Al the Banker told Congress yesterday that:
Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.
Hang on, Al, I’m not.
Through the late 90s, Greenspan chided the markets for “irrational exuberance” while continuing to pump easy money into the system. With a wink and a nod at the idea of neither encouraging nor popping asset bubbles, he did just that, providing excess liquidity during the Mother and Father of the Mother of All Bailouts – the Asian currency crisis in 1997 and the Long Term Capital Management failure in 1998 – just as the tech stock market built up excess steam and companies like WorldCom and Enron built houses of cards from exotic derivatives.
Then, still paying lip service to the idea that it wasn’t his job to pop the tech bubble, he set out to do exactly that, raising interest rates at successive Federal Open Market Committee meetings even after the effect of the tightening was spreading past containing the stock bubble and controlling inflation to causing a recession.
Then, like a kid on a swing adding more momentum with each pass, Al the Banker pumped more money at even lower interest rates into the economy puffing up the housing bubble, all the while decrying his latest creation. Having pumped up his biggest bubble yet, he proceeded to tighten again, raising interest rates for at least two FOMC meetings after the yield curve had already inverted – indicating at least that inflation was thoroughly under control with housing prices soon to follow. Then he exited stage left, leaving the mess to Helicopter Ben whose only solution was to dump cash, creating the energy bubble with its severe consequences for American consumers and businesses before the housing bubble had even fully deflated.
Why should there be shocked disbelief? It doesn’t require advanced econometrics or the use of differential equations to understand that when the Fed purposely induces inflation then enters a tightening cycle that lasts even after obvious and well understood economic indicators show it’s time to stop tightening, over and over again, each time adding more fuel to the fire, the results will not be pleasant.
Anyone wanting to make political hay of Greenspan’s repudiation of the free market yesterday would do well to remember that until just over two years ago he held more economic power than any other human being on earth. Maybe, just maybe, Al the Banker is looking for a scapegoat and rather than admit that the housing bubble was his monster he decided to deal the final of the thousand cuts he started inflicting to the free market in 1987.