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Tuesday, August 3, 2010

Greenspan: Fed works for banks, hedge funds, and speculators. Not for ordinary citizens.

Alan Greenspan the patron saint of easy moneyAlan Greenspan the patron saint of the banksters and easy money

Graham Summers / gainspainscapital.com / ZeroHedge.com:
The Most Wrong Thing I’ve Ever Heard -- I’ve written about our esteemed former Fed Chairman enough times for people to know my views of the man. However, the Maestro recently let loose a statement on MSNBC that absolutely MUST be read by anyone who wants to understand the general philosophy at the Federal Reserve as well as why the US economy is so screwed up.

Greenspan said:
"if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here." (on MSNBC’s Meet the Press).

The above statement is simply extraordinary given its source. This statement confirms what we have all suspected deep down all along: that Greenspan and the Ben Bernanke (the latter was Greenspan’s protégé) believe that the US economy’s focus is financial speculation.

In 1970, the financial industry only accounted for 10% of S&P 500 earnings. By 2003, this percentage had swelled to 31%. Put another way, by the turn of the century the financial industry accounted for nearly $1 out of every $3 in corporate profits.

Greenspan and the Fed instituted policies that helped facilitate this. They:
  • Left interest rates below the rate of inflation, punishing savers and forcing them to speculate in riskier assets
  • Told Congress to push back regulation allowing Wall Street to leverage up
  • Urged the regulators to ignore derivatives and other financial products that they themselves knew were dangerous and out of control
  • Thrown TRILLIONS of dollars at Wall Street
  • Didn’t give a hoot about incomes falling or the deterioration of other economic metrics that impacted ordinary citizens everyday lives
Greenspan’s admission also tells us why his successor, Ben Bernanke has chosen to combat the Financial Crisis by implementing policies that largely benefit Wall Street (the speculators) and punish Main Street (ordinary citizens). After all, if your primary focus is making sure that the markets stay up, who are you REALLY helping, the retiree with the 401(k) or the hedge fund trader who speculates aggressively using leverage?

Folks, this is the REAL “New Economy” Greenspan touted in the ‘90s: financial speculation...

Meet the Press transcript for August 1, 2010 --
MR. GREGORY: Interest rates, how long before they start coming up? Do they need to stay low?

MR. GREENSPAN: Well, the problem there implies that the government has control over those rates, meaning the Federal Reserve and the Treasury Department, in a sense. There is no doubt that the federal funds rate, that is the rate produced by the Federal Reserve, can be fixed at whatever the Fed wants it to be, but which the government has no control over is long-term interest rates, and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment, there is no sign of that, basically because the financial system is broke and you cannot have inflation if financial system is not working...

MR. GREGORY: Dr. Greenspan, the Associated Press reported on a survey this week of economists, and we'll put a portion of it up on the screen. "A bleaker outlook for the economy into 2011. The U.S. economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend, employers hesitant to hire." That's according to an AP survey of leading economists.

"The latest quarterly AP Economy Survey shows economists have turned gloomier in the past three months. They foresee weaker growth and higher unemployment than they did before." The current Fed chairman, Bernanke, said the outlook is "unusually uncertain." A little bit of newer generation Fed speak there. Does that mean--do you think that means the economy gets worse before it gets better?
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MR. ALAN GREENSPAN: Maybe, but not necessarily. I think we're in a pause in a recovery, a modest recovery. But a pause in the modest recovery feels like quasi recession. Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the--and everyone's pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.

MR. GREGORY: If you add in the housing crisis, which remains a crisis, do you think it's possible that we get this double-dip recession that a lot of people fear?

MR. GREENSPAN: It is possibly if home prices go down. Home prices, as best we can judge, have really flattened out in the last year. And while it is true that most economists expect a small dip from here, largely as a consequence of the ending of the tax credit, the data don't show that at this particular stage. If home prices stay stable, then I think we will skirt the worst of the housing problem. But right under this current price level, maybe 5, 7 or 8 percent below is a very large block of mortgages which are underwater, so to speak, or could be underwater, and that would induce a major increase in foreclosures. Foreclosures would feed on the weakness in prices, and it would create a problem. So that--it's touch and go...

MR. GREGORY: Dr. Greenspan, the Dow, an important barometer, as you've said before on this program, because there's real money there, there's real wealth. Are we out of the woods in the sense that Dow 10,000-plus you think is here to stay?

MR. GREENSPAN: I wish I could answer that one. It's a critical issue because, as you point out and as I've always believed, we underestimate the impact of stock prices on economic activity. Asset prices are having a profoundly important effect. What created the extent of the contraction globally was the loss of $37 trillion in market value. It collapsed the value of collateral in the system and it disabled finance. We've come all the way back--maybe a little more than halfway, and it's had a very positive effect. I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about...

Alan Greenspan: "The Financial System Is Broke"

Pragmatic Capitalist:
GREENSPAN SPEAKS, THE MEDIA SITS ON THE EDGE OF THEIR SEATS…. -- This week it was Alan Greenspan, one of the grand orchestrator’s of our financial industry’s deregulation and the most vocal advocate of the virus that is neoliberalism. This man has poisoned our economy for almost 5 decades (and he has admitted that his models were “flawed”) yet we continue to worship at the altar of Greenspan…
Jeremy Warner  / Telegraph [UK]:
Alan Greenspan is making UK weatherman Michael Fish look like a good forecaster -- Alan Greenspan appears to have taken to heart the old adage that "if you can't forecast well, forecast often"...
Tom Keene's Econo Chat with Jim Grant --

Question: You have persistently called for higher interest rates. Why?

Answer: You know, there is a great emphasis now within the Federal Reserve on consumer protection. And I think a nice way to protect the consumer is to give the consumer a rate of return on his or her savings greater than zero. The great paradox to me of the Fed's obsession with consumer protection is that the one thing it can control— that is to say, its own federal funds rate—is stuck very close to zero.

Question: Is it an elite policy? Are they doing it off Ben Bernanke's study of the Thirties, which stressed saving the financial institutions but not savers?

Answer:I am not sure I would call it elite. I think I would call it misplaced. I'm not sure Chairman Bernanke has any greater love for JPMorgan (JPM) than he does for the average saver. Maybe there are only six or eight savers in America left, in which case he is playing to a much bigger constituency on Wall Street.

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