Poor ol’ Alan…
We almost felt sorry for him…
“Maestro mauled…” said the headline in The Financial Times. We wanted to maul him many times. But now that others were doing it…it made us feel sympathetic to the old scalawag.
Didn’t the Alan Greenspan Fed’s failure to curb subprime lending deserve to go into the ‘oops’ category, demanded chief tormentor Phil Angelides.
Mr. Greenspan defended his legacy. He was right 70% of the time, he said. The other 30% of the time he was wrong.
Hey, that’s not bad. Pity it’s not true. Greenspan was wrong 90% of the time – at least.
He thought those fancy derivatives actually spread the risk of failure…and made the system more stable.
He thought those subprime loans helped people of modest incomes realize the goal of home ownership.
He saw no risk in keeping the key rate at an ’emergency’ low level…years after the emergency had passed.
But he hit one of those magic moments last week…when he was finally right about something. He declared that the yield on the 10-year note was “the canary in the coal mine.” This week, the canary wobbled…but stayed on his feet. He’s still standing…but looking a little peaked. More below…
While the former Fed chief was in the spotlight at The Financial Times yesterday, the present Fed chief was front-page news over at The Washington Post. Alan Greenspan is a scoundrel, no doubt about that. But he was, in some ways, a better Fed chief than Bernanke.
The trouble with Bernanke is that he doesn’t know his limitations. He actually believes the Fed can look at the possible outcomes going forward and improve them before they come out.
“Fed chief sounds a deficit warning,” is the headline. He said Americans faced a “difficult choice.” It’s between higher taxes and fewer entitlement services, he said.
This doesn’t seem like a difficult choice to us. We’d gladly accept fewer “services” from the feds if they’d lay off on the taxes. But that’s because we’re in the half of the US households that actually pays taxes.
No kidding; the report was in yesterday’s news:
“Almost one half of US households pay no federal income tax.”
So, welcome to the beginning of the end. If half the citizens get bread and circuses without paying for them, you can bet that the whole shebang is headed for destruction. The math doesn’t work. Half the people have no interest in curbing taxes or spending. Obviously, those people would prefer to raise taxes – on us – rather than give up their free pills and retirement benefits. Even among the half that does pay taxes, most pay very little – less than they get back in ‘services.’
Meanwhile, the ‘rich’ get socked hard. According to the reports we’re seeing on scurrilous blogs and from our usually unreliable sources, the tax burden on the rich is set to rise over 60% of income – thanks to the health care charges they will have to bear.
By the way…the whole thing is a fraud. The services, that is…
Here’s how it works. In 2007, the private sector finally blew itself up – thanks largely to all that debt offered by Wall Street and encouraged by the Alan Greenspan/Ben Bernanke Fed.
So then…in comes the Fed again…and the US government…wearing white hats and pretending to save the situation. How? By bringing more of the economy under their control!
As far as we can tell, the last successful government program was WWII. And that was only successful because the competitors’ programs were also run by government. But that doesn’t stop them…
Does anyone seriously think the feds can do a better job? These are the people who run the Post Office…and Amtrak, for Pete’s sake. Even with monopolies, they can’t make money. Now they’re the majority owners of auto companies, insurance giants and mortgage firms. Hardly anyone buys a house in America anymore without the help of a government-owned mortgage business. And soon, you won’t be able to get a doctor to take your temperature – assuming they still do that – without getting a bureaucrat’s approval.
In theory, the feds take charge of more of the economy, and spend more money, so they are able to keep the GDP from going down. The feds have been pumping about $4 billion per day of deficit spending (money they didn’t collect in taxes) into the economy. The bankers say ‘thank you very much’ for the business and pay themselves big bonuses. But this money doesn’t stimulate the private economy…it replaces it.
But it replaces it with zombie ‘growth.’ The government-driven part of the economy is largely brain-dead. It is a waste. What real, positive boost to prosperity comes from someone filling out health care forms for the feds? What benefit do we get from tax accountants? How about from the ambulance-chasing lawyers?
(Yesterday, driving to work, we saw an ad in Baltimore’s inner city: “Birth injury? Malpractice? Workplace injuries? You need a lawyer!”)
How about from any of these multitudes of mid-level bureaucrats…lobbyists…handlers…interveners…meddlers…?
The feds spend money. But the money is like warm water to a boat hull. It just stimulates the barnacles. Gradually, the boat slows…and sinks.
What can you do? Haul it out and scrape the barnacles off! That’s what Ben Bernanke is proposing. But wait…the barnacles vote!
And they make campaign contributions…
But here is Ben Bernanke talking tough. ‘If you don’t straighten up,’ he seemed to say, ‘you’re going to end up like Greece.’
Wait…this has a familiar ring to it. This is the same Ben Bernanke who is holding rates near zero to make it easier for the feds NOT to straighten up. Like those of his predecessor, Bernanke’s centrally- controlled lending rates are sending out just the wrong signal at just the wrong time.
And like Greenspan, he can get away with it…for now.
But maybe not for long. On Monday, US T-note yields ran over 4%. “The fun’s over,” said old-timer Richard Russell. It looked like the end had come for the long bull market in bonds. Bond yields have been going down since ’81. But they seemed to hit bottom near the end of 2008. What we’re seeing now – possibly – is the beginning of the long march in the other direction.
This seemed even more likely because at the end of March the Bernanke Fed lost one of its pumps. It can no longer buy up the toxic mortgage- backed bonds of Wall Street, thereby giving the banks money to buy US Treasury debt.
Still, on Wednesday, threats of more trouble from Greece sent investors towards US bonds for safety.
“Greece Rescue Not Going According to Plan,” was the headline at Bloomberg.
“Demand strong in US 10-year Treasury debt sale,” reported The Financial Times.
But by yesterday, it looked like the plan for US debt was not going well either.
“Treasuries decline after $13 billion auction of 30-year bonds,” said another Bloomberg report.
Jobless claims unexpectedly rose last week. What do you expect? This is a Great Correction. Learn to love it.
“China offers high-speed rail to California,” says The New York Times. Get used to that too. Who’s got the money? Who’s got the new technology? Who’s got the engineers…the people who actually know how to do something.
Hey China…let’s make a trade. We’ll give you 1 million lawyers for 100,000 engineers. Or, how about 20,000 lobbyists for one good metallurgist? Heck…we’ll throw in 535 members of Congress.
Hold the Congressmen? Okay…guess we’re stuck with them.
for The Daily Reckoning Australia