Alan Greenspan was lauded as the architect of the boom years in the USA during the boom itself. Now his reputation is somewhat tarnished and some blame him for keeping interest rates too low for far too long.
So his warnings here need careful consideration. And I reproduce here one that has done just that and doesn’t like it one bit!
After these warnings I give a selection of business news headlines from the press today
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FINANCIAL TIMES 5.8.08 Greenspan warns of more bank bail-outs By Krishna Guha in Washington More banks and financial institutions could end up being bailed out by governments before the credit crisis is over, Alan Greenspan, the former chairman of the Federal Reserve, warns in an article in Tuesday’s Financial Times. [ http://www.ft.com/cms/s/0/3aaef4f6-623f-11dd-9ff9-000077b07658.html ]
However, Mr Greenspan cautions that a heavy-handed regulatory response to the crisis would do more harm than good because it would depress global share prices. He worries that governments, already troubled by inflation, might try to reassert their grip on economic affairs. “If that becomes widespread, globalisation could reverse, at awesome cost,” he says. The former Fed chairman says this financial crisis is a “once or twice a century event deeply rooted in fears of insolvency of major financial institutions”. Highlighting the examples of Northern Rock in the UK and Bear Stearns in the US, he says: “There may be numbers of banks and other financial institutions that, at the edge of defaulting, will end up being bailed out by governments.” Mr Greenspan says this “insolvency crisis” will end only when home prices in the US begin to stabilise. He says that “later this year” suppressed housing starts will feed through into a significant decline in home completions, allowing for a “rapid rate of liquidation of the inventory glut”. But this “assumes that current levels of demand for housing hold up”. Mr Greenspan says the performance of world stock markets will be crucial in determining how well the financial system holds up in the interim, and to banks’ ability to recapitalise themselves. He says a key determinent of global equity prices is the rate at which investors discount future cash flows, and this in turn is influenced by the degree of market capitalism and globalisation.
THE TIMES BUSINESS NEWS 5.8.08
At last Alan Greenspan is saying what he means He's obscure no more. The former chairman of the Federal Reserve Board is speaking out - and, more worryingly, he's spooking the market Dominic Rushe in New York REMEMBER when Alan Greenspan was hard to understand? The gnomic — and gnome-like — former Federal Reserve chairman used to be a master of obscurity. Here are some words from his mid-1990s glory years — If you haven’t had breakfast yet, I suggest you skim read this. “And I think where the confusion arises is the fact that you cannot view monetary policy as a sort of simple issue, if the most probable outcome is coming out of this soft patch into moderate growth with low inflation, which I think is the most probable outcome, that is not the same statement as saying that you therefore, in the process of implementing monetary policy or formulating it, I should say, completely disregard what the upsides and downsides of a potential outcome may be.” Horrific. Well he’s obscure no more. Now that Alan is a paid pundit and not Master of the Financial Universe, he’s saying what he means. Whether he should or not is another matter. Last week Greenspan was on CNBC and was clear in his views that we were heading in the wrong direction. The housing slump was “nowhere near the bottom”, the economy was “right on the brink” of a recession and the mortgage giants Fannie Mae and Freddie Mac were “a major accident waiting to happen”. To be fair Greenspan was still showing signs of his talent for smudging the outlines of his arguments. “I think the data at this stage in the United States are not . . . suggesting recession,” Greenspan said. But he added: “We’re right on the brink and I would be more surprised if we didn’t [have a recession] than if we did, given the financial state.” Greenspan said companies were controlling inventories effectively and that “at this stage, I think they are the major reason why in the very short term we’re fending off inflationary pressures”. But he noted that with jobless claims rising and growth overseas slowing, it would be hard for the US to avoid recession. Who will history blame for this mess? My money is on Greenspan getting his own chapter. The housing bubble and the overheated credit markets were financed by Greenspan’s easy monetary policy and unwillingness to regulate.This is not the first time that Greenspan has opined on a mess that he created, or that he’s told us, too late, something we already know. Having done so much to encourage the millennial dotcom/tech fiasco he tried, way too late, to slow that bubble’s impending pop by dismissing it as “irrational exuberance”. When the markets imploded, he sucked up all the hot air and blew it into the housing market with rock bottom interest rates and a pat on the back for the free market excesses that led to the sub-prime disaster. Ex-presidents, and prime ministers, usually get a second career out of the lecture circuit and autobiographies. But no one pays much attention. The gnome still has a devoted audience. Greenspan’s words came on top of more gloomy economic figures and helped push the stock markets down again. Now he has dropped the veils of obscurity, it’s easy to see why he spooked the market. The real mystery is why anyone is listening.
Business News headlines 5.5.08 -
SELECTION
Guardian headlines •
Northern Rock warns it will be 'significantly loss-making' for rest of year as government gives fresh financial support •
HSBC profits drop 28% on US troubles •
RBS set for biggest loss in banking history •
Writedowns of largest banks reach $274bn •
Services gloom fuels recession fears •
Dominant part of economy shrinks for third consecutive month as new business dries up Chancellor hints at stamp duty concession •
More borrowers struggling with mortgage arrears
FT - EUROPE Eurozone July services PMI dips to 5-year low
FRANKFURT August 5
The euro zone’s dominant services sector slid further into contraction in July, hitting a five-year low, while inflationary price pressures remained near record levels. Final data in a key monthly survey of private sector companies showed that of the big four economies in the euro zone, only in Germany did services activity expand, and more quickly than in June.
TIMES
Repossessions rise 40% as mortgage arrears worsen A total 45,000 people are expected to lose their homes this year as more homeowners struggle to meet mortgage payments =Slowdown nears as service sector shrinks Service activity slowed for a third month while declining manufacturing output suggests GDP figures may be revised
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