Greenspan: Once in a century financial crisis

[August1991]

Bank of America buys Merrill Lynch and no one quite knows who owns Lehman Bros.

The United States is mired in a "once-in-a century" financial crisis which is now more than likely to spark a recession, former Federal Reserve chief Alan Greenspan said Sunday.

The talismanic ex-central banker said that the crisis was the worst he had seen in his career, still had a long way to go and would continue to effect home prices in the United States.

"First of all, let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event," Greenspan said on ABC's "This Week."

Asked whether the crisis, which has seen the US government step in to bail out mortgage giants Freddie Mac and Fannie Mae, was the worst of his career, Greenspan replied "Oh, by far."

"There's no question that this is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go," Greenspan said.

"And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes.

"That will induce a series of events around the globe which will stabilize the system."

Greenspan was also asked whether the United States had a greater-than 50 percent chance of escaping a recession.

"No, I think it's less than 50 percent.

Link

Who am I to disagree with Greenspan? I have to agree that falling house prices and a volatile markey tending downwards have shaken confidence. OTOH, the question is whether these paper changes will affect people's action in the real economy.

There, despite rising gasoline prices, oil is back down to a price where it should be. The western world will face a labour shortage, not a surplus - unemployment is not and will not be a problem.

Compared to past crises (eg. the collapse of Bretton Woods or the 1987 NYSE collapse), I'm not certain that this is worse. Unlike past crises, inflation is still low (and inflationary expectations are low) and the Fed has the resources and good information about what is going on.

IMV, the US economy has been undergoing major structural changes over the past 20 years due to computer use. One cannot have sustained productivity growth as the US has had without expecting major changes within sectors and between sectors. Some firms will survive and some won't.

I take a secular view of financial markets but I'm sure that I won't be the only one watching carefully what happens after the opening bell tomorrow morning.

Edited September 15, 2008 by August1991

[WIP]

I take a secular view of financial markets but I'm sure that I won't be the only one watching carefully what happens after the opening bell tomorrow morning.

Well, Asian stockmarkets didn't take the news of Lehman Bros. bankruptcy and the firesale at Merrill Lynch too well, so I wouldn't expect a turnaround on Wall Street.

[August1991]

"It's a pure flight to quality right now," said Adam Donaldson, head debt strategist at Australia's Commonwealth Bank.

I love quotes like that almost as much as the "There was profit-taking in the market today." quote.

I expected EAFE to take a hit and I'm not surprised about the futures - but don't you see a contradiction between a "flight to quality" and declining futures?

Something else. Greenspan is not the kind of guy who decides one morning to speak to the press, certainly not on the weekend.

At this point, I think everyone is a bit confused. To mix metaphors, it's not clear if the Fed's trying to let the air out of the ballon or trying to put the toothpaste back in the tube. Maybe these kids should get back to inflationary/liquidity fundamentals and, as the French say, leave the rest alone.

[HisSelf]

deleted

Edited September 16, 2008 by HisSelf

[WIP]

I love quotes like that almost as much as the "There was profit-taking in the market today." quote.

I expected EAFE to take a hit and I'm not surprised about the futures - but don't you see a contradiction between a "flight to quality" and declining futures?

Something else. Greenspan is not the kind of guy who decides one morning to speak to the press, certainly not on the weekend.

At this point, I think everyone is a bit confused. To mix metaphors, it's not clear if the Fed's trying to let the air out of the ballon or trying to put the toothpaste back in the tube. Maybe these kids should get back to inflationary/liquidity fundamentals and, as the French say, leave the rest alone.

I try to ignore the talking heads who play market analysts for the networks. Same with your local financial adviser -- these guys are brokers who have a vested interest in maintaining present share values at all costs. They've been trying to minimize bad news like the collapse in U.S. real estate and soaring national debt for so long that real panic could set in and cause a total meltdown.

Things would be worse than they are now if it wasn't for the sovereign wealth funds of the Saudis and the sheiks in the oil-rich emirates putting up billions to buying U.S. investments.

It's questionable whether anyone on Wall Street or at the Federal Reserve can state with any degree of certainty how much risk there is to the markets if there is a collapse in the value of derivatives that were originally designed as a hedge against market losses, but are apparently being used to leverage larger purchases of investments. And we're being told that concentration of derivatives is concentrated among the the five largest banks, while the S.E.C. has never bothered to conduct much oversight of the use of derivatives:

Disclosure in the brokerage industry is especially bad. Big Banks Risk All with Danger of Defaults on DerivativesMany brokerages are private and do not disclose more than their rank and serial number. The SEC collects sparse data and does not publish it. So if you want to figure out how much derivates risk your broker is exposed to, good luck! Getting the information can be like pulling teeth.

* Concentrated in the hands of five major players. Nearly 97% of all U.S. bank-held derivatives are concentrated in the hands of just five major U.S. banks — JPMorgan Chase, Citibank, Bank of America, Wachovia and HSBC.

* Far larger than assets. As you can see in the chart to the left, the pile-up of derivatives greatly exceeds the total assets of the firms. At the same time, in most cases, the default risk related to these holdings greatly exceed the banks' capital.

* Big brokers are also loaded with derivatives. Merrill Lynch has $4.2 trillion. Morgan Stanley has $7.1 trillion. As best we can determine, Lehman Brothers has significantly less — $729 billion. But in proportion to its dwindling capital, its exposure seems to be among the worst.

http://www.marketoracle.org/Article6275.html

[sharkman]

It's interesting, the biggest story of the year happens and hardly anyone comments on it. I mean of course I expected the shrill spittle spray responses, but it seems like most don't get that this crisis could permanently change the landscape. Kind of like watching the band as the Titanic goes down...

Meanwhile I'm looking into opting my money out of the union pension plan.

[Ontario Loyalist]

All I can say is that there is one sure way to secure oneself for bad times and that it to have actual physical possession of gold and silver.

[Argus]

All I can say is that there is one sure way to secure oneself for bad times and that it to have actual physical possession of gold and silver.

The price of precious metals has plunged over the last few months.

So much for that.

[Argus]

It's interesting, the biggest story of the year happens and hardly anyone comments on it. I mean of course I expected the shrill spittle spray responses, but it seems like most don't get that this crisis could permanently change the landscape. Kind of like watching the band as the Titanic goes down...

Meanwhile I'm looking into opting my money out of the union pension plan.

I think most people are confused by it. From what I've been able to see the root cause was lousy management on the part of CEOs and high flying Wall Street elites who got huge bonuses when they bet on risky ventures and win - but arent punished when they lose. Banks made lousy loans to people who never should have gotten them, then sold the mortages and risk up higher to investment banks and brokers, who often sold them themselves. This means the guy who is making all these loans gets fat bonuses, the bank is happy and shows big paper profits, so the manager gets a fat bonus, and the risk - they assumed - was passed up the line to people who didn't properly examine what that risk was before assuming it. The big players at all levels made huge bonuses and never worried about the future as they built up their house of cards.

This was combined with no real regulatory oversight by the American banking authorities to ensure banks and investment houses didn't go crazy with risk and debt. And since the last American banking crisis which cost the taxpayers a fortune in bail-outs it seems to me the government should have been watching a hell of a lot more closely. Of course, just like last time, it will emerge that most of the Senators and Congressmen involved in commitees which supervised the financial industry took in big, fat bribes from financial industry lobbyists.

[eyeball]

Of course, just like last time, it will emerge that most of the Senators and Congressmen involved in commitees which supervised the financial industry took in big, fat bribes from financial industry lobbyists.

That's right and just like every other time no one was watching the watchers.

If I've said it once I've said it a thousand times - this is why we need to hard-wire the government to the Internet. Nothing less than burning the backrooms to the ground and total public awareness will ever protect us from the corruption of power by wealth. Nothing.

Edited September 16, 2008 by eyeball

[maldon_road]

This was combined with no real regulatory oversight by the American banking authorities to ensure banks and investment houses didn't go crazy with risk and debt.

Do the banking regulators have that authority? Should they? There is deposit insurance, the integrity of which might need to be protected by oversight.

On the other hand, should the regulator second guess as to what are acceptable investments and loans?

And since the last American banking crisis which cost the taxpayers a fortune in bail-outs

I doubt Congress has the balls but legislation forbidding government bailouts would be appropriate.

[jdobbin]

U.S. government bails out AIG.

http://www.ctv.ca/servlet/ArticleNews/stor...?hub=TopStories

In a bid to save financial markets and economy from further turmoil, the U.S. government agreed Tuesday to provide an US$85-billion emergency loan to rescue the huge insurer AIG.

The U.S. Federal Reserve said in a statement it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said.

[August1991]

That's right and just like every other time no one was watching the watchers.

If I've said it once I've said it a thousand times - this is why we need to hard-wire the government to the Internet. Nothing less than burning the backrooms to the ground and total public awareness will ever protect us from the corruption of power by wealth. Nothing.

And the corruption of governmental power? For some reason, you believe that's immune?

That is, you believe that wealth corrupts but political power does not? That's a strange and inconsistent belief. IMV, the State's power exacerbated this problem.

I'm also shocked and appalled by the smug Canadian reaction. "This could never happen here because we are more careful and don't engage in greedy, selfish tactics like those uncivilized, selfish, immoral Americans." Gimme a break.

We cannot live in a world without risk. Anyone or any politician who claims that they can offer a risk-free world is just adding extra risk to the world. Government security is an illusion. The only way to reduce risk is to diversify and government is the concentration of power: the exact opposite of diversification.

----

The danger here is threefold. First, how many people will this minor change spook? How many traders will leave the markets and how many otherwise good deals will not occur? Second, how many more traders will engage in risky behaviour, risks that they would not normally take if they had to assume the full nature of the risk, because the Fed is arranging bail-outs? Third, what kind of inflation (and infationary expectations) will the Fed unleash when it drops the discount rate and opens up the cash vault?

The Fed is dealing with perceptions and expectations. So, it's a game of pyschology and signals as much as anything else.

In the real world, oil is now under $100/barrel and prices of other commodities lower. People get up and go to work and the US economy is still producing trillions of dollars of real value. The stock market may change its valuation of the future worth of these efforts but the work and product remains.

Stock markets are by nature volatile and speculative places.

[jdobbin]

We cannot live in a world without risk. Anyone or any politician who claims that they can offer a risk-free world is just adding extra risk to the world. Government security is an illusion. The only way to reduce risk is to diversify and government is the concentration of power: the exact opposite of diversification.

Do do you believe in the Fed bail outs or not?

[msj]

August, you're late to the game to even be discussing risk.

I mentioned as far back as June of this year about Lehman Brothers going bankrupt in the recession thread under Canada/US relations.

In that same thread I have been pointing out links to many people who are smart enough to take on Greenspan (who is not an authority in anything other than "how to ruin an economy by creating moral hazard while getting out of the way just in time so that others can take the blame").

Of course you defer to Greenspan - it's not because you are being humble or anything. It is because you don't know any better.

If you spent some time reading Barry Ritholtz, Calculated Risk, Nouriel Roubini and Brad Setser then you would know that the US financial system has been under pressure for years and you would know that the fix isn't going to be easy because IT NEVER SHOULD HAVE GOTTEN THIS BAD IN THE FIRST PLACE.

Had Greenspan followed the pragmatic course of regulating the system rather than knowingly allow NINJA loans (as in No Income, No Job, No Assets - no problemo - you still get the loan) and allowing ratings agencies to rate packages of these types of loans as "AAA" grade when they were/are not.

So no, it has nothing to do with "productivity" and everything to do with a simple choice - regulate prudently before the SHTF or socialize the financial system after the SHTF.

The first method is closer to capitalism than the latter.

As for this crisis being better or worse than other crises - once again, in the other thread I have shown that to be nonsense as well.

In another year we will see just how bad it is to see a huge bankruptcy like Lehman Bros. and the near bankruptcy and bailout of AIG.

Next is WAMU, perhaps Wachovia and who knows what else.

This crisis is not over and comparing it to 1987 or the failure of Bretton Woods shows that you are just throwing around historical events as if you know something about them or that you have the ability to properly compare them to the events of today.

Clearly you do not have this ability so please stop trying to fool those who may not know any better.

Edited September 17, 2008 by msj

[msj]

The Fed is dealing with perceptions and expectations. So, it's a game of pyschology and signals as much as anything else.

In the real world, oil is now under $100/barrel and prices of other commodities lower. People get up and go to work and the US economy is still producing trillions of dollars of real value. The stock market may change its valuation of the future worth of these efforts but the work and product remains.

Stock markets are by nature volatile and speculative places.

People are losing real money. It is not some sort of game of poker. Saying the same old things as in prior crisis does not rank high up as sound advice.

As for oil prices going down - this is a symptom and not something that is good for the economy (other than it probably means that we are at the end of the beginning in this part of the "game").

Deflation and a ZIRP is what people should be worried about now (ZIRP - zero interest rate policy - like Japan had for over a decade in the 90's and 00's).

And yes, the stock market does go up and down. It doesn't mean that it is a good idea for most people to be invested it they are not comfortable with their investments (for which you know absolutely about).

It is also laughable in that the stock market has been far behind the curve on this crisis.

But then so many have been in denial about the seriousness of this credit crunch, including yourself, as can be seen in the US recession thread under Canada/US relations.

[eyeball]

And the corruption of governmental power? For some reason, you believe that's immune?

That is, you believe that wealth corrupts but political power does not? That's a strange and inconsistent belief. IMV, the State's power exacerbated this problem.

Of course power corrupts. Power...wealth what's the difference? They're pretty much one and the same thing and both need to be heavily mistrusted and monitored for the same resaon.

Edited September 17, 2008 by eyeball

[Argus]

That's right and just like every other time no one was watching the watchers.

If I've said it once I've said it a thousand times - this is why we need to hard-wire the government to the Internet. Nothing less than burning the backrooms to the ground and total public awareness will ever protect us from the corruption of power by wealth. Nothing.

The bribes being paid to senators and congressmen are fully avilable for public viewing. That has changed nothing. Remember Roger Moore's "Sicko" where all the politicians come on stage to speak before some kind of health group, and the price tags are listed over their heads to demonstrate how much they had been given by the health industry? Do you think any of them had trouble getting re-elected afterards?

[maldon_road]

I'm also shocked and appalled by the smug Canadian reaction. "This could never happen here because we are more careful and don't engage in greedy, selfish tactics like those uncivilized, selfish, immoral Americans." Gimme a break.

We cannot live in a world without risk. Anyone or any politician who claims that they can offer a risk-free world is just adding extra risk to the world. Government security is an illusion. The only way to reduce risk is to diversify and government is the concentration of power: the exact opposite of diversification.

I listened to Deutsche Welle this morning. Same smug reaction - it could never happen here. This from the country that gave the world Naziism.

Since the early 1990s the US has been the engine that has lead economic growth in the West. It's still moving at a 3% rate. Canada's GDP's growth is flat with declining productivity (no surprise there)

Canada just dawdled along. By most economic and social measures Canada is slipping in comparison to other Western countries. For a decade France and Germany had stagnant economies and double-digit unemployment.

With limited and no regulation comes risk. But you also get innovation and growth.

[Smallc]

I listened to Deutsche Welle this morning. Same smug reaction - it could never happen here. This from the country that gave the world Naziism.

Since the early 1990s the US has been the engine that has lead economic growth in the West. It's still moving at a 3% rate. Canada's GDP's growth is flat with declining productivity (no surprise there)

Canada just dawdled along. By most economic and social measures Canada is slipping in comparison to other Western countries. For a decade France and Germany had stagnant economies and double-digit unemployment.

With limited and no regulation comes risk. But you also get innovation and growth.

Funny then how we managed to catch up with the US in wages and many other areas. People who live here have such a negative view of this country and for the life of me I can't figure out why. We live in one of the most prosperous countries in the world, and so many just can't be happy with it. Instead of working to make things better within our system, they compare us to other countries and complain.

Canada is not slipping. Ontario is doing badly right now because of a global slow down and a high dollar. The west and parts of the east are on fire in terms of economy. To say that we are slipping is far from the truth. In recent years, things have gotten so much better in so many areas(from where I stand anyway), but some of you just refuse to look around and see the improvements. It can get quite disheartening at times.

Edited September 17, 2008 by Smallc

[White Doors]

Things have improved in Canada smallc, but I think alot of people think that Canada could be alot better than it is. We should be THE wealthiest country in the world, bar none. But we are not.

Our productivity rate is declining relative to other Western countries and our health care system is terrible.

There was a report released yesterday ranking us last as compared to Western Europe.

There are some glaring anomolies that need to be corrected and then Canada can come closer to it's potential.

Edit to add:

Don't get down about the people complaining - at least they care.

Get down about the people who can't see past the end of their noses.

People criticizing the country does not mean that they love it any less than you do - necessarily.

Edited September 17, 2008 by White Doors

[Smallc]

Our productivity rate is declining relative to other Western countries and our health care system is terrible.

Its not terrible. It needs improvement, but its far from terrible. A study done by the CBC a while ago showed that most people had a negative view of the health system despite having mostly positive experiences with it. I know that nay dealings my family has had have been good. I'm not sure how it is in the rest of the country, but I would say that in Manitoba at least the system isn't doing all that bad. Again though, there are areas that need improvement, mostly when it comes to waits for certain procedures.

[maldon_road]

Don't get down about the people complaining - at least they care.

Get down about the people who can't see past the end of their noses.

People criticizing the country does not mean that they love it any less than you do - necessarily.

I agree.

I want to see improved health care. It's in my own interests.

And productivity improvements are the things that drive our prosperity.

And I want to see an 85¢ CDN dollar. That will help our manufacturers.

[Smallc]

I do want to see Canada improved, I really do. I think though, that in all of our complaining, we often forget to celebrate whats really so good about this place. What we have to ask ourselves is why our productivity is so low. I'm not sure if we really know that.

I think when it comes to healthcare, one of the big problems is the same one that is currently affecting very other industry and that's a shortage of labour. I'm not sure how we can best address that problem. Streamlining of the immigration system as well as a reform of the welfare system may help, but I really don't know the best way to get more people into the workforce.

[White Doors]

Its not terrible. It needs improvement, but its far from terrible. A study done by the CBC a while ago showed that most people had a negative view of the health system despite having mostly positive experiences with it. I know that nay dealings my family has had have been good. I'm not sure how it is in the rest of the country, but I would say that in Manitoba at least the system isn't doing all that bad. Again though, there are areas that need improvement, mostly when it comes to waits for certain procedures.

It's terrible. full stop.

The funding needs to change to where hospitals budgets are based on how many people they serve and if they serve more, they will get more money. That makes an incentive to serve people.

We also need alot more private sector involvement in our healthcare system and thanks to Quebec 9credit where credit is due) we are going to get it.

Being used to the healthcare system and having lowered expectations does not mean it is a good healthcare system. One only needs to look at the recent study comparing Canada's Health care system to that of Wester Europe where my suggestions are common-place.