it invalidates their work and exposes their schemes. Since they can't discredit our discoveries, they refuse to acknowledge GATA at all.
However, the beauty of all is this is the days of the flat earthers are numbered. With the supply/demand deficit so high, mine supply on the wane, and available central bank gold supply dwindling, it is only a matter of time before the price of gold HAS to explode. At the same time, life is going by. The sooner GATA's findings are accepted by the biggest money in the world, the SOONER the price of gold goes bananas.
What would a $300 per ounce higher gold price do for the gold companies here? For the performance of you gold fund managers? Would life be a lot better for you than it is now? Of course. This is why this conference is so vital. Enough is enough. It is time the word get out there. It is time the investment world be made aware of GATA's findings.
The confounding part about the manipulation of the gold price is that it is so obvious for all to recognize:
*In the summer of 1998 Fed Chairman Greenspan testified twice before Congress saying, "central banks shall lease gold in increasing quantity should the price rise." GATA's voluminous evidence makes it patently clear this is just what occurred in the ensuing years.
*Former Fed chairman Paul Volker stated the following recently in his memoirs regarding Fed activity during his regime:
"Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."
Greenspan was determined not to make the same mistake from his Orwellian point of view.
Speaking of Greenspan, one of my favorite GATA gotcha's over the years has to do with an interplay between Senator Jim Bunning, a Hall of Fame baseball pitcher in his day, Greenspan, and the Fed's senior counsel Virgil Mattingly. Bunning, in response to one of the GATA ARMY in his home State of Kentucky, asked Greenspan to clarify the meaning of the following in a 1995 Federal Open Market Committee meeting:
"It's pretty clear that these ESF operations are authorized. I don't think there is a legal problem in terms of the authority. The statute [31 U.S.C. s. 5302] is very broadly worded in terms of words like 'credit' -- it has covered things like the gold swaps -- and it confers broad authority."Mattingly's response to Greenspan, which was passed on to Bunning:
"Given the passage of time, some six years, I have no clear recollection of exactly what I said that day but I can confirm that I have no knowledge of any "gold swaps" by either the Federal Reserve or the ESF. I believe that my remarks, which were intended as a general description of the authority possessed by the Secretary of the Treasury to utilize the ESF, were transcribed inaccurately or otherwise became garbled."
Talk about hogwash. There is not a more scrutinized document anywhere in the world than these Fed minutes. Garbled? Phooey!
Even the day to day Gold Cartel market maneuvers are blatantly obvious:
- Many of you know of the $6 Rule. Once gold rises $6, The Gold Cartel goes into its price-capping maneuvers for the day. The upper band of this limit is $7.30. It happens every time gold attempts to make a significant move to the upside – yet there is no downside limit. The cabal has implemented this rule for years to eliminate potential option volatility problems (as occurred after the Washington Agreement in September of 1999) and to keep gold excitement to a minimum.
- Then there are the constant price take downs on the Comex after the physical market pricing is over at the London Fixes.
- And finally there are the ad nauseam amount of times the gold shares will mysteriously go lower while the bullion price is moving up, only to have gold nailed the next day. Free markets don't trade this way time and time again. This is part of The Gold Cartel's operations. They are constantly fleecing investors, money managers and gold companies alike with impunity.
When it comes to US financial market policy, I'm sure most of you have heard of the US Strong Dollar Policy, set in motion by former Treasury Secretary Robert Rubin. Now, a policy needs something besides verbiage. Can anyone here outside the GATA camp explain to me how the US actually implemented this policy?
The rigging, or manipulation of the price of gold, is what the Strong Dollar Policy is all about – which is why, even when the dollar is tanking, Treasury Secretary Snow continues to talk about this policy.
From Gibson's Paradox we know a motive for the rigging of the gold price has been to keep US interest rates lower than they otherwise would have been. What other motives would Rubin, Summers, Snow have for keeping the price of gold artificially suppressed?
Another easy one – think of the predictable diatribe you hear from ALL the mainstream investment world pundits when the price of gold is rising sharply:
*INFLATION, CRISIS INVESTING, SAVE HAVEN, DOLLAR TANKING! All of it is negative for US financial markets – and gold hasn't even done anything of consequence yet – which is your motive why The Gold Cartel continues to prevent the price from going where it ought to be.
For me one of the most disturbing aspects of the artificial suppression of the price of gold is the acquiescence on the part of the US financial press to The Gold Cartel. The notion that we have a free press in the US is a joke. We have a bought press, not a free one.
Not only does the gold establishment refuse to deal with GATA's evidence of gold price manipulation, the US financial market press will not even mention the name GATA, much less print what we have to say. Let me offer some concrete examples why I know this is so:
- I've met with the Bloomberg news gold people and contacted them numerous times over the years. NADA.
- GATA went to Washington and New York to meet with WSJ reporters, Dallas too. Result: Zip.
- A distinguished Washington attorney spent years cultivating his friend, Nell Henderson, the business editor of the Washington Post over the gold price manipulation issue. They even go to the opera together. Result: nothing.
- A well known Editor at Barron's would only accept a Letter to the Editor by Chris Powell if Chris would rewrite it to his satisfaction. What are you kidding me?
GATA's press releases are not given the time of day anywhere in the US. Reuters pays scant attention, etc.
Our so-called free US financial press is petrified of taking on the biggest money and power in the world. Business is business. So Be It, US financial market press - but don't proclaim we have a free press in America. How are we much different than the controlled press of the old Soviet regimes?
How pitiful it is that GATA has received more press from
- Franfurter Allgemeigne
- Der Spiegal
- Russian Business Weekly
than we have received in over six years from the media in America.
One of the purposes of this conference is to discuss ways GATA's findings can reach the world financial market press. For once the big money in the world knows what we know – where the price of gold is headed and why – The Gold Cartel has had it.
The impact on central bank sellers, those not obliged to the cabal, could be profound. With the knowledge the price of gold is going MUCH higher, the new rage regarding central bank gold activity could easily become who is buying, not selling.
For example, last Thursday Russian Finance Minister Alexei Kudrin said that Russia's gold and foreign exchange reserves are going to double due mainly to surging oil revenues. The Russians must decide where to employ those revenues. Should they choose to put a significant amount in gold, it could blow the price sky high AND increase their gold revenues coming from their mines at the same time.
The GATA camp has discovered a gold cancer. The longer this cancer goes untreated, the greater impact it will have on financial markets around the world. As it stands now, I believe the manipulation of the gold price to be the lynchpin mechanism/reason for the market bubbles prevailing in the US. The longer the price manipulation goes on, the greater the bubble bursts will be. Better the US financial markets take chemotherapy-like treatments now regarding the gold truth than stay in denial only to face certain death further down the road.
When I was a kid, we all routed for the early George Washington-type Americans who took on the tyranny of the British and fought to make us a free country. There would not have been one youth in our entire nation who routed for the British when watching the movies of the day about our fight for independence in 1776. Who could be against those fighting to right a terrible wrong?
What few Americans appreciate is our that country evolved because of a very few dissenters who vociferously protested what the British were doing. These few eventually galvanized the entire country, most of whom were previously content to go along with the status quo; the accepted, mainstream British line of thinking. This is how America was founded and gained its freedom.
It is GATA's hope this conference will be a galvanizing catalyst to right another terrible wrong – that the energy emanating from Dawson City will successfully expose what The Gold Cartel has done and why. For when this happens, gold will be become a free and fair market again - and the world will be better off for it.
WorldNetDaily Gold and GreenspanSen. Joseph Lieberman, D-Conn., has asked Treasury Secretary Lawrence Summers and Federal Reserve Chairman Alan Greenspan to answer a series of questions about national gold policy, in response to an inquiry from a precious metals research firm.
The questions posed by the Gold Anti-Trust Action Committee initially were published as an "open letter" to both officials in the Dec. 9 issue of the Capitol Hill newspaper Roll Call.
The public inquiry was titled, "What are you doing with America's gold?" and was addressed specifically to Greenspan and Summers. Since its initial publication, however, GATA Chairman Bill Murphy said neither official has responded.
Because both agencies have remained silent, Chris Powell, GATA secretary/treasurer and managing editor of the Manchester, Conn. newspaper, the Journal Inquirer, contacted Lieberman and asked him to intervene on the group's behalf.
In his letter to the officials, Lieberman mentioned GATA's unsuccessful bid for answers and asked if both men would address them "at your first opportunity." So far neither official has responded to the senator's request, either.
GATA, which has been monitoring U.S. and global gold policies and markets for months, believes some elements within U.S. government financial circles may be "intervening in the gold market" in an attempt to assist major bullion banks in keeping the price down because, they say, there are "millions" of ounces of gold loans on the books -- far more than exists as hard currency in the world.
Murphy said such an action, if it is occurring, "is a clear and illegal violation of the bank's purpose clause."
Murphy and GATA initially warned congressional leaders over a year ago that the organization believed there may be some concerted effort to artificially depress gold prices, but few listened, he said.
However after a brief gold price surge in October, Murphy said he could sense that there was "near-panic in the gold loan industry," which strengthened his belief that gold prices were artificial.
Today, though prices have stabilized again, Murphy said he still believes some of the world's most influential central and bullion bankers have attempted to manipulate the gold market to their advantage, and the advantage of key investors, by artificially depressing the price of gold while making short-term loans on millions of ounces of non-existent gold.
WorldNetDaily Gold price manipulationBy Jon Dougherty
Lawyers for the Gold Anti-Trust Action Committee have filed suit against five investment houses, an international bank, and top officials of the U.S. Treasury Department and Federal Reserve Board for "conspiring" to suppress the price of gold.
According to GATA officials, the suit -- filed Dec. 8 in U.S. District Court in Boston, Mass. -- charges defendants with "anti-trust violations, securities fraud, and breach of fiduciary duty," as well as charging government officials with exceeding their constitutional authority to regulate commerce and the U.S. economy.
The suit was filed by Reginald Howe, a lawyer and gold-market analyst, as well as a consultant to GATA. He is also the founder of Golden Sextant.com, a website "devoted to gold market commentary."
The suit alleges that the investment houses -- Chase, JP Morgan, Deutsche Bank, Citibank and Goldman Sachs -- as well as U.S. officials and the Bank for International Settlements "have been at the center of a scheme with central banks" and investment firms "to coordinate the sale of gold and gold derivatives to keep the price of gold low and thereby disguise inflation and weakness in the U.S. dollar."
Howe said the Bank for International Settlements, or BIS, is improperly attempting to pay its private shareholders far less than fair value for their shares as it moves to rid itself of private investment and replace those shareholders with shares owned by international financial institutions.
The charges leveled by GATA in the Howe lawsuit are not new. As WorldNetDaily reported in May 1999, the group alleged that gold price manipulation was taking place, perhaps to de-emphasize the precious metal's stature as a valuable commodity.
"Entire nations, such as Great Britain, are poised to release hundreds of tons of gold into the market over the next few years in a move some believe is an attempt to artificially deflate gold prices and possibly to de-emphasize gold as a valuable commodity," WND reported then.
Because of what it viewed as suspicious market activity in the face of high gold demand and low gold supply -- a classic "supply-and-demand" equation that usually triggers a price increase -- GATA was, even last year, contemplating a suit "aimed at breaking up the alleged control over gold market prices."
In his legal action, Howe claims the Bank for International Settlements -- which owns a "substantial amount of gold" (reports say 192 tons) -- is planning to cancel shares of its stock currently in private hands "so that the bank might become owned entirely by member governments" who may also have an interest in suppressing the price of gold.
"I've been a trader for 25 years, and I began noticing that the gold market was just not trading the way it was supposed to," said GATA Chairman Bill Murphy, in an interview last year. He said that when gold reached the $295-300 per ounce range, "I began noticing that the market price for gold would always stop (at a certain level), lose, then come right back" to the previous level -- but never higher.
That didn't follow the established rules of supply and demand, he explained
For its part, BIS has denied the allegations made in the suit, calling them baseless.
"The BIS is aware of the lawsuit … and the BIS considers the lawsuit without merit," bank spokeswoman Margaret Critchlow told Reuters last week.
BIS is known as the central bank to the world's central banks.
Other gold traders and industry leaders had little to say about the GATA suit. A spokesman at Blanchard and Co. -- the country's largest rare coins and precious metal's dealer -- had not heard of the GATA suit. Neither had officials at the Gold Information Network.
And at least one industry expert, who asked not to be identified, said GATA itself lacked credibility as an organization.
On the other hand, gold expert Jim Sinclair, according to Goldseek.com, called the Howe/GATA lawsuit "the most positive gold development in 21 years."
Beyond the accusations and denials, though, are distinct indications that many Western nations -- at least on the surface -- appear to be moving away from using gold as the guarantor of their currencies.
Besides Great Britain, the Swiss National Bank is looking to dump hundreds of tons of its gold. The bank has commissioned the BIS to help sell 1,300 tons of gold -- or about half of Swiss gold reserves -- "under a plan for coordinated gold sales agreed by 15 European central banks last year," Reuters reported Tuesday.
The Dutch central bank has also unloaded what it deemed "excess gold" recently via BIS.
Both Howe and Murphy remain convinced there is manipulation taking place, and they believe there is some panic within the industry -- especially when gold prices manage to spike before they are eventually brought back under control.
Also, Murphy says a number of investment houses are "short" tons of gold - meaning they have loaned out money ostensibly backed by gold that hasn't even been mined yet.
Howe said his lawsuit will seek to "stop the Treasury Department and the Fed from intervening in the gold market, and to stop the investment houses from manipulating the price of gold." Also, he said he is asking the court to "issue an order to the BIS to compensate its private shareholders fully," and to pay "damages against all the defendants for fixing the price of gold."
Gold Price News Alan Greenspan on Gold Price Manipulation
Dr. Ron Paul: Even if the central banks, who are the major holders of gold, are willing to sell gold in order to manipulate the price or hold the price at a certain level? We are not on a gold standard, so what would the motivation be?
Mr. Alan Greenspan: They are not doing it for purposes of fixing the gold price. They are looking for it to reduce their stock of gold when they have sold on the grounds that: one, it costs to store the gold; and, two, it didn't obtain any interest. So they perceived it to be a poor asset to hold. But the purpose was not to manipulate the price of gold.
Why is Alan Greenspan speaking on behalf of foreign central banks as to what those countries' motivations are for selling their gold?
Why is Alan Greenspan actually stating on their behalf that their purpose in doing so is not to control the price of gold?
How does he have such total knowledge of the actions of Foreign Central banks?
Why does he have the authority to testify before congress as to the thinking and motivation of foreign central banks' activities in the gold market?
Not to mention act in effect as their defense counsel.
The private Gold Antitrust Action Committee GATA has uncovered evidence suggesting that the Federal Reserve and the Treasury department, operating through the Exchange-Stabilization fund and in cooperation with the International Monetary Fund, have been systematically working to deflate the price of gold. Because rising gold prices are seen by investors as a barometer of inflation, the Fed has purportedly suppressed prices to disguise the true nature of the financial bubble of the 1990s.
Congressman Ron Paul said in a Media Release in 2002
"The Fed wants all of us to think the stock market is not overvalued, and that credit and monetary expansion can create lasting prosperity" he went on to say "gold prices should always serve as an unbiased indicator of the true health of world markets."
Outing Alan Greenspan Dollars & Sense BY JOHN MILLER
This article is from the July/August 2005 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/Skeptics/Financial_skeptic/Casino_capitalism/12_Apostols_of_deregulation/Greenspan/Bulletin/greenspan_bulletin2005.shtml
This article is from the July/August 2005 issue of Dollars & Sense magazine.
I'm not a big Alan Greenspan fan.… I think he's one of the biggest political hacks we have in Washington.
--Senate Minority Leader Harry M. Reid (D-Nev.) on CNN's "Inside Politics," March 2005
Federal Reserve chairman Alan Greenspan a "political hack"? Political thug is more like it. Greenspan's policies have robbed retirees, poor people, and working people--while bestowing riches on the best off in our society.
Let's start with Greenspan's betrayal of the elderly on Social Security. That's what got Harry Reid, a former boxer, so angry that he took the gloves off.
In 1983, Greenspan chaired the commission that convinced Congress to raise the payroll tax that funds Social Security. He said the tax hike would ensure the Social Security system's solvency for the baby boomer generation and beyond.
The higher tax fell heavily on low- and middle-income taxpayers, nearly all of whom pay more in payroll taxes than income taxes. As promised, the tax hike built up a surplus in the Social Security trust fund. With the surplus in place, Greenspan turned around in 2001 and endorsed the Bush administration's tax cuts, whose benefits went overwhelmingly to the richest 1% of taxpayers, those who make more than $373,000 a year. Now that those tax cuts have contributed to soaring budget deficits, Greenspan insists we need to cut Social Security benefits in order to restore "fiscal discipline." Put simply, Greenspan jacked up taxes on working people, adding to the budget surplus, and then endorsed squandering that surplus on giant tax cuts for the top 1%.
It was a masterful bait-and-switch. As New York Times columnist Paul Krugman points out, if Greenspan "had tried to sell this package honestly--'Let's raise taxes and cut benefits for working families so we can give big tax cuts to the rich!'--voters would have been outraged."
Future retirees weren't the only ones to fall prey to Greenspan's maneuvers --the poor have taken a drubbing as well. Much of the deficit reduction that Greenspan urged the Clinton administration to carry out came at the cost of low-income families. Robert Pollin, co-director of the Political Economy Research Institute, reports that a majority of the federal budget's swing from deficits to surpluses during the second half of the 1990s came from reducing government spending relative to the size of the economy. Relative to GDP, funding for education was slashed by nearly a quarter, while deep cuts to food stamps, nutrition, and other supports for poor families carved away one-sixth of funding for income security programs.
That Greenspan's true aims were to shrink government and reward the wealthy--and not to enforce fiscal responsibility--became abundantly clear when George W. Bush took office. Despite indications in the administration's early days that he favored "triggers" capping the size of the Bush tax cuts should the budget surplus disappear, Greenspan never made such triggers a precondition for his endorsement of Bush's tax giveaways to the rich. Instead, he assured the Senate in 2001 that "sufficient resources will be available" to undertake both debt reduction and tax cuts. Given the ballooning federal budget deficit, this was either a shockingly poor analysis or pure ideological excess.
Today's monstrous deficits rival those Greenspan insisted must be closed in the early Clinton years, but Greenspan still favors making Bush's tax cuts permanent--even in the face of overwhelming evidence that doing so will force massive cutbacks in social spending and core entitlement programs. (Making the 2001 and 2003 tax cuts permanent would cost the U.S. government more than five times the amount that would be necessary to close the projected shortfall in Social Security over the next 75 years, according to the Center on Budget and Policy Priorities, a liberal think tank.)
In other words, Greenspan is the chief enabler of the Republican "starve the beast" strategy for slashing government spending--first enacting tax cuts and then insisting that spending cuts (not tax increases) are necessary to restore budget balance.
When Congress asked him what happened to his concern for fiscal responsibility, Greenspan responded that he had always favored lower taxes, but that he favored lower spending and smaller government as well. And the strategy, at least the government slashing part, is working. In 2004, federal government revenues relative to the size of the economy reached their lowest level since the 1950s.
For all these reasons, the liberal commentator Jonathan Chait has offered up a modification of Reid's insult, calling Greenspan "a Fiscal Policy Hack." His careful choice of words underlines Greenspan's failures in the sphere of fiscal policy, or government spending and taxes. "For the last four years," Chait points out, "Alan Greenspan has cast himself as a champion of fiscal responsibility while lending crucial support to policies that undermine it." Chait insists nonetheless that "Greenspan's views on monetary policy--specifically, his setting of interest rates--"ought to count for a lot." Sadly, this common liberal position turns a blind eye to the role Greenspan's monetary policy plays in perpetuating the searing inequality of today's economy. Greenspan makes monetary policy on behalf those who hold financial assets, not job seekers or workers. And Greenspan's insistence that inflation must be kept low to protect the value of stocks and bonds even if it means keeping a cap on employment growth might count for a lot in the minds of some--but it shouldn't.
Think back to the second half of the 1990s boom. Early on, Greenspan warned that an "irrational exuberance" was igniting a dangerous stock market bubble. In a 1996 Federal Reserve Board meeting, he acknowledged that raising the margin requirement would "get rid of the bubble." The margin requirement is the percent of the purchase price of financial investments, like stocks and bonds, that the buyer must pay for in cash rather than credit. (Since 1974, investors have been required to pay for at least 50% of their stock purchases with cash.) The Fed chair could have raised margins on borrowing to purchase stocks then, cooling off the stock market without sacrificing the whole economy. But, unwilling to confront the monied classes, or uninterested in doing so, Greenspan instead endorsed a huge capital gains tax cut in 1997 that only inflated the bubble more.
Then, in late 1999 and early 2000, with the bubble apparent to everyone, he slammed on the economic brakes, repeatedly hiking interest rates and helping to bring on an economic slowdown just as working people were beginning to see some healthy gains in their paychecks. The recession and the job-barren economic recovery that followed have wiped out much of those gains. Last year, workers' real wages, their purchasing power, actually declined for the first time in 14 years. And today, even Wall Street Journal reporter David Wessel warns that "the risk to workers now is that the Federal Reserve, anxious about indications that inflation is returning, [once again] will raise interest rates to slow the economy before the labor market gets strong enough to push wages up."
Outing Greenspan's political thuggery is the first step in the battle for a Federal Reserve Board that serves all of us, not just the rich. No longer the man behind the curtain glorified in Forbes magazine billboards, or the Maestro, as establishment journalist Bob Woodward dubbed him, Greenspan might finally be seen for what he is: public enemy number one when it comes to building a more just economy. And once they're accurately translated, "Greenspan-speak," the Fed chair's notoriously obscure mutterings that tighten the screws of class privilege at every turn, will no longer pass for a truthful and disinterested take on the state of the U.S. economy.
John Miller is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.SOURCES "Workers' Wages Trail Growth in Economy," David Wessel, Wall Street Journal, April 21, 2005; "Hacking at Greenspan," Wall Street Journal, March 7, 2005; "Greenspan, a Fiscal Policy Hack," Jonathan Chait, Los Angeles Times, March 18, 2005; "Maestro of Chutzpah," Paul Krugman, New York Times, March 2, 2005.
By Deroy Murdock, a columnist with the Scripps Howardmagine flying on a 747 from New York en route to sunny Southern California. Suddenly, the jet jerks sharply to the right, narrowly missing a mountain top in the Rockies. Would you praise the pilot for avoiding a collision or have him grounded for drifting so perilously off course?
Americans similarly are wondering how to interpret Alan Greenspan's unexpected 0.5 percent decrease in short-term interest rates on January 3. Just two weeks earlier, Greenspan interrupted the in-flight entertainment to reassure everyone on board. The central bank acknowledged that "economic weakness" posed a greater risk than did inflation. Nonetheless, a December 19 statement declared, the Fed merely would "continue to monitor closely the evolving economic situation." This position flatly contradicted the Fed's November 15 conclusion that "heightened inflation pressures" were more worrisome than a slowdown.
Greenspan flew on as if nothing were amiss. Meanwhile, the warning lights continued flashing all around him, as they had for months. The Dow Jones Industrial Average fell 6.2 percent in 2000 while the tech-heavy NASDAQ plunged 39.3 percent. Consumer confidence sagged each month in the fourth quarter, as did auto sales. Manufacturing payrolls shrank from August right through year's end, falling by 62,000 positions in December alone. According to the Challenger employment report, 133,000 Americans were laid off in December, the most monthly dismissals since 1993.
The dreadful shriek of the National Association of Purchasing Managers Survey finally snapped Greenspan out of his daze on January 2. The NAPM composite index fell to 43.7 in December, its lowest reading since America emerged from the last recession in April 1991. Figures below 50 signal a manufacturing contraction.
The very next day, the Fed surprised investors by cutting the federal-funds rate a half-point to 6 percent. Still, Greenspan's sudden, evasive measure has done little to stop the carnage 30,000 feet below.
Office Depot will padlock 70 outlets and fire 1,470 employees. Sears, reeling from a 1.1 percent drop in December sales, plans to shutter 89 stores and sack 2,400 individuals. Sluggish sales have prompted General Motors to idle eight plants as of this month, forcing 21,000 hard-working men and women onto the streets. Chrysler and Ford plan factory closures as well.
This Fed-inspired mayhem could have been avoided. A generous rate cut delivered at the Fed's December 19 meeting would have boosted the confidence of Christmas shoppers and retailers alike during the year's most commercially sensitive time for millions of businesses. Instead, the Fed refused to refill the egg-nog bowl. Consumers and store owners groaned. With the gift wrap and ribbons returned to America's attics until next December, retailers now wish Greenspan had kissed them under the mistletoe rather than merely show them some ankle by hinting at interest-rate cuts.
The pain among Old-Economy firms is exceeded only by the scores of now-deceased companies in the New Economy, which has lost 36,000 jobs since July, NBC News reports. The New York Post now publishes a feature called "Dead Dot.com of the Day" including a sketch of a computer terminal decaying in a garbage can. The cover of the current Silicon Alley Reporter perfectly summarizes the travails of the once high-flying dot.com sector. It simply shows a photo of the Hindenburg exploding.
For years, Greenspan and Federal Reserve Airways have promised smooth, predictable service. Remember their famous slogan? "Fed Air: Where every landing is a soft one." But the voyage to Nirvana on which Captain Greenspan and his crew embarked is now long forgotten after six turbulent rate hikes totaling 1.75 percent between June 1999 and May 2000.
But this is nothing new. Greenspan has veered off course time and time again, even as frequent fliers from Wall Street to Washington gullibly applauded as he wandered maplessly through the skies.
Last April 3, a cover story by Gene Epstein of Barron's compared Greenspan's flight plans with his contrails. On economic growth, Greenspan said on February 26, 1997 that there would be "measured real GDP growth of 2 percent to 21/4 percent over the four quarters of the year." Actual 1997 growth: 4.1 percent.
On February 24, 1998, Greenspan announced: "The growth rate of real GDP is most commonly seen as between 2 percent and 23/4 percent over the four quarters of 1998." Actual 1998 growth: 4.7 percent.
On February 23, 1999, Greenspan predicted that "Economic growth this year will slow to a 2 1/2 percent to 3 percent rate." Actual 1999 growth: 4.6 percent.
Greenspan fared no better on unemployment, predicting 51/4 to 51/2 percent joblessness in 1997, even as that year's figure dropped to 4.7 percent. In 1998 and 1999, he expected joblessness to remain "about unchanged" while real-world figures fell further to 4.4 percent and 4.1 percent, respectively.
Inflation - the bete noir that haunts Greenspan's every waking moment - is nowhere to be seen. Gold prices are stuck at about $265-per-ounce. Oil prices shot up to $38-per-barrel, but have slid back to about $29 while having a limited impact on overall purchasing power. The consumer price index remains tame, rising 2.7 percent in 1999 and 3.4 percent in the 12 months ended last November. Excluding food and energy costs, the core CPI rose just 2.6 percent in that period (the most recent measured).
Reviewing these data, one cannot escape the conclusion that Alan Greenspan simply does not know what he is doing.
Again, this is nothing new. On October 2, 1990, Greenspan told his Fed colleagues: "The economy has not yet slipped into a recession." The National Bureau of Economic Research later concluded that the recession had begun in July 1990. Amazingly, Alan Greenspan - regarded almost universally as nothing less than an economic genius - did not recognize a recession even after he had been standing in one for three months. There is little evidence that the 74-year-old's powers of perception have sharpened in the intervening 11 years.
More than economic savvy, Captain Greenspan has benefited from gallons of favorable, indeed reverential ink. Alone among people in "the dismal science," Greenspan has starred in a veritable cult of personality.
*Veteran journalist Bob Woodward compares him to a symphony conductor in his Greenspan biography, Maestro.
*On Christmas Day, CNN's Tony Guida glowingly called Greenspan "the man who steers the luxury liner called America."
*California governor Gray Davis visited President Clinton and Energy Secretary Bill Richardson late last month to discuss the Golden State's power crisis. He also was granted an audience with Greenspan, perhaps to seek his views on electric-power generation and distribution, or perhaps to receive his benediction.
*Los Angeles Times cartoonist Darrin Bell skewered all this absurdity by showing a little girl saying grace before dinner while her parents stare in astonishment. "Greenspan bless Mommy," she says. "Greenspan bless Daddy, and Greenspan bless Playstation."
As Fed Air Flight 1 rapidly loses altitude, Americans are beginning to realize that Greenspan is neither Jesus, Moses, nor Mohammed. He is a fallible, mortal human nine years past legal retirement age. He lacks accountability and possesses more power than should reside in one pair of hands. His fetish-like fear of an inflation monster last seen in 1983 causes him to chart a flight path widely divergent from where the great 747 actually travels.
Captain Greenspan should not be flying a jumbo jet, much less arrogantly attempting to guide Earth's premier financial superpower. (America neither requires nor deserves an economic pilot any more than Cuba does.) Too bad his term continues until June 20, 2004. Alan Greenspan could serve his country best by immediately leaving the cockpit, grabbing a cocktail, and taking a narrow seat among the nervous passengers in economy.
It's strange that Alan Greenspan hasn't been blamed for the housing bubble. After all, he set the "easy money" policies that put the whole thing in motion and he's the one who should be held responsible when it goes up in smoke.
Let me explain.
Most people expect the Federal Reserve to lower rates when business is flagging to stimulate the economy by making loans more available for commerce, home buying, recreational spending etc. But, just as higher rates can stop the economy in its tracks by making money too expensive to borrow, so too, lower rates can have equally adverse consequences.
For example, when Greenspan lowered rates to 1% in 2002 he knew that money would surge into the economy and create the appearance that everything was hunky-dory. Predictably, the economy sputtered along from the economic activity generated by the housing boom and from the 30% increase in government spending.
But, what else did Greenspan's lower rates achieve?
Well, they achieved the results for which they were designed; they kept the economy humming along while Bush dragged the country to war, they kept the American people asleep while $400 billion per year in Bush tax cuts were siphoned from the US Treasury, and they generated what the "The Economist" calls this "the biggest bubble in history"; the housing bubble.
All of these were purely political choices made at the Federal Reserve under the auspices of Fed-chairman Greenspan.
Now, of course, Greenspan has signaled that the Happy Days are over and that the Fed will continue to ratchet up rates to strengthen the dollar. So far, the Fed has raised rates 10 times in the last 14 months. This eventually will strain the resources of all the poor slobs who took out ARMs (Adjustable Rate Mortgages) trusting is the soundness of the system. They will inevitably see their monthly payments go through the roof.
No one understands the ins and outs of monetary policy better then the Federal Reserve. It's their job, and they have plenty of experience judging the results of their decisions. They know that when they lower rates the public will borrow boatloads of cash and dump it in the preferred investment of the day. Since, many American's were burned in the 1990s stock market crash; investing in the housing market seemed like a logical alternative. But, as more and more people entered the market, housing prices skyrocketed well beyond their true value, and that hyper-inflation was recorded in the monthly housing figures. Greenspan, who prides himself on studying every abstruse fact and figure about the economy, was fully aware of the speculative bubble that was emerging before his eyes. He also knew about the "interest only loans", "the no-down payments", the shaky lending practices, and the exaggerated prices, but just like the 1990s, when he had every opportunity to raise marginal rates on stocks and stop the bleeding, he kept the game in motion.
Greenspan knows all about "irrational exuberance"; he's its primary champion. The Fed seduces the public with cheap money, so that credit spending increases and, then, "presto", millions of Americans slip inexorably into indentured servitude.
Isn't this what's happening right now?
The American public is presently mortgaged up to the hilt with most of their personal wealth invested in their homes and with the highest level of personal debt in any period since the Great Depression.
Especially when we consider that the current bubble is "larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP)."
Or, when we consider that "over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP." (The Economist")
Or, when we consider that 2 out of every 5 jobs in America are now related to construction. One blip in the housing market and we'll all be hawking pencils on the street corner.
Regrettably, this Greenspan-generated pyramid scheme is headed for the dumpster. The fundamentals for securing a loan have all been abandoned; putting traditionally unqualified applicants in a position to buy a home. 42% of all new home buyers cannot even come up with a few thousand dollars for a down payment. Equally disturbing is the fact that "nearly one third of all new mortgages this year call for interest-only payments (in California, it's almost half)" (NY Times)"
The Fed's "cheap money" policy has spawned a "creative financing" monster and the speculation in the housing market has grown accordingly. A full 36% of homes are bought either for investment or as second homes; "the very definition of a financial bubble." (Economist)
"Speculation"? Not according to Colonel Greenspan. According to him, it's just a bit of "froth" in the market.
"Froth"? The biggest bubble in history!?!
Of course, none of this even vaguely resembles the activities of a "free market". The market is not free when a privately owned banking system like the Federal Reserve sets the prime rate according to its own political-economic agenda.
Most people have no idea to what extent Greenspan has abandoned his principles to carry out his task as the country's foremost class-warrior. Earlier in his career, Greenspan proclaimed, "Deficit spending is simply a scheme for the confiscation of wealth".
That, of course, was when deficits were used to pay for exorbitant social programs, like Welfare or Medicaid that benefited the broader American public. Greenspan has revised his thinking now that the deficits are a means for lining the pockets of his rich constituents.
Greenspan fully grasps the danger of his current strategy of flooding the market with, what he once called, "easy money". As he noted in an article he wrote in 1967 "Gold and Economic Freedom":
"After a mild business contraction in 1927 the fed decided the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed."
Let's see if we got that right?
"The excess credit which the Fed pumped into the economytriggered a fantastic speculative boom.which collapsed the American economy".
And who does Greenspan blame for the 1929 depression; the people who bought the stocks on speculation or the policy-makers?
The "speculative imbalances" (re: Housing bubble) were the work of the policy-makers just as they are today. And, in this case, that's the Fed-master himself.
Greenspan's term at the Fed has been devastating for the dwindling American middle-class. In 1983 he worked to "fix" Social Security for upcoming generations. In fact, his fix was nothing more than a shifting of the tax burden onto poorer and middle class Americans by increasing the withholding for SS. Greenspan knew that the additional resources would be used to fund basic government operations and not stashed safely in a "lockbox" for retirement. His presumption proved to be accurate.
He's also been an ardent supporter of financial deregulation, which has allowed foreign countries, particularly China and Japan, to buy up American assets and businesses. Deregulation has crushed America's manufacturing sector by forcing it to compete with the poorest paid workers in the world in head-to-head competition. Now, the US is teetering from its unsustainable trade deficit and must get infusions of $2 billion per day in foreign investment per day to maintain its current standard of living. Greenspan and his "free trade" friends have hammered the American worker and tilted the nation towards third-world status. At this point, there's little that can be done to reverse the trend other than a major overhaul of existing trade policies and a renewed effort to restore America's manufacturing base; something neither party has even recommended.
Greenspan has worked exclusively to serve the interests of American elites. He has helped shape the policies on taxation, minimum wage and Social Security that have enriched the wealthy and battered the middle class. His lowered interest rates have perilously expanded credit and produced the "largest speculative market of all time". Whatever economic calamity befalls the American people certainly bears his imprimatur.
The nation now faces the end of the Greenspan epoch and the very real prospect of an economic tidal wave greater than 1929. The bubble was manufactured by Greenspan and his colleagues at the Fed to swindle millions of working-class Americans out of their life-savings and to facilitate the greatest transferal of wealth in American history.
The lesson of the housing bubble is simple: whenever monetary policy is put into the hands of privately owned institutions like the Federal Reserve, those policies will invariably reflect the narrow interests of the men who own them and the members of their class.
That's why Thomas Jefferson warned, "Banking institutions are more dangerous than standing armies."
He undoubtedly had the Federal Reserve in mind.
Mike Whitney lives in Washington state. He can be reached at: email@example.com
Remarks by Chairman Alan Greenspan
To the American Bankers Association Annual Convention, Palm Desert, California (via satellite)
September 26, 2005
In the weeks and months ahead, the Federal Reserve will continue to closely follow the consequences of the recent devastating events in the Gulf Coast region in order to assess their implications for our economy. However, we are well aware that the broader economic impact is only a part of the human misery left in the wake of these events.
* * *
In my remarks today, I plan, in addition, to focus on one of the key factors driving the U.S. economy in recent years: the sharp rise in housing valuations and the associated buildup in mortgage debt.
Over the past decade, the market value of the stock of owner-occupied homes1 has risen annually by approximately 9 percent on average, from $8 trillion at the end of 1995 to $18 trillion at the end of June of this year. Home mortgage debt linked to these structures has risen at a somewhat faster rate.
This enormous increase in housing values and mortgage debt has been spurred by the decline in mortgage interest rates, which remain historically low. Indeed, the thirty-year fixed-rate mortgage, currently around 5-3/4 percent, is about 1/2 percentage point below its level of late spring 2004, just before the Federal Open Market Committee (FOMC) embarked on the current cycle of policy tightening. This decline in mortgage rates and other long-term interest rates in the context of a concurrent rise in the federal funds rate is without precedent in recent U.S. experience.
Some of the decade-long decline can be ascribed to expectations of lower inflation, a reduced risk premium resulting from less inflation volatility, and a smaller real term premium that seems to be due to a moderation of the business cycle over the past few decades. Besides these factors, the worldwide trend reduction in long-term yields presumably reflects an excess of intended saving over intended investment.
Since the mid-1990s, worldwide saving has been boosted by a significant increase in the share of world output produced by economies with persistently above-average saving--predominantly the emerging economies of Asia. This impetus to saving has been supplemented by shifts in income toward the oil-exporting countries, which more recently have built surpluses because of steep increases in oil prices.
Softness in intended investment, however, is also part of the story. In the United States, for example, capital expenditures have been restrained for some time relative to the very substantial level of corporate cash flow. That development likely reflects the business caution that was apparent in the wake of the stock market decline and the corporate scandals early this decade. In similar fashion, Japanese investment exhibited prolonged restraint following the bursting of Japan's speculative bubble in the early 1990s, and investment in emerging Asia, excluding China, fell appreciably after the Asian financial crisis in the late 1990s.
The economic forces driving the global saving-investment balance have been becoming manifest over the past decade, so the steepness of the recent decline in long-term yields suggests that something more may have been at work over the past year. According to estimates prepared by the staff of the Federal Reserve Board, a significant portion of the more recent decline appears to have resulted from a fall in term premiums. Such estimates are subject to considerable uncertainty; nevertheless, they suggest that a perceived increase in economic stability in recent years has encouraged risk-takers to reach out to more-distant time horizons.
Regardless of the precise mix of factors that explains the decline in interest rates, the associated run-up in housing values has left households with a substantial pool of available home equity. According to data recently developed by Jim Kennedy of the Federal Reserve Board staff, and me, discretionary extraction of home equity accounts for about four-fifths of the rise in home mortgage debt.2
Our data splits home equity extraction net of closing costs, and hence debt increase on existing homes, into extraction from three sources: (1) that associated with home turnover--that is, mortgage originations of buyers of existing homes less the associated debt cancellation of sellers, (2) refinancing cash-outs, and (3) increases in home equity loans.
The size of equity extraction owing to turnover closely parallels and presumably finances the realized capital gains on homes, whereas cash-outs and home equity loans generally extract as-yet-unrealized capital gains.
What share of the financed capital gains are spent on consumer goods and services, thereby reducing the saving rate, is uncertain.3 Survey data suggest that approximately a fourth to a third of the value of home equity loans and cash-outs finances personal consumption expenditures directly.4 Another fourth funds repayment of nonmortgage debt that had been used, in effect, as bridge financing, predominantly of personal consumption expenditures.5 Home mortgage debt is thus the final source of funding of some consumer outlays originally financed by extensions of credit card and other consumer debt. Although there are no comparable surveys of the disposition of equity extracted by sellers of homes beyond amounts applied as a down payment on a subsequent home purchase or outright cash purchases, plausibly they would exhibit similar propensities.
If indeed this is the case, the implied increase over the past decade in consumption expenditures financed by home equity extraction, rather than by income and other assets, would account for much of the decline in the personal saving rate since 1995.
However, a significantly different approach to separating the proportion of consumer spending financed out of income from that financed out of wealth, though one that is similarly robust, concludes that the decline in the saving rate over the past decade can be explained by the decline in interest rates and by the increase in overall household wealth. That wealth, however, includes nonhousing wealth, most importantly stock market wealth.
Thus, we have two approaches, both of which would seem capable of explaining much or all of the decline in the personal saving rate. Of course, both cannot be true, for if they were, we would have explained a greater drop in personal saving than actually occurred. Obviously, this issue will remain an area of active research interest.
Nonetheless, it is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction.
If so, leaving aside the effect of equity prices on consumption, should mortgage interest rates rise or home affordability be further stretched, home turnover and mortgage refinancing cash-outs would decline as would equity extraction and, presumably, consumption expenditure growth. The personal saving rate, accordingly, would rise.
Carrying the hypothesis further, imports of consumer goods would surely decline as would those imported intermediate products that support them. And one would assume that the U.S. trade and current account deficits would shrink as well, all else being equal.
How significant and disruptive such adjustments turn out to be is an open question. Nonetheless, as I have pointed out in previous commentary, their economic effect will, to a large extent, depend on the flexibility inherent in our economy. In a highly flexible economy, such as the United States, shocks should be largely absorbed by changes in prices, interest rates, and exchange rates, rather than by wrenching declines in output and employment, a more likely outcome in a less flexible economy.
* * *
To judge the size of a hypothetical decline in home turnover and cash-outs, we need to examine more closely the composition of sales of homes and the possible future path of home prices.
Although we do not have comprehensive data on the split between sales to owner-occupants and those to purchasers of second homes, especially investors, enough data are available to draw some conclusions, however tentative.
As I noted earlier, we can have little doubt that the exceptionally low level of home mortgage interest rates has been a major driver of the recent surge of homebuilding and home turnover and the steep climb in home prices. Indeed, home prices have been rising sharply in many countries around the world. In the United States, signs of froth have clearly emerged in some local markets where home prices seem to have risen to unsustainable levels. It is still too early to judge whether the froth will become evident on a widening geographic scale, or whether recent indications of some easing of speculative pressures signal the onset of a moderating trend.
The housing market in the United States is quite heterogeneous, and it does not facilitate the easy diffusion of local excesses. Instead, we have a collection of local markets only loosely connected by such factors as mortgage interest rates and, over the longer term, migration and construction capacity. As a consequence, the behavior of home prices varies widely across the nation.
Speculation in homes is also largely local, especially for owner-occupied residences. For homeowners to realize accumulated capital gains on a residence--a precondition of a speculative market--they must move. Another formidable barrier to speculative activity is that home sales involve significant commissions, taxes, points, and other fees, which average in the neighborhood of 9 percent of the sales price. Where sales by owner-occupants predominate, speculative turnover of homes is difficult.
But in recent years, the pace of turnover of existing homes has quickened. Apparently, a substantial part of the acceleration in turnover reflects the purchase of second homes--mainly for investment or vacation purposes. According to data collected under the Home Mortgage Disclosure Act (HMDA), mortgage originations for second-home purchases rose from 7 percent of total purchase originations in 2000 to twice that at the end of last year. Anecdotal evidence suggests that the share may currently be even higher. Because down payments on second homes appear to be larger, on average, than they are on homes bought for owner occupancy, and because a larger share of second homes appear to be paid for wholly in cash, second homes presumably represent a larger fraction of total purchases than of loan originations, and arguably are at historically unprecedented levels.
Transactions in second homes, of course, are not restrained to the same degree as sales of primary residences--an individual can sell without having to move. This suggests that speculative activity may have had a greater role in generating the recent price increases than it customarily has had in the past.
* * *
The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny. To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is adding to the pressures in the marketplace.
Over the past few years, a great deal of attention has focused on the growing range of loan choices available to mortgage borrowers. The menu, as you know, now features a long list of novel mortgage products, not only interest-only mortgages but also mortgages with forty-year amortization schedules and option ARMs, which allow for a limited amount of negative amortization. These products could be cause for some concern both because they expose borrowers to more interest-rate and house-price risk than the standard thirty-year, fixed-rate mortgage and because they are seen as vehicles that enable marginally qualified, highly leveraged borrowers to purchase homes at inflated prices. In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses.
Although the aggregate loan-to-value ratio (LTV) for single-family residences, condominiums and cooperatives has been about flat since early 2003, this flatness could mask increases in the number of very highly leveraged home purchasers. Using data for individual mortgage loans and other information, members of the Board staff have estimated the distribution of the remaining mortgage principal to the current home value for a very large set of U.S. households. The loans factored into this calculation include first mortgage liens and most types of second liens. The results show that, as of mid-2005, less than 5 percent of borrowers had current LTVs exceeding 90 percent. In large part, this share was small because the recent growth in house prices has rapidly pushed down the effective LTV for many homeowners. Only the most recent, and the most highly leveraged, home purchasers have high LTVs.
Highly leveraged home purchasers tend to use so-called piggyback mortgages; that is, second liens originated at the time of purchase. These loans are popular, in significant part, because they avoid the non-deductible private mortgage insurance payments required on larger, single loans. If piggyback loans are more common in states in which house price appreciation has been particularly rapid over the past five years, one might worry that homebuyers are especially exposed to reversals in house prices. However, data collected for 2004, the first year of coverage in HMDA, show that the use of piggyback loans was not particularly correlated with strong appreciation of prices. Among mortgages tracked by HMDA, piggyback loan use was particularly high in Texas, California, Utah, Oregon, and Colorado. The presence of California on this list is probably no surprise, but home prices in the other four states have not grown particularly rapidly.
Of course, the HMDA data do not track mortgages made by all institutions or open-ended loans such as home equity lines of credit (HELOCs). Anecdotal reports suggest that some homebuyers are using HELOCs as piggyback mortgages, and so we probably do not have a full accounting of all mortgage debt.
Nonetheless, combining the newly available data on piggybacks from HMDA with other information, we can construct a reasonably comprehensive measure of the degree of leverage of mortgages used to purchase homes, by state, in 2004. These estimated LTVs are highest in states that have experienced relatively little house price appreciation, and lowest in states in which prices have appreciated the most, such as California and Massachusetts. The main reason for this negative relationship is likely that most people buying a home in California are probably also selling a home in California and using at least part of their accumulated home equity capital gains as a down payment on their new house. Apparently, many households are forgoing some consumption to lower their new mortgage balances.
In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices. In addition, the LTVs for recent homebuyers appear to be lower in those states that have experienced the most explosive run-up in house prices and that, conceivably, could be at risk for the largest price reversal. That said, the situation clearly will require our ongoing scrutiny in the period ahead, lest more adverse trends emerge.
1. Includes second homes that are not rented, vacant homes for sale, and vacant land. Return to text
2. We define discretionary extraction as the change in mortgage debt (excluding construction loans), plus scheduled, i.e., nondiscretionary, debt amortization minus mortgage debt originations to finance newly built homes. See Alan Greenspan and James Kennedy (2005), "Estimates of Home Mortgage Originations, Repayments, and Debt on One-to-Four-Family Residences, " Finance and Economic Discussion Series 2005-41 (Washington: Board of Governors of the Federal Reserve System, September) Return to text
3. Because the personal saving rate is measured relative to personal disposable income, any purchases financed with the proceeds of capital gains will increase personal consumption expenditures but not income, and therefore the measured saving rate will decline. The reason for excluding capital gains from income, and hence saving, is that only book saving can finance capital investment, a key requirement of the structure of our national accounts. Capital gains do not add to gross domestic product (GDP). Return to text
4. Surveys report approximately a third of mortgage extraction is spent on "home improvements," part of which is home repair, a personal consumption expenditure. Return to text
5. The survey results cited here were reported in Glenn B. Canner, Karen Dynan, and Wayne Passmore, "Mortgage Refinancing in 2001 and Early 2002," Federal Reserve bulletin, vol. 88 (December 2002), pp. 469-81, Peter J. Brady, Glenn B. Canner, and Dean M. Maki, "The Effects of Recent Mortgage Refinancing," Federal Reserve bulletin, vol. 86 (July 2000), pp. 441-50, and Glenn B. Canner, Thomas A. Durkin, and Charles A. Luckett, "Recent Developments in Home Equity Lending," Federal Reserve bulletin, vol. 84 (April 1998), pp. 241-251. It is not possible to trace the part of equity extraction that initially purchases certificates of deposit, stocks, bonds, and other assets but is later liquidated to finance personal consumption expenditures. Survey data usually request the disposition of loan proceeds over a limited period of about a year. We make the assumption that the shares of the loan proceeds are fixed over the past decade. Return to text
January/February 2005 | Foreign Policy
U.S. Federal Reserve Board Chairman Alan Greenspan is credited with simultaneously achieving record-low inflation, spawning the largest economic boom in U.S. history, and saving the world from financial collapse. But, when Greenspan steps down next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Has the world's most revered central banker unwittingly set up the global economy for disaster?
"Greenspan Is Responsible for the U.S. Economic Boom of the 1990s"
Only in part. The United States experienced an extraordinary period of prosperity in the 1990s. Between 1993 and 2000, 21 million new jobs were created in the United States, and in 2000 the country's unemployment rate briefly dipped below 4 percent for the first time in 30 years. During this boom, the U.S. economy grew at nearly 4 percent a year, adding more than $2 trillion to real U.S. gross domestic product (GDP)-more than the annual output of France.
But many stars aligned to produce that outcome, not just good monetary policy on the part of Greenspan's Fed. For starters, a judicious focus on fiscal discipline by former President Bill Clinton's administration brought the budget deficit under control. The Clinton administration managed to lower the deficit every year between 1993 and 1997. By 1998, there was a surplus that lasted until 2001. The 1990s also saw a powerful wave of corporate restructuring and technological change. Together, these two forces set the stage for sustained low inflation and a powerful acceleration of productivity and employment growth.
Greenspan's leadership in monetary policy undoubtedly played an important role in fostering the conditions that allowed the U.S. economy to surge in the 1990s. The chairman helped achieve the economy's high-performance potential during that time period. But no one should believe that the economic boom of the 1990s was the work of just one man or just one monetary policy.
"Greenspan Defeated Inflation in the United States"
No. Credit for breaking the back of double-digit inflation goes to Paul Volcker, Greenspan's tough and courageous predecessor. In the summer of 1979, when Volcker assumed the reins at the Federal Reserve, inflation was raging at 12 percent a year. Eight years later, when Alan Greenspan took over, the inflation rate stood at around 4 percent. During Greenspan's 17-year era, inflation slowed further to 2.5 percent per year. But 80 percent of the drop in inflation occurred under Volcker's stewardship at the Fed.
True, Volcker put the United States through its worst recession in modern times. It was the only way to unwind the destructive interplay between wages and prices that drove U.S. inflation. Greenspan's major challenge was to finish the job Volcker started. That was no easy task, and Greenspan's successes should not be minimized. In only one of Greenspan's 17 years at the Fed (1990) did inflation move above 5 percent; in 11 of those years, inflation was 3 percent or lower.
But there were serious complications along the way, not least of all a dangerous flirtation with outright deflation, or an overall decline in the price level, in early 2003. This problem resulted from Greenspan's biggest gamble-a willingness to push U.S. interest rates to extremely low levels during a period of rapid economic growth. The move gave rise to the destabilizing stock market bubble of the late 1990s, a speculative excess unseen in the United States since the roaring 1920s. The bursting of that bubble in early 2000 transformed an orderly disinflation (i.e., when inflation merely decelerates) into a close call with actual deflation.
"Greenspan Rescued the United States from a Stock Market Meltdown"
Maybe, but at what cost? In early 2004, Greenspan gave a speech to the American Economic Association, arguing that the Fed should feel vindicated in its efforts to contain the 2000 stock market shakeout. By slashing the federal funds rate-the interest rate at which the Fed lends money to other banks-by 5.5 percentage points between January 2001 and June 2003, the Fed limited the severity of the recession that followed the burst of the bubble.
That cure may cause bigger problems down the road. Bubbles have developed in other asset markets (especially corporate bonds, mortgage-backed securities, and emerging-market debt). And Greenspan's rock-bottom interest rates have led to the biggest bubble of all: residential property. Annual inflation in U.S. home prices is now running at a 25-year high of 8.8 percent, with 15 states experiencing double-digit increases in residential property values between mid-2003 and mid-2004.
At the same time, the home-buying and consumption binge has put individual Americans deeply in debt. Greenspan takes comfort that rising home values compensate for increased borrowing, but that rationalization assumes a permanence to rising property prices that belies the long history of volatile asset markets. So far, the Fed and debt-addicted U.S. homebuyers have bucked the odds. Over the last four years, debt accumulated by U.S. families was 60 percent larger than overall U.S. economic growth. Many households in the United States now spend near record-high portions of their monthly incomes on interest expenses, leaving consumers in a precarious position should either interest rates increase or the growth in incomes slow.
History shows that central banks aren't always able to cope when bubbles burst. That was the case with the Bank of Japan in the 1990s, after the Japanese stock and property markets collapsed, and it could still be the case in the United States today. The United States dodged a bullet when the stock market tanked in early 2000. There are no guarantees that highly indebted Americans will be as lucky the second time around.
"Greenspan Saved the World from the 1997–98 Asian Financial Crisis"
False. Time magazine devoted its February 1999 cover to the "Committee to Save the World." Featured were then U.S. Treasury Secretary Robert Rubin, then Deputy Secretary Lawrence Summers, and Greenspan, all celebrating the end of the worst global financial crisis in more than 60 years. In truth, the world weathered the Asian financial storm only to chart increasingly dangerous waters in the years that followed.
Global economic imbalances have intensified dramatically since 1999. The United States' gaping current account deficit says it all-$665 billion in mid-2004, equal to a record 5.7 percent of U.S. GDP. Never in history has the world financed such a massive deficit. The United States is sucking up more than 80 percent of the world's surplus savings, requiring capital inflows that average $2.6 billion per business day. And the U.S. deficit is bound to get worse before it gets better.
This huge balance-of-payments gap reflects major disparities between global savings and consumption. A savings-starved U.S. economy is living beyond its means, while Asia and, to a lesser extent, Europe, are plagued by low consumption and high savings. Consequently, the United States is now the world's consumer of last resort. Asian economies, by contrast, are more prone to save and rely on export-led growth strategies, and they are unwilling or unable to stimulate domestic private consumption.
The result is an enormous buildup of U.S. dollars held by Asian nations (more than $2.2 trillion in mid-2004, or twice Asia's holdings in early 2000). These countries then recycle this cash back into the United States by buying U.S. Treasuries. This process effectively subsidizes U.S. interest rates, thus propping up U.S. asset markets and enticing American consumers into even more debt. Awash in newfound purchasing power, Americans then turn around and buy everything from Chinese-made DVD players to Japanese cars.
This is no way to run the global economy. Asia and Europe are increasingly dependent on overly indebted U.S. consumers, while those consumers are increasingly dependent on Asia's interest-rate subsidy. The longer these imbalances persist, the greater the likelihood of a sharp adjustment. A safer world? Not on your life.
"Greenspan Was Alone in Foreseeing the Productivity Revolution"
Yes. In the early 1990s, when the United States was mired in a productivity slump, Greenspan was largely alone in believing that an important shift was at hand. He was right. Worker productivity in the United States grew 3 percent a year between 1996 and 2003, double the anemic 1.5 percent annual increase of the preceding 20 years.
The productivity breakthrough had a profound impact on the performance of the U.S. economy, as well as on Greenspan's command of monetary policy. High-productivity economies can withstand rapid growth without an increase in inflation. So, as U.S. productivity climbed in the late 1990s, Greenspan boldly let the economy fly without raising interest rates. Investors, of course, were thrilled with Greenspan for not standing in the way of rapid economic growth. The stock market bubble of the late 1990s (which he initially warned of, but later ignored) reflected this exuberance. As Greenspan said in early 2000, "When we look back at the 1990s.… [w]e may conceivably conclude…[that] the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever."
Within two months of that statement, the stock market collapsed, but the productivity miracle did not. Whether it will endure, though, remains an open question. Most U.S. businesses have an advanced IT infrastructure. The lack of new corporate hiring and the sharp falloff in business expansion point to ever more hollow American corporations. Moreover, the pendulum is now swinging back toward greater government regulation, further constraining corporate risk-taking. The drivers of the productivity miracle of the past eight years may not be sustainable, after all.
"Greenspan Spells a Strong Dollar"
Not necessarily. Until recently, the dollar has generally been stable during Greenspan's 17-year tenure, a noteworthy accomplishment for any central banker. An exception came in 1994 and early 1995, when the dollar weakened sharply, only to regain its strength in the latter half of the 1990s.
But the dollar's past may not be prologue. Global imbalances-underscored by America's record balance-of-payments gap-are best corrected through a cheaper dollar. A cheaper dollar means higher U.S. interest rates, which in turn will suppress U.S. spending and enable a long overdue rebuilding of national savings. Conversely, other currencies will strengthen, forcing the export-led economies of Asia and Europe to embrace long-overdue reforms, including lowering tariffs and making labor markets more flexible.
Today, even Greenspan acknowledges that the world needs a weaker dollar. That's the verdict from America's record (and rising) current account deficit and from Asia and Europe's excess dependence on exports. The hope, of course, is that the dollar experiences a "soft landing," a gentle descent over several years. But in light of the massive U.S. current account deficit, the risk of a hard landing is all too real. The more the current account deficit grows, the greater the odds of an abrupt adjustment. The dollar may be an accident waiting to happen, with a sharp decline in the greenback raising the possibility of collateral damage to stocks, bonds, and price stability. Given the central role the United States plays in driving the world economy, any shock "made in the U.S.A." could reverberate around the world.
"Greenspan Leaves the U.S. Economy in Good Shape for the Future"
The jury is still out. By congressional mandate, the Fed's goals include price stability, full employment, and economic growth. Greenspan's Fed has made progress on all three.
However, some unintended consequences of Greenspan's efforts may jeopardize the United States' long-term economic future. Consider the profound shortfall in U.S. savings. The United States' net national saving rate-the combined saving of households, businesses, and government-fell to 0.4 percent of national income in early 2003, and it has since risen to just 2 percent. Lacking in domestic savings, the United States must import savings from abroad and run massive current account deficits to attract that capital.
Greenspan shares some blame for this problem. It all goes back to the asset economy, his often-expressed belief that financial assets can play an important role in sustaining the U.S. economy. He made that argument in the late 1990s when stock prices went to new highs, and he reiterated it recently with regard to surging home prices.
The catch is, people interpret Greenspan's analysis as advice. So individuals view the appreciation of their home as a proxy for long-term saving and are therefore less inclined to save the old-fashioned way-by putting away cash from their paychecks. This scenario sets U.S. citizens apart from those in most other Western economies. Only in the United States are people aggressively tapping the savings in their homes (through mortgage refinancing) to finance current consumption.
Moreover, the rapid buildup of debt, both domestic and foreign, leaves a savings-short U.S. economy in precarious shape. The problem is compounded by the 77 million aging baby boomers, now approaching their retirement years, when they need savings more than ever. To the extent that Greenspan has condoned asset-based savings (homes) in lieu of income-based savings (cash in the bank), he has unwittingly compounded the United States' most serious long-term problem.
"Greenspan Is Politically Independent"
Yes, but… Unfortunately, the Federal Reserve is located in Washington, D.C. That thrusts its chairman into the political arena and has led to some indelicate episodes for Greenspan over the years, including his endorsement of the Bush administration's 2001 tax cuts as the wisest way to spend the government's budget surplus-a surplus that has now disappeared into thin air.
Despite such momentary lapses, there is no evidence that Greenspan has politicized U.S. monetary policy. Although Greenspan is a Republican (he first entered public service as an advisor to President Gerald Ford in 1974), he had no compunction in raising interest rates on GOP administrations, including the current one, at inopportune times. Over the years, Greenspan has been critical of fiscal policies pursued by Democrats and Republicans alike.
But with Greenspan, the line between politicization and policy activism is blurred. There is no mistaking Greenspan's aggressive stance on several key issues driving financial debates and policy. In early 2000, Greenspan made a strong (and ultimately wrong) case for why there wasn't a stock market bubble. More recently, he minimized the immediacy of the United States' current account deficit problems and played down the risks of an oil shock. And, in October 2004, he dismissed concerns over the United States' excess household debt.
The sheer weight of Greenspan's point of view can bear critically on financial markets and the real economy. To the extent that his intellectual activism aligns with Fed policies, investors tend to take Greenspan's messages too far. This tendency compromises his position as an independent central banker. Moreover, his recent role as a cheerleader for policies such as tax cuts compounds already serious imbalances and imparts a pro-growth bias to his central banking philosophy that could make the endgame all the more treacherous. That was the case with stock buying in the late 1990s and could well be the case today in condoning the household debt binge, overvalued property markets, and Asian demand for U.S. Treasuries. Greenspan's stances may not be political-nor may they be prudent.
"It Will Be Difficult to Replace Greenspan"
Hardly. Alan Greenspan's term as a member of the Federal Reserve Board of Governors expires on the last day of January in 2006, at which time he is required to step down. When he does, Greenspan will have served as chairman for more than 18 years under four different presidents, making him the second longest-serving chairman since the founding of the Fed in 1914.
There is understandable apprehension over the transition to new leadership at the Federal Reserve. Business leaders, politicians, and investors expressed similar concerns when the Volcker era came to an end in the summer of 1987. "There is concern in Washington," Paul Glastris reported in the Washington Monthly in 1988, "that Alan Greenspan sees himself as the new Paul Volcker and that he may seriously damage the economy." Yet, aside from a small flutter in the financial markets, the U.S. economy barely skipped a beat when Greenspan replaced Volcker. Shepherding the world's most dynamic economy is not a personal accomplishment. It has more to do with the interplay between markets, consumers, businesses, politicians, and policymakers than any cult of personality a Fed chairman may or may not have.
A key challenge for Greenspan's successor will be rebuilding private-sector savings. It's a critical step if the United States is to close its balance-of-payments deficit and an essential insurance policy for an aging population of baby boomers nearing retirement. Although prudent fiscal policy and budget deficit reduction by the U.S. Congress will be part of any fix, the Fed's monetary policy can also play an important role in fostering a long overdue improvement in national savings.
At the same time, the next Fed chair must be a true internationalist-facing the increasingly daunting challenges of globalization. The United States has enjoyed an unprecedented dominance of the global economy since the mid-1990s. But, like U.S. geopolitical hegemony, its economic dominance is unlikely to last. The next Fed chairman will have to walk a delicate line between domestic imperatives and the challenges posed by other players in the global economy.
History cautions against rendering a premature verdict on the accomplishments of any one economy, or any one central banker. When Alan Greenspan arrived at the Fed in the late 1980s, Japan and Germany dominated the world economy, and the United States was down and out. Over the last 20 years, the fickle pendulum of economic prosperity swung the other way, as the United States redefined the very concept of global economic leadership. Greenspan will be a tough act to follow. But his success was as much an outgrowth of history as it was a reflection of any one person.
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