The Credit Crisis Financial Stocks Short Journal

Funny you say that, given that the current top expert on sovereign debt crisis Ken Rogoff agrees with no more fiscal stimulus. Thats because he understand Japan is the exception not the rule. All this talk about a 'balance sheet' recession guarantees the sovereign can borrow is nonsense, Greece has
-declining inflation
-plunging stock market
-delevering private sector

that didnt prevent their bonds from plunging. Using the 'rates are low' argument and ignoring the country 'borrowing capacity' is irresponsible. Rogoff research indicates that debt to GDP and other measures of the country leverage are far more important than current rates(which will always be ok before the crisis by definition)

 

Whether he is right or not is immaterial - even a stopped clock is right twice a day. This guy has been wrong about the major issues in which he was supposed to be THE expert for his entire career. His reign has proven to be an unmitigated disaster. His legacy is correctly trashed.

The man who moved markets is now ignored (except by a few who for some reason still give a shit). Bond yields fell again yesterday.

 

greenspan 's reign was during a time when banks and brokerage houses merged and banks tripled their power,the behind the scenes selling out of the american people by the house and senate and presidency is never documented and rarely spoken of in public arenas ,so the blame game must find another patsy,even though they know there are a lot of facts they can't mention, i'm not defending greenspan, just sizing up the game's being played after volcker left

 

You really think his public statements have always reflected his personal opinion?

 

he mockingly admitted to double speak so you've always had to read between the lines

 

Barry Ritholtz on the little man ...

http://www.ritholtz.com/blog/2010/06/greenspan-deficit-reduction/

Greenspan Says “Deficit Reduction A Priority” — Hence, You Know its Not

Posted By Barry Ritholtz On June 19, 2010 @ 9:03 am In Credit, Economy, Federal Reserve, Taxes and Policy | No Comments

Former Fed Chair Alan Greenspan discussed the Federal deficit in a WSJ OpEd piece yesterday. In it, he argued that the budding “urgency to rein in budget deficits” is occurring “none too soon.”

Like most of his analyses, forecasts, and economic beliefs, it is pure, unmitigated nonsnense. A brief look at the Greenspan legacy and track record of forecasts leads to the obvious conclusion: Greenspan is an economist to blithely ignore, as his commentary contains almost nothing of value other than its status as a contrary indicator.

Before we get into the details of his deficit commentary, I must highlight this sentence: “The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy.”

No, Alan, the financial crisis was not triggered by Lehman’s collapse; you are getting the causation backwards, the crisis is what triggered LEH’s collapse. Further, the fall of Lehman was hardly “unexpected.” Whether you want to look at stock price before the collapse, spreads on its debt, David Einhorn’s forensic accounting (he was short LEH [1]) or our own quantitative analysis (we were short LEH [2]), there were plenty of warnings about Lehman’s collapse.

Moving onto his discussion about the deficit, its not too difficult to demonstrate how absurd they are. First, any Greenspan related discussion of deficits must begin with his role in helping to create them.

I am in favor of properly funded tax cuts — meaning, reductions in taxes that are paid for with a matching reduction in spending. Not Greenie: When the Bush White House proposed a trillion in unfunded tax cuts in 2001, Greenspan publicly endorsed them [3]. (Why a sitting FOMC chair got involved in the politics of tax legislation is best saved for another day, as is his support of privatizing Social Security [4]).

Regardless, Greenspan’s lent the considerable prestige of the FOMC Chair to the debate, and arguably helped tip the scales in favors of these huge, unfunded tax cuts. His present argument now rails against the net results of his prior arguments. Perhaps misguided guilt is driving him. Regardless, history has proven him wrong then, and history — namely, the post depression 1937/38 recession, was similarly caused by a misplaced focus on deficit reduction.

Here’s a bit of Greenspan insanity that warrants further discussion:

“Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.”

This is classic Greenspan. It shows his lack of knowledge, his inconsistency, and his disconnected belief system:

1) To say that “remarkably subdued” inflation and long-term interest rates is regrettable reflects 1) a lack of understanding of the current deflationary environment;

2) If inflation and higher interest rates are the “typical symptoms of fiscal excess,” then perhaps the message of the markets is that deficits during the immediate aftermath of a huge recession are not a problem? For a guy who supposedly placed incredible trust in the markets, he sure does cherry pick what he wants, and disregards the rest.

3) The surge was caused by the enormous shortfall in tax revenue due to the recession, and the massive costs of bailing out the banking sector. Treating these costs as if they are ordinary budget items is ridiculous.

I can go on and on, but its he weekend, and I will give it a rest. But no before pointing out that Greenspan’s forecasting ability, has been generally awful. After Greenspan announced his retirement in 2005, I pointed to some of his specific failures in Myths of the Greenspan Era [5]:

# July 20, 2004: Greenspan testified before Congress saying that rising energy prices “should prove short-lived.” Crude prices tripled form there.
# Summer 2004: Greenspan’s advice to would-be homeowners: Consider adjustable-rate mortgages. Surprising advice, considering that fixed-rate loans were near half-century lows. He then started raising rates, contributing to the huge foreclosure surge.
# May 2003: Greenspan made an amazingly bad call on natural gas when he warned of potential shortages; natural gas prices tumbled shortly thereafter.
# Summer 2003: Fed concern about deflation led Greenspan to suggest the Fed stood ready to make open-market purchases of Treasuries to ensure rates stayed low. He even convinced the Treasury market into believing that rates would stay low for a long, long time. Bond buyers discovered (to the detriment of their holdings) that this statement was false.
# October 1999: The Fed erroneously anticipates a Y2K-induced run on the banks, and it infuses liquidity. That surge in money supply effectively doubled the Nasdaq Composite from October 1999 to March 2000; I presume you recall how that ended.
# 1996: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?” Markets proceeded to rally strongly for another four years.

Greenspan is arguably the most incompetent economist of his generation, yet still retains some credibility amongst the uninformed. OpEds such as this one serve as reminders of that . . .

 

Ritholtz is a tool. If things depended on him the Fed would have 5.25% rates through 2008 while he cried about commodity prices

The guy is the typical blogger who will say anything that will please his audience, and that usually means bashing politicians. I repeat, that op-ed could have been written by Rogoff, all of the sudden everybody would been praising it and saying how important is to cut the deficit

"Rogoff was skeptical about the benefits of continued fiscal stimuli. “Borrowing vast sums
of money to create vast quantities of low quality government jobs, like census takers, may
spruce up the figures in the short run,” he said. “But we can’t have a census every two
years, and this comes at a big cost later on.”
He said fiscal stimulus measures should be phased out at a gradual rate and monetary
stimuli should be kept in place longer to avoid a double-dip emerging as a possibility.
“Premature exit from monetary stimulus is dangerous,” he said."

http://www.advisorperspectives.com/...xpects_Slow_Growth_and_Sovereign_Defaults.pdf

 

Even Meredith Whitney is afraid to call for a double dip in the economy. Says 'its a better than 1% chance' yet she is quite confident of a double dip in housing. I'd say if housing continues to tank a double dip recession becomes the a likely outcome. Simply because the Hussman model doesnt factors in housing prices, for a good reason, they just kept going up so historically it never influenced the economy to the downside(only locally sometimes)

But adding in that factor and the consequences to consumer spending, bank losses leading to credit tightness its downright obvious that increases the likelyhood of a recession. The free lunch homeowners that wont pay their mortgage to spend on goods, will hurt the banks, which will make NPLs stay high and credit tight

 

Am I the only one who finds utterly amazing that people all of the sudden joined the "US is fine" because rates are low?Specially when that argument is put forward by economists
Yet they are the same people who will talk about 'contagion', a completly different measure of risk to a sovereign that is trigged by events in somebody elses interest rate not their own.

Therefore, the fact that the world is in a sovereign debt crisis should decrease the attractiviness fiscal stimulus because the risk of contagion to your country exits, specially when that country has a large deficit and large stock of debt. So even if the Krugman argument that more stimulus would decrease debt to GDP(compared to austerity) were correct, the bond market is not a Keynsesian student, when they see the drunk drinking too much, they refuse to finance more drinks. Matter of fact, the simple fact that he spends so much time trying to convince people on it's evidence that the market would not buy it

 

The rates are low camp seems to be attached to that measure of risk, and only that one. Ignoring others like

-Banking crisis historically have lead to sovereign debt crisis
-Deficits as a % of GDP
-Rising public debt as a % of GDP
-Contagion. They somehow imply that the EU crisis has lead to a 0% increase in the likelyhood of a US sovereign debt crisis