Excerpts from The Age of Turbulence

Markets have opened up the new week in edgy fashion this morning, spurred on by weekend scenes of the UK's first bank run in more than a generation. The news makes fairly grim reading, with some £2 billion of Northern Rock's £12 billion deposit base withdrawn since Friday morning. London dealers are asking themselves this morning whose fortunes have collapsed more swiftly: those of Northern Rock or the England rugby team?

Regardless, the chart of Northen Rock is beginning to resmble that of another mortgage lender that suddenly found it difficult to obtain market financing for their loan book. Although many expect a white knight buyer to emerge for Northern Rock, would it really come as much of a surprise if they went the way of New Century?
This week should prove to be very tumultuous indeed, what with the Fed announcement tomorrow and Lehman, Morgan Stanley, Goldman, and Bear all reporting Q3 earnings. There is clearly scope for plenty of volatility, particularly with the S&P 500 perched just a few points from its high since the "crisis" began. Macro Man would not be suprised to see fairly quiet trade today as markets wait nervously for the newsflow to begin in earnest tomorrow.

Those tempted to do a bit of reading in the meantime may turn to Alan Greenspan's new book, The Age of Turbulence, which is published today. The Maestro's legacy has become a bit tarnished recently, with many laying the blame for the subprime debacle squarely on his shoulders. There has been some suggestion that The Age of Turbulence was prompted by Greenspan's desire to engage in a little historical revisionism to preserve his legacy as the Maestro.

Is this in fact the case? Judge for yourself. Macro Man 's contacts in the publishing industry have provided him with access to an initial version of the galleys, reprinted here on an EXCLUSIVE* basis. Enjoy!

Greenspan on....

the housing crisis: In the spring of 2003, it started to become clear to me that the US housing market could begin to start suffering significant distress in 2006, with a concomitant decline in the price of mortgage derivative securities in 2007. I therefore acted promptly, authorizing a 0.25% cut in the Fed funds target rate to 1%. While many on the Committee did not agree with this move, my argument in favour of pre-emptive action against an economic downturn in four years' time eventually carried the day.

irrational exuberance: It is a widely-held fallacy that I used the phrase "irrational exuberance" in reference to stock markets in late 1996, just as they were set to register stunning gains for the next three years. In fact, what I said to the American Enterprise Institute that night was "But how do we know when irrational antipathy has unduly depressed asset values, which then become subject to prolonged and justified appreciation over the next several years?"

In March 2000, I determined that equity markets had, at last, become irrationally exuberant, and described them as such in meetings with the Administration and Congress.

fiscal policy: I was occasionally stunned by the inability of politicians from both sides of the aisle to understand the appropriate use of fiscal policy. Although I eventually developed a working relationship with the Clinton and G.W. Bush administrations, it came only after the painstaking effort of lecturing the executive and legislative branches on how to use fiscal policy.

I recall a meeting that I had with Gene Sperling in early 1993. Sperling articulated the new Clinton administration's intended economic program, which included a substantial increase in spending along with targeted tax cuts. Given that the Fed funds rate was set at an already-accomodative 3%, this was a clearly inappropriate setting for fiscal policy.

"Gene," I said, "let me explain to you what the role of fiscal policy is. When monetary policy is easy and I do not wish to be blamed for taking away the punch bowl, it is the job of fiscal policy to begin tightening the strings on the economy. Only after it is clear that the economy is resilient enough to absorb policy tightening is it appropriate for the Fed to adjust its monetary stance.

"By the same token, when it becomes clear the the economy is slowing, it is appropriate for the Fed to slash interest rates quickly so as to provide a needed boost to activity. Only after monetary policy fails to engender an economic recovery (no doubt because the government ovecooked the fiscal tightening previously) is it appropriate to cut taxes or raise spending.

"In a very real sense, monetary and fiscal policy must work together as a 'good cop' and 'bad cop.' Because of the nature of transmission mechanisms, it is imperative that the Federal Reserve, as an unelected agent, fulfll the role of the good cop."

his recommendation that mortgagees take out adjustable-rate mortgages (ARMs) during the early stages of the tightening cycle in2005: In early 2005, the Economic Club of Cheyenne invited me to Wyoming to make a few remarks. Knowing the local predilection for hunting, I made a casual reference to the forthcoming end of deer season and called on the attendees to "go take out arms" to try and bag one last large-antlered buck before the season ended. This was subsequently misinterpreted in the financial press as a recommendation that homebuyers use exotic and dangerous mortgage products. In reality, nothing could be further from the truth.

the stock market crash of 1987: Half an hour after after the opening of the New York Stock Exchange on October 19, 1987, it became clear that the stock market was in significant distress. Two months into my tenure as Chairman of the Federal Reserve, I was about to meet my first great challenge.

At approximately 10.30 a.m., I took a phone call from Treasury Secretary James Baker. The Secretary asked me what I planned to do about the stock market decline.

I replied that I planned to do nothing, as my Objectivist background had taught me that government agencies should not play a role in private markets and in no way should save "looters" from the consequences of their own economic decisions. I told him that I did not wish to grant markets a "put option" to insulate them from price declines.

Mr. Baker was not impressed. In his inimitable Texas drawl, he said, "Boy, I don't know much about them there put options. But if you don't do something quick, I'll give you another kind: you can have the option of whether I put my left boot or my right boot up your be-hind."

After deliberating for a few minutes, I concluded that shoring up confidence in the financial system was, after all, a worthwhile goal, and thus provided liquidity to markets. And that was the genesis of the policy tool that eventually became known and loved as the "Greenspan put."

Bob Woodward's biography, Maestro: A number of friends and colleagues told me that I should be flattered by my portrayal in Woodward's book, but frankly I found it all to be a bit embarrassing. Woodward left out numerous examples of my policy-making genius, and left the reader in doubt as to whether the entirety of world economic growth was down to my decisions, which of course it was.

Macro Man is sure you'll agree that Greenspan has outdone himself....


* these galleys fell off the back of a truck
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OldVet
admin
September 17, 2007 at 3:35 PM ×

Very funny stuff from Greenspan. Everybody plays the clown and the good guy.

Where the Fed can be most critized is in its failure to monitor what kinds of loans were being made by banks, and most especially, what it allowed to be called "core capital" or Tier One capital. After the meltdown of the stock market in 2001, banks were gradually allowed to include mortgage backed securities as Tier One capital. This allowed even more lending to real estate, based on loans already made. I wouldn't be surprised, even now, to see banks in the US asking for something more than "liquidity" bailouts.

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"Cassandra"
admin
September 17, 2007 at 5:13 PM ×

hey MM - AGs unpublished excerpts - the ones that [rightfully?] got edited out are available over at my place! It's amazing that they all have the same tone of indignation that for whatever good and genuine reason, was seemingly absent from everyone's memory at the time....

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Macro Man
admin
September 17, 2007 at 6:06 PM ×

I'll check it out, C. Somehow I think Turbulence will be providing food for satire for some time.

I'm facing a dilemma about whether to actually buy the book, however. On the one hand, imagine the possibilities once you've actually read Greenspan's "wasn't me, guv" explanations. On the other hand, I'd rather not see any of my wealth transferred to him.

I guess that's me down to the library, then...

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Anonymous
admin
September 17, 2007 at 7:21 PM ×

Funny how we rarely , if ever , heard any criticism about "the Maestro" when he was in office , but the last two years have seen every blogger and critic in the world take shots at him...... where were they then ???

so easy being a Monday-morning quarterback

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Macro Man
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September 17, 2007 at 8:16 PM ×

I can assure you that I have taken a dim view of Greenspan for a number of years, though I've only written in this space since Bernanke has been in office (and as such cannot "prove" that I'm not a MMQB.)

My "Alan Greenspan office voodoo kit" still has pride of place on my desk, however.

A simple Google search of 'Greenspan bubble" yields 1.27 million responses, many of which were written when Greenspan was in office. Itulip.com has been around for 9 years and is still going strong!

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Anonymous
admin
September 17, 2007 at 9:48 PM ×

I'm making no reference to you MM , though I find it strange how most everyone takes a shot at Greenspan these days ..... can't go a foot without some Blogger taking a shot at him ..... I find that he did more good than bad , saved the markets a few times , and don't think that anyone else would have done differently ... most Fed minutes were 12-0 or 11-1 so the other Governors were in agreement

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Macro Man
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September 17, 2007 at 10:04 PM ×

I've had the pleasure of spending some time with a former member of the FOMC. This individual said that Greenspan wrote the statement himself before the meeting and then presented the board members with a fait accompli five minutes before the end of the meeting. We also know from "Maestro" that he took great pains to minimize public evidence of dissension within the committee.

While I'd agree that some people have changed their tune on Easy Al, his conduct from 2002-2005 in particular did draw criticism from many quarters in real time.

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Anonymous
admin
September 17, 2007 at 11:27 PM ×

MM -- indeed, go to the library since you'll be reading what Greenspan sees and writes in his "rear view mirror"

Penny Pincher

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"Cassandra"
admin
September 18, 2007 at 12:04 AM ×

anonymous,

is not dissent within the FOMC reminiscent of Japan? Without having tallied the nums, I might even wager that the FOMC has historically been rather more unanimous that that most unanimous of institutions, the BoJ...

It's not that AG was so BAD. It's that when he went down to the crossroads, and was faced with tthe really big decision, the one that matters, he sold his soul to friends of John Galt, rather than the public interest.

-C-

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Anonymous
admin
September 18, 2007 at 1:00 AM ×

" The bottom line is that the Bank of England, the media and the markets have no idea of the force which could be about to hit them - a situation uncannily reminiscent of the days before Black Wednesday, exactly 15 years ago"

http://www.investorsinsight.com/otb_va_print.aspx?EditionID=587

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Manc Trader
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September 18, 2007 at 5:47 AM ×

Anonymous
I would say Grant's Interest Rate observer and many of its readership were big critics in real time.
Jim grant wrote a book "The trouble with prosperity" in the mid 90's which was a detailed criticism.
Not sure whether he was any more right.
Jim Rogers probably made more actual money from his criticisms in real time.

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Macro Man
admin
September 18, 2007 at 3:13 PM ×

C, I would disagree that Greenspan sold his sould for John Galt, as it were. If anything, he sold his soul for James Taggart, attempting to insulate segments of the population from the economic consequences of their own cack-handed decisions.

In my book, Greenspan's actions are just about defensible until the third cut in 1998. Thereafter, and especially in 2002-2005, his actions seem to be etermined by a ferocious desire to preserve his legacy. Instead, his over-easy monetary setting will end up definig it.

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