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Connect the Dots
Tuesday, 23 January 2007 10:59
by Dr. Chris Martenson

Can you possibly stand another article about Greenspan? If the answer is “no” I completely understand – I too am ready to let the man take his place in history next to the buggy whip – but he was responsible for something that will be resonating in your life for a very long time.

Since I’ve already typed two complete sentences and am still on topic, I think it’s time for a detour. So let me tell you that I am cursed with a brain that connects dots. Worse, my brain likes to store things up as though random news items were potatoes and a particularly vicious Polish winter were on the way. The fact that I live in the US only confuses things all the more.

But that’s not the point. The point is that Alan Greenspan is either depraved or a fool and, of the two, I am not sure which I feel worse about as describing the man who was at the helm of the monetary bobsled during the longest stretch of paper credit expansion the world has ever seen.

Let’s play ‘connect the dots’:

  • In December 2002, private bankers warned Greenspan that consumers were taking on worrisome amounts of debt and that an unsustainable, interest rate driven housing bubble was fueling this behavior (page 22 of this linked document).
  • In July of 2003 Greenspan lowered interest rates to one-percent (as in 1.0%, or one-point-oh), an emergency rate, and held it there for over a year (see chart below).
  • In February of 2004 Greenspan advised Americans that they’d be better off with adjustable rate mortgages (ARMs) than they would with fixed rate mortgages.
  • In October of 2005, the new bankruptcy law, largely written by private banking lobbyists and insiders, was passed.
Here’s how those data points look when plotted out on a chart of short-term interest rates:

Known and very popular cialis coupon which gives all the chance to receive a discount for a preparation which has to be available and exactly cialis coupons has been found in the distant room of this big house about which wood-grouses in the houses tell.

To summarize; (1) Mr. Greenspan was warned that he was igniting an unsustainable asset bubble, (2) he threw more gasoline on the fire, (3) he then advised consumers to switch to ARMs right before what he knew (for certain) would be a protracted period of rising interest rates, and then (4) kept mum while bankers worked feverishly to pass bankruptcy legislation that was indisputably banking-friendly but a consumer nightmare. Kind of sounds odd when you put out there like that doesn’t it?

Now here’s the interesting part about the story. To consumers, Adjustable Rate Mortgages (ARMs) are good or bad depending on whether interest rates are rising or falling. When interest rates fall the ARM adjusts down with them. The reverse is true when rates are rising.

As the following highly technical table makes clear, you really, really don’t want to be holding an ARM during a rate hiking campaign.

Clearly, when interest rates are about to embark on a sustained rise the best advice to consumers would be to lock in a low rate conventional mortgage.

But when we refer to the four data points in the chart above, we observe that Mr. Greenspan advised consumers to take advantage of ARMs right before the onset of what he knew would be a multi-year rate hiking campaign. Obviously he advised people to do the exact opposite of what they should have done. Why did he do that?

We can look at this two ways. On the one hand we could assume that Mr. Greenspan is a very poor banker and that despite his long career in banking he did not have access to the requisite highly technical information (see Table 1, above) and was simply unaware that it was very bad advice to steer people towards ARMs mere months before the onset of a protracted rate hiking campaign. On the other hand we could assume Greenspan knew exactly what he was doing and conclude that his motivations lay with shielding the banking industry from rising interest rates by cajoling consumers into ARMs at the very worst possible moment in the past 50 years.

Naturally, I’d like to assume the best but given the two options, I’m not sure which horse to root for. If I hope he was just a fool, what hopes should I pin on our chances for an agreeable resolution to the credit bubble he created? And If I’m to assume that all his actions were a depraved attempt to shield large banking institutions from a bit of risk then I need to accept the possibility that all of his policies were geared towards promoting institutions over people.

So which is it?

History will tell, but the early returns suggest you would be better off getting your financial advice off the back of a Wheaties box than you would from Mr. Greenspan.

As for me, I’m wondering what to do with all these potatoes.

Trivia question: Who was in attendance at that 2002 meeting with Greenspan?
Answer: Ben Bernanke.
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Comments (6)add comment

a guest said:

Mr. Chris,
Man! That table gave me a migraine what with all the high-tech jargon and graphics. Well done, though. It gave me faith in the non-public school edu. I got once upon a time. Oh, yeah . . . here's a tidy tip that I'm sure you're aware of but maybe not some of your readers: Greenapsn works for "The Federal Reserve Bank" which, in fact, is in no way actually associated with the Federal Government but is a privately-owned business which owns the American Government at this point in history. It therefore stands to reason that since Uncle Al worked for "the fed" he would be much more interested in protecting their (his) interests rather than those of the lowly chattel (their philosophy, not mine) referred to as the American Public. I like this clean, rather direct line of logic. How 'bout you? It clears up a lot of the mystique and mystery associated with this sort of behavior. Just ask John Kennedy about "the fed". He, obviously, knew a lot more about them than a lot of the mindless sheeple that blindly accept "the fed" as an actual part of the Fed. Gov. and then he was somewhat abruptly curtailed in this line of thinking cause it's not nice to fuck with Uncle Al or his buddies. See?
Of course Uncle Al did what he did, silly rabbit. What else would he do?
See ya!
January 23, 2007
Votes: +0

Russell Wellen said:

Disgraceful Human Being
The one person you think, like the Chief Justice of the Supreme Court, that should stand apart from the administration and special interest groups.

They have no idea of -- or simply don't care about -- their impact on ordinary American.s
January 23, 2007
Votes: +0

a guest said:

A reply...
Thanks for the comments and I am pleased that you enjoyed the article.

My work in life of late, has been to try and warn people about what I see coming. Disabusing any quaint notions that Alan Greenspan was "working for the greater good" is part of that work.

Once upon a time, such as with Paul Volker (a man I greatly admire by the way) the Chairman of the Federal Reserve was independent and viewed his station as being outside of the daily muck and grind that characterizes DC politics.

Alan was not able to resist the siren call of power and forgot that history extends far beyond one's mortal existence.

In short, like Rehnquist, Greenspan was a weak man, prone to very average human frailties and probably possessing a very average intellect.

It's important to separate the effects from the causes and we have enjoyed a once-in-a-generation party fueled by trillions upon trillions of newly created debt...heck...give me a few trillion dollars and I'll throw a great party too...there's simply no magic in what has been done here.

Money was printed with abandon throughout the 1990's and 2000's and people felt rich as a consequence. See also the roaring 20's, the South Sea bubble, etc.

However, history also suggests that credit bubbles have a strong gravitational pull associated with them and no society has ever achieved escape velocity.

The piper must always be paid.

And, thankfully, Greenspan helped us all along by using his considerable pulpit to advise the weakest among us to lift the risk from the poor, poor bankers.

For my money, I would wager that his ear was bent at some black tie cocktail party by some banker and that's why he said what he did.

In short, it's best that we all realize that we are entering the "every man for himself" stage and act accordingly.

Chris Martenson

January 23, 2007
Votes: +0

a guest said:

Greenspan understands who owns the Fed
Being so close to it, how could he not? The Constitution authorizes Congress to create money; in 1913 they treasonously outsourced that function to international bankers who charge interest for printing ink on paper and selling our nation and future generations into debt slavery. Your voluntary income taxes go to pay the interest on the national debt created by a free-spending corporate-controlled Congress.
January 24, 2007
Votes: +0

a guest said:

You cant be serious here Chris ? The FED is NOT a govt entity. They are not compelled to do anything but look out for the bankers interest...not ours. Were the suckers they play
March 20, 2007
Votes: +0

a guest said:

this is very good it is easier and it is also a faster website for me to use when i am in a hurry.
March 20, 2007 | url
Votes: +0

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