Ever wonder what investment advice the multi millionaires are receiving in these troubling times? Wonder no more, recently in my surfing the web I came across an excellent web site, i.e., "Jesse's Café Américain", that over the past months has provided me significant insight concerning what is happening with our economy, its causes and likely fall out. Posted April 25, 2008, was an article/story entitled "Greenspan, Bernanke, and Volcker: A Study in Contrasts", the content of which was based on the April 2008 quarterly investment article by Jeremy Grantham of GMO entitled:
"Immoral Hazard", Greenspan, Bernanke, and Volcker: A Study in Contrasts.
Read in its entirety, Mr. Grantham’s April 2008 Quarterly newsletter, Down Loadable Here, is a lengthy and somewhat biting indictment of riddle talking Alan Greenspan.
Following are just a few of the gems contained in Mr Grantham’s quarterly newsletter. After reading it, I am a bit more encouraged and hopeful that America still retains a few honest and judicious individuals at the levers of America's economy.
It’s not that the former Fed boss Greenspan was incompetent that is remarkable. Incompetence is common enough after all, even in important jobs. What’s remarkable is that so many people don’t seem, even now, to get it. Do people just believe high-quality self-justifying blarney? Or is it just that they apparently want to believe that critical jobs in a great country attract great talent by divine right. Sometimes, of course, they do, but sometimes the most important jobs – even that of a presidency or a Fed boss – end up with mediocrities. Let us pause here to regret the absence of Mr. Volcker and wonder what a parallel Volcker universe would have been like. Just as we can wonder how much a few votes in Florida or a vote in the Supreme Court would have changed our world from what it is today.
This has indeed not been our finest hour in the U.S. Times are bad enough, in fact, to make us mourn the American leadership skills of WWII and the generosity and foresight of the Marshall Plan. We can all wonder at the incredible vision, drive, organizational skill, and willingness to sacrifice resources that were required by the Manhattan Project and compare it to the rudderless or even deliberate avoidance of leadership of the greatest issues today: climate change and energy security. We can only wonder what a Manhattan Project aimed at alternative energy might have accomplished by now, had it been started 15 years ago. What we have had in lieu of vision, leadership, and backbone is a series of easy paths taken.
The defense of bailouts is that the alternative is ugly. But surely the penalties for excessive risk taking, issuing flaky paper, passing it on – often in its entirety – to others, and not even understanding the consequences of the low grade paper that you yourself issue should be ugly. "Yes, of course, we would like to punish the excessive risk takers" goes the line, but we can’t do it without hurting the innocent economy. But we will never know what can be absorbed if the penalties are always removed by a bailout. In more traditional times, say, from 1945 to 1985, the economy could absorb substantial punishment from recessions and still grow faster than it has done in the last 10 years. So in a crisis à la Bear Stearns we now transfer pain from risk takers to innocent tax payers. Worse, even the routine treatment for the bubble breaking disease does the same. By raising the slope of the yield curve, the Fed deliberately benefits its bankers and hedge funds that borrow short and invest long and punishes pensioners and others who are trying to make a safe but still reasonable return at the short end.
Yes, this is a real credit crisis, substantially the worst since the Depression, so it now invites unusual responses, and what we have is a series of harried and hasty responses, perhaps even panicky, but we can at least understand the urgency. The real incompetence here goes back over 20 years: the refusal to deal with investment bubbles as they form, combined with willingness, even eagerness, to rush to the rescue as they break. It’s almost as if neither Greenspan nor Bernanke allows himself to see the bubbles.
The trouble with markets is that if you let them get totally out of control, they will likely burst at the most inconvenient of times. That is precisely what happened in 2000, the third of our five "failures." The election year is when above all you want no rocking of the boat, and usually don’t have any. It is usually treated with great care, but not this time. With internet stocks selling at large P/Es of unfortunately huge negative earnings and the whole NASDAQ at 65 times earnings, things just began to pop of their own weight in February and March and nothing that anybody could have done would have been likely to stop it. The S&P blue chips fought a noble rearguard action, peaking in October, but the rot had set in and the year was down with spectacular declines in the internet and tech favorites. It is not that I question Greenspan’s willingness to please the administration, which was of course immense, just his effectiveness in doing it. By being over-eager to please, he overdid it.
In a dead heat election, it is not hard to imagine that Greenspan’s miscalculation cost the Democrats the election.
Even a fraction of 1% of the voters disgruntled by stock losses pushed into voting against the incumbent party would have been more than enough to change the outcome. If it did move a few votes, shall we say it was not without consequences?