THREE STUPID GENIUSES: GREENSPAN, RUBIN
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Mr. Krugman is halfway smart: he is an economist who understands some of the dangers of the Floating Currency. But he doesn’t go after ‘free trade’ or he would lose his perch at the NYT, I guess. But yesterday, he took off after the ‘Three Musketeers’: Greenspan, Rubin & Summers. This is because the dumb trio pretended to be too stupefied to foresee the very obvious housing and buy-up bubbles. In his editorial, Mr. Krugman mentions a very interesting Time Magazine article from 1999.
Krugman - Lest We Forget - NYTimes.com
Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.
Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.
In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.
During the 1990’s, the US stock market rose over 18%. The only decade where this grew even better was the decade when the US recovered all the losses from the Great Crash of 1929. Stocks rose nearly 18% in the 1980’s and even more, the next decade. The Dot Com Crash hit the US in 2000: the NASDAQ began to collapse in March. The rest, right BEFORE 9/11, not after. Bush’s popularity was crashing after March, 2000. He wanted to boost it and the tax cuts were supposed to assure a crashing stock market.
The world was sliding into a bad recession back then. In Japan, all economic indicators, especially exports, were falling swiftly. The Bush mega-tax cuts poured money into the world economic systems. The consumer economy in the US took off again. After 9/11, Greenspan dropped interest rates far, far below the rate of inflation right when the US increased military spending to record levels.
Two things took off for the skies: the US trade deficit ballooned right as all our housing values ballooned. These were part of the outcome of the tax cutting coupled with military overspending and let us not forget the ‘free trade’ business which ground onwards, eliminating nearly all US trade protections.
I remember that time well. Bush pushed for emergency tax cuts to ’save the economy.’ I was disgusted. Clinton and the GOP, due to hating each other and snarling up Washington, DC’s massive debt machine, balanced the budgets for the first time since President Kennedy. It was obvious, by 1999, the US was in the middle of a very disastrous and energetic inflow of foreign funds driving up stocks. iTulip.com was launched in 1999 during the Dot Com stock market madness.
iTulip is a great way to find information that seems to be obscured from the eyes of the Three Marketeers:
The Three Marketeers - TIME Feb. 15, 1999
The Asian collapse of 1998-1999 was fixed in two very interesting ways: the nations that either went through the collapse or who anticipated runs on their own finances all began to amass gigantic FOREX reserves. Before the Asian Currency Crisis, virtually no one had FOREX reserves bigger than $80 billion. Afterwards, Asian and then, in the last three years, nearly all our trade partners ran up their FOREX reserves. In Asia, these grew from less than $80 billion to $2 trillion or more in size.
One thing that our brainless Three Marketeers should think about is exactly this: the sudden surge in FOREX reserves after a series of bubbles popped in Asia. After all, the Federal RESERVE is supposed to be the entity holding our dollars, eh? And instead of changing direction after Asia and then the world, changed direction, the US stubbornly kept the old reserve levels. We should had been buying and holding euros and yen. We didn’t. And so our trade deficit shot upwards to nearly a trillion in losses a year by 2007.
Greenspan, Rubin and Summers were supposed to be MONETARISTS. This means, the manipulate the CURRENCY. To do this, they use tools and one of these is the FOREX reserves! Duh! Why on earth don’t they understand this simple story?
According to Krugman, the semi-sane economist, these nutty guys claim they have no idea what went wrong here. They couldn’t see bubbles forming. This, of course, is a lie. At the point where Krugman talks about this pretense of ignorance, he should have gone off to see why this is so. Why do our leaders always profess stupidity when messes they made are obvious to anyone?
HAHAHA. They are a bunch of very naughty little boys, aren’t they? They don’t want anyone to know their dirty deeds. So, once they drop the cookie jar, they hold up their hands and yell, ‘I didn’t touch it!’
I still remember the Asian crisis. Note how the article from back then, clearly states that this was due to too much real estate and useless factories being built. And the value of all existing systems suddenly shooting upwards as FOREIGN money flowed suddenly into Asian lands!
OK: here is where it gets most interesting. WHOSE MONEY WAS FLOWING INTO ASIA???? Ah! This is the key. We know how these bubbles form. Someone is very reckless with lending money to someone else. That someone else takes these stupid sub-1% loans and dumps them all over everything on this planet, seeking someone to be trapped into paying interest rates forever and ever.
And what bank dropped their interest rates to nearly zero in 1996? This, incidentally, is when the bubbles began to suddenly form and grow rapidly, in Asia, in South America. Well, I look around and I spot someone who is probably the guilty party: the Bank of Japan!
The carry trade began in 1996. By 1998, it was a roaring business in Asia. This tsunami of easy credit pouring out of the Bank of Japan was carried offshore. It was Japan’s greatest export product! On top of this, Japanese exporters and Japanese savers needed to park money offshore and have it earn a higher interest rate since rates in Japan were at 0%. So a flood of savings and profits from the world’s #2 economy flooded all of Asia and sluggishly flowed over South America. And the US itself. Housing values in these places began to balloon nearly instantly.
Why is that? HAHAHA. Mortgages are for 30 years! Guaranteed income for life. The Time Magazine 1999 article left this dynamic out. Indeed, no one in the media mentioned the words ‘Japanese carry trade’ back then. It was a devil of a time for me to figure this out during the last decade. A real educational experience.
The initial downturn didn’t surprise the Fed or the Treasury too much. For the better part of two years, Greenspan and Rubin had been quietly fretting about the narrowing “spread”–the difference in interest rates–between U.S. bonds and emerging-market bonds. By 1996 banks were lending money to countries such as Malaysia at interest rates just a few percentage points above what the U.S. Treasuries commanded. The implication: Malaysia was not a much riskier bet than the U.S. This was nonsense, and the committee knew some correction was in order.
But the speed of the collapse, when it came, was breathtaking, and proof that world markets had entered a new and much more volatile phase. Summers has a favorite analogy: “Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular.”
Summers and Rubin didn’t run the Bush train off the tracks. But Greenspan obviously was the main driver in this present crash. But Summers and Rubins are meddlers who were VERY active in dealing with the previous Bank of Japan-engineered crashes. Since they ran around the world, ‘fixing’ things, they bear a lot of responsibility for the present mess. Because they didn’t fix what was really wrong. Instead, we are all striving now to ape the Bank of Japan!
Namely, all the INDUSTRIAL NATIONS are dropping interest rates to 0%, fast. And all the COMMODITY nations are raising interest rates! Isn’t that rather queer? Especially since the US market is rather a big more a commodity exporter compared to Japan or England, just for example.
“I’m in the middle of shifting my cash holdings to hedge funds,” Sagami, 48, said in an Oct. 14 interview at his Hisashi Kobayashi-designed house on a 3,300 square-meter (0.8 acre) lot. “This is the beginning of the biggest bargain sale.” He confirmed last week he is still investing in the funds….Department Chief Hiromitsu Nakagawa said he offers mutual funds that include hedge funds to individuals with more than 500 million yen in financial assets. He said many clients want to diversify portfolios that are mostly made up of inherited properties and securities.
Whenever an economic system develops whereby a large upper class simply sits back and collects wealth via inheritance and clipping coupons, we get long, long depressions. Japan is in the grip of this epic depression and like Victorian England, the upper classed don’t mind this one bit. Indeed, they work very hard to prevent it from ending. The benefits of seeing their holdings grow steadily while the prices fall at home is a lot of fun.
On the other hand, it kills economies. The dead hand of debt accumulation eventually grinds commerce to a halt. In Japan, this is deliberate. The ruling LDP is made up of these sorts of people who want money to flow steadily into their laps. They do NOT want a consumer surge that might encourage imports. Once a country has an ‘inheritor class’ in charge of things, it is all downhill. This is why we had such high inheritance taxes here. It was a sociological experiment at trying to prevent depressions due to a nation being run by people who inherit their wealth.
It is now set at 0%. The rich can happily accumulate wealth without working, for infinite lengths of time. It is also part of our budget crisis. Money is no longer flowing in like it used to. I remember when the inheritance tax was first reduced: it was to save ‘the family farm.’ Instead, ‘family farms’ are dying as they are turned into vast estates that are worked by foreign stoop-labor of mostly illegal aliens from the South.
Since the repeal of the inheritance tax, nearly all the small family farms in my community have vanished. Now, mega-rich people like the McCain family can hand off their wealth intact to their children. Couple this with the drop in the number of babies produced by these rich families and we get an accumulation of wealth that is very dangerous. If rich families marry each other and then have one or at most, two children, this ‘old wealth’ will accumulate into fewer and fewer hands! This is bad. Very bad. Nowhere on earth do democracies thrive when there is this sort of passive wealth accumulation at work.
The three men trying to cope with these mid-ether collisions of dollars and expectations are an unlikely team. Greenspan, the data-loving analyst with government roots sunk back into the financial and moral chaos of the Nixon Administration, and a shaman-like power over global markets. Rubin, the Goldman Sachs wonder boy who ran the firm’s complex and dangerous arbitrage operations and then led it to rocket-ship international growth. And Summers, the Harvard-trained academic who is invariably called the Kissinger of economics: a total pragmatist whose ambition sometimes grates but whose intellect never fails to dazzle.
What holds them together is a passion for thinking and an inextinguishable curiosity about a new economic order that is unfolding before them like an Alice in Wonderland world. The sheer fascination of inventing a 21st century financial system motivates them more than the usual Washington drugs of power and money. In the past six years the three men have merged into a kind of brotherhood, with an easy rapport.
All Goldman Sachs people should be permanently banned from working in the government. Especially the Treasury or the Federal Reserve. Ditto, JP Morgan. These clowns have, as the article in 1999 points out, invented this financial system! And it truly is an ‘Alice In Wonderland’ world: the Mad Hatter’s Tea Party as well as the Queen of Heart’s court. These guys eat a meal and then move down the endless table, leaving us, Alice, to eat off of their dirty plates.
When she suggests they ALL move forwards to clean dishes, the Mad Hatter and the March Hare regard her as insane. The criminal brotherhood of these three guys has prepared a global feast where 90% of humanity gets to eat the crumbs off of their dirty dishes! While they dine on clean dishes. I will note here that there are many ‘widdershin’ aspects to both ‘Alice in Wonderland’ and ‘Through the Looking Glass’ stories.
The three men have a mania for analysis that has bred a rigorous, unique intellectual honesty…. This pragmatism is a faith that recalls nothing so much as the objectivist philosophy of the novelist and social critic Ayn Rand (The Fountainhead, Atlas Shrugged), which Greenspan has studied intently. During long nights at Rand’s apartment and through her articles and letters, Greenspan found in objectivism a sense that markets are an expression of the deepest truths about human nature and that, as a result, they will ultimately be correct….they all agree that trying to defy global market forces is in the end futile….In the same way that the threat of mutually assured destruction helped Kissinger replace Washington ideology with Realpolitik, the shadow of a massive economic meltdown has helped the committee sell a market-driven policy that could be labeled Realeconomik.
Ayn Rand is like any number of demons in the Cave of Wealth and Death. She knew that there is a connection between sex and money. She exploited this information. Note here that this toxic trio viewed the collapse of the Japanese-carry-trade flood of lending to Asia is a motivation to INCREASE danger by pursuing a MARKET-DRIVEN policy. Misnamed as ‘Realeconomik’.
How about ‘Realcrash’? For this was obvious by 1999: flooding any nation with lots of easy lending leads to bubbles and terrible crashes. So why did the US immediately volunteer to be the new destination of all this Japanese carry trade loot? It was obvious, back then, this was a very bad thing!
And if the ‘markets’ are correct, then why interfere with them? The markets are obviously screaming, ‘This was a BAD BUBBLE! RUN AWAY!’ And off, we go, seeking shelter in gold or bonds, classic depression items. Instead, everyone is struggling to restart this goofy lending business that failed so abruptly in 2007.
The IMF has taken particular heat because even as these nations suffer, the U.S. and Europe continue to grow. The committee believes that the IMF remains a key international tool, especially as it works to clean up the abuses that led to the current mess and makes it easier for investors to get back into those developing markets.
That means trying to reduce volatility where possible. Many countries are at the mercy of international lenders who can decide, if they feel nervous, to jerk billions of dollars from country to country. This would be like having your bank pull your mortgage because your banker heard you’d had a bad day. The solution to the problem, the men believe, is more honesty on the part of borrowers–so banks know what they are getting into–and more caution on the part of banks. While some economic thinkers–notably Soros and Malaysia’s Mahathir–have lobbied for more dramatic controls, Rubin warns that simply locking capital in place can often become a substitute for much needed reform, delaying an inevitable correction. As for the impact of speculators, who have been torched by politicians around the world, Rubin says they are a part of the crisis but a much less important factor than the real economic problems of the countries they hit.
No nation has more economic problems than the US. No nation is running so huge a deficit in government spending, so huge a trade deficit. These two things doom our nation to destruction. Yet, no one is trying to stop either. Only after inflation of necessities sucked dry, nearly everyone’s bank accounts in the US, has the spending on imports slowed down.
Capital being ‘locked in place’ is not the problem nor the solution. Preventing floods of easy lending: that is the problem. The IMF forbade countries undergoing collapse to spend on social services or increase public debt. Yet, as the US spends to infinity, probably doubling our government debt obligations in ONE YEAR! Well…the IMF is silent, of course. All the smaller nations who were hammered by the US officials in the IMF in the past are steamed that the US gets a free ride.
But international powers like China and Russia are quite happy about letting the US continue to build up debts! They want us to go bankrupt. This is called ‘revenge.’ And is best eaten cold. And the leaders of Russia and China can be quite cold-blooded.
Note also, in the old Times article, the writers mention that banks should be more cautious. And borrowers shouldn’t lie about their incomes! HAHAHA. Both did the opposite here in the US when the flood of Japanese carry trade lending hit our own shores! Money was ladled out like there was no tomorrow. And when tomorrow came, everyone began to default. Fast.
To operate effectively in this new world, Rubin has remade the Treasury into an organization that is “more like an investment bank,” says Tim Geithner, the 37-year-old Under Secretary for International Affairs….And fresh thinking has been crucial in the new economic order. One legacy of 1998 has been the destruction of some of academe’s and Wall Street’s most cherished models of the world. More data and faster markets, says Greenspan, mean more opportunities to make money.
They also mean more chances to lose your shirt, something he calls “the increased productivity of mistakes.” Computers make it possible to push a button and destroy a billion dollars of wealth. The chairman was warning about the problem long before Long-Term Capital Management vaporized $4 billion, but that debacle silenced any skeptics of the new risks.
All our investment banks are bankrupt. They all changed their names to ‘regular banks’ and are struggling to recapitalize themselves AT GOVERNMENT EXPENSE. They can’t attract wealth anymore. They are negative wealth machines due to the Derivatives Beast eating anything they park inside their banks. Instead of giving up and having all our systems nationalized, we are trying to use future taxes to recapitalize these stupid banks that are bankrupt.
The Treasury has no money. Our government has run in the red nearly my entire life! How can a Treasury be an ‘investment bank’ if all it has is epic red ink? It is a NEGATIVE system. All such systems eat capital, not create capital. Right now, everyone wants treasuries only because we are in a NEGATIVE FLOW situation thanks to the investment bankers! Selling our debts, cheap, isn’t productive. It still increases our net out-flow. It still destroys, not makes, our nation. Here is the latest news about US Treasuries:
The problem, the men say, is that the markets are encumbered by all kinds of imperfections. Even tiny flaws create problems. A Thai banker who breaks the rules by passing $100,000 to his brother-in-law puts the whole system at risk.
To help resolve the riddle of imperfect markets, the committee has spent six years working on an experiment. It’s called the U.S. economy. The current boom is as much a part of the committee’s legacy as is its battle to stem global turmoil. It was Rubin–via the 1993 deficit-reduction plan–who navigated the Clinton Administration into budgetary agreements that helped create the first surplus in 29 years. This fiscal responsibility helped lower interest rates, which kicked off a surge in business spending. Greenspan, who dovetailed his own monetary policy with those goals, let the economy build up its present head of steam. The men don’t get all the credit for the boom–they’re the first to say all they did was let the markets work–but on both Wall Street and Pennsylvania Avenue, they get the bulk of it.
The flood of corruption that flows through the Washington, DC sewer is far worse than some Thai banker giving his goofy brother some loot. I have pointed out in the past, the ‘imperfections’ are exactly where wealth is created. The investment bankers, hedge fund geniuses and other people restlessly roam about, seeking loopholes, creating loopholes via bribing politicians, they seek imperfections and hammer away at them, turning them into mega-abuse opportunities for free funny money.
Another lie here: constricting US spending does NOT cause lower interest rates! When we were overspending merrily by 2001, Greenspan dropped rates due to 9/11. Then kept them at a ridiculous 1% as energy costs soared. As the budget deficit grew, rates remained low.
Then, in a hurry, Bernanke tried to raise them again. Only to panic and drop them BELOW 1%, heading to 0% by December.
The Race to Zero Interest Rates - Seeking Alpha
When a central bank runs out of room to cut interest rates, it resorts to Quantitative Easing. This term was coined by the Bank of Japan in 2001 when interest rates were already at zero and the central bank stopped targeting the overnight call rate and turned to targeting a current account level. Their goal was to flood the Japanese financial system with liquidity by buying trillions of yen of financial securities including asset-backed instruments and equities.It can be argued that the US has already engaged in Quantitative Easing as the government has recently announced plans to spend $800 billion to unfreeze the consumer and mortgage market.
They have agreed to buy mortgage backed securities backed by government sponsored entities and could accelerate that if interest rates hit zero. Excess reserves have also increased significantly, driving the effective fed funds rate well below 0.5 percent. This would have been one of the desired outcomes of quantitative easing. Last week, Fed vice chairman Donald Kohn said quantitative easing measures were under review at the central bank as normal contingency planning.
The goal would be to encourage banks to lend more aggressively by coming in as a buyer at specified rates. Even though quantitative easing drove Japan into deflation, it was the key to turning around the economy and this is a risk that the US central bank may have to take.
I have pointed out in the past that the US cannot do what Japan has done: run eternal depressions that benefit mostly the coupon-clipping inheritors of wealth. We cannot imitate Japan’s 0% system because we run a trade deficit. We import far too much energy products to run a Fortress Japan situation. This is due to Japan restricting the use of energy going to workers and the poor.
This is why Japanese workers must toil in colder or hotter offices, for example. And live in homes that are uncomfortable. The US loves climate systems even though we need to import fuel to run our delightful McMansion energy systems. And of course, how can the US be doing ‘quantative easing’ when the stated result is supposed to be no depression but a light form of inflation?
Either this will boomerang badly and become mega-inflation or it will do what it did to Japan: kill the lower classes off. Guess which system the very rich who have children, want?
Of course! The Japanese system whereby they can clip coupons and marry each other and concentrate wealth more and more in the hands of fewer and fewer people.
FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net