Why Did Greenspan Allow Stock and Real Estate Bubbles?

A money manager, Bill Fleckenstein, co-authored a book titled Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. (You can read a review here.) In the book, he makes a pretty convincing that Alan Greenspan contributed to the stock bubble of the 1990s and the real estate bubble of this decade by not taking appropriate actions. Actions like raising the interest rate in the 1990s; raising the amount that a stock purchaser had to deposit with a stock broker when buying on margin; and by allowing the creation of novel mortgage instruments.

They point out that the United States had gone from the stock market crash of 1929 to 1979 without a speculative bubble. Then, from 1980 to the present time, there have been three bubbles. One in real estate in the late 1980s that caused the collapse of the savings and loan industry, and the two mentioned above. All of which happened on Greenspan's watch.

The authors argue that a lot of the problems were caused by Greenspan's arrogance in thinking that he knew more than most people, by his belief that he was "the smartest guy in the room." There could be other reasons, however. Could it be that Greenspan was pursuing policies that he thought would benefit the presidents who appointed him?

While George H.W. Bush lost his re-election in 1992, both Bill Clinton and George W. Bush won re-election. In both administrations, however, toward the end of their second terms, financial clouds loomed on the horizon, although obviously much worse in Bush's case than in Clinton's.

In any event, no matter what his motivations, Fleckenstein and his co-author make a compelling case that far from being a good thing, Greenspan's time at the Federal Reserve had very bad consequences for most Americans.

"Bush Economy" Heading for a Recession?

The economy is heading toward a recession. New home sales are down 8.5% since July. Prices of new homes have fallen 7.5% from a year ago. Credit is increasingly hard to get for consumers and businesses. All of these are signs that the economy is heading towards a recession.

Ever since Bush's reckless, radical tax cuts, we have heard from his supporters and apologists about how they have helped the economy. Actually, and this is something that presidents of both parties don't want to talk about, but the Federal Reserve Board has more control over the economy than any president. If the Fed makes more money available, it helps both consumers and businesses get loans. They use these loans to buy goods and services, thereby creating more jobs for Americans.

Under Greenspan the Fed basically allowed homeowners to turn their homes into ATM units. Americans borrowed on their equity to finance everything from home remodeling to a new vacation for the grandkids.

Naturally, since Greenspan is a Republican and since Bush is an idiotic Republican, no one thought about overseeing the financial institutions making these loans. As a result, we now have a wave of losses in the billions of dollars from risky loans. Consequently, we see financial institutions, who are apparently led by people who are not real bright given their past history, sharply cutting back on new loans.

If there is a recession, look for three things to happen. One is that Republicans like Bush will push for even more tax cuts under the rationale that we need to "pump" up the economy. Two, Democrats will do even better next year than anticipated. Three, illegal immigration will become even more potent as an issue because of economic insecurity among working class Americans.

Will Foreigners No Longer Buy U.S. Debt?

During the Bush Administration the United States government has managed to avoid trouble from Bush's huge deficits by borrowing money, a lot of it from foreigners. That market may be drying up. Bloomberg, a financial news reporting service, ran an article on its website, which reported on a speech that Alan Greenspan recently gave. The following is from the article:

Former Federal Reserve Chairman Alan Greenspan said the dollar's depreciation may reflect growing unwillingness among foreigners to buy U.S. debt.

``Obviously there is a limit to the extent that obligations to foreigners can reach,'' Greenspan said in a speech in Washington today. The dollar's decline to its lowest since 1997 may be ``an indication America is approaching this limit.''

Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. financial assets in August. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July.

The dollar has declined about 8 percent against the euro this year and 4 percent against the yen.

Most Americans aren't aware of how much the Bush Administration has come to depend on foreigners purchasing American debt to finance the government's operations. During Bush's administration the amount of debt held by foreigners has doubled from about one trillon to two trillon, according to information put out by the Federal Reserve Bank of St. Louis.

During that same period the amount of debt incurred by the United States has gone up from six trillion to over 8 trillion dollars, again according to the Federal Reserve Bank of St. Louis. This means that almost one-half of the total debt incurred during the Bush Administration was purchased by foreigners.

This deficit spending has allowed Bush to pursue his reckless tax cuts, fight a war costing half a trillion dollars, and still run the Federal government, albeit not very well. If, however, foreigners cut back on purchasing U.S. debt, then the financial house of cards that Bush built may come tumbling down. The U.S. would either have to cut back its spending, raise interest rates to attract more investors, raise taxes, or some combination of all three.

None of this will happen under Bush. He won't be able to cut spending during the last year and a half of his presidency. He won't raise taxes. He doesn't control what the Federal Reserve pays out in interest payments. It will happen under the watch of the next President while Bush is down at his Crawford ranch playing cowboy.

Alan Greenspan Says Iraq War is About Oil

Alan Greenspan has a new book out in which he is quite critical of the Bush Administration. Most of the press coverage of the book has been centered around his complaints about Bush and his disappointment with Cheney, who he served with in the Ford Administration. There is, however, a fascinating quote about Iraq. Here is the quote:

"I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

Now, apparently, he doesn't go into an explanation of what this quote means or why he believes that the Iraq War is about oil. This could just be speculation, but if it is, it is speculation coming from a man who is wired into both Republican and Washington power circles. The next time that some Bush loyalist tells you that this war was started because of weapons of mass destruction or to spread democracy, or any of the other discarded reasons we have been given, give them Greenspan's quote.