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  Posted on: Thursday, October 23, 2008
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Greenspan's Mea Culpa

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"Those of us who have looked to the self-interest of lending institutions to protect shareholder equity (myself especially)  are in a state of shocked disbelief"

     Alan Greenspan-October 23, 2008.


RICK:  How can you close me up? On what grounds?

CAPTAIN RENAULT:  I'm shocked, shocked to find out that gambling is going on here.  (A croupier hands Renault a pile of money).

CROUPIER:  Your winnings, sir.

CAPTAIN RENAULT: Oh, thank you very much.

 From "Casablanca" (1942)


"Don't be lulled into a false sense of security by the near unanimous gushing over Greenspan's legacy.  In our view the Chairman's legacy is still open to question, and upcoming economic and market developments are likely to result in a much harsher assessment of his lengthy tenure"

Comstock Partners-February 2, 2006


How could Greenspan not know the dire consequences of the massive housing bubble together with the lethal combination of subprime mortgages, complex structured products, a huge trade imbalance, record household debt and near-zero household savings?  He was Chairman of the Federal Reserve Board since 1987, and a successful private economic consultant before that.  Furthermore, he headed an organization employing some 250 economists, the largest economics department on the globe.

For that matter how could so many others be so wrong as well?  Where were the regulators, the White House, Congress, the nation's vast number of economists, the brilliant minds on Wall St. and the large number of financial journalists working for the media.  Why does there now have to be an investigation as to where everything went wrong?  After all, the facts were out there for all to see.  Here at Comstock we have been writing about the dire consequences of the housing bubble for many years with no access to any information that wasn't publically available.  It's absolutely ludicrous that the vast majority are saying even now that the events leading to the current crisis were not foreseeable. 

We are now entering a period where there will be innumerable commissions, hearings, committees and studies recommending new regulations to prevent the current turmoil from ever happening again.  Forget about it.  No amount of regulation can prevent the continuing cycles of greed and fear that have characterized various economies over the last few hundred years.  After the turmoil is over caution will be the rule for a number of years.  However, eventually a new generation will grow up with no personal memories of the current events, and the reckless speculation will resume again in a different form.

Following are a number of quotes from our past comments.  In reading them, keep in mind that we are a small organization, and that everything we wrote about was based on knowledge acquired from public sources that were available to anyone with the willingness to look at reality rather than rely on an unproven model of the way things should be in a world of one's imagination.




September 22, 2003--

One of the amazing aspects of the massive refinancing of homes, which is effectively piling on consumer debt at record levels, is the fact that this is being done with the blessings of our esteemed Federal Reserve Chairman, Alan Greenspan.  In various testimonies he has stated that borrowing the equity in consumers' homes is helping the economy and he supports it.  Imagine the head of the Central Bank of the world's largest economy becoming a cheerleader for individuals to continue borrowing on the equity of their homes while they have already incurred a record amount of debt and the homeowners' equity is falling to record lows.  Could the Fed Chairman actually think it is appropriate to use ones' home as an ATM cash machine?



June 23, 2005--

In our view a housing bubble with national implications definitely exists, and the risks to the economy are enormous.  The Fed and other depositories are acutely aware of the situation leaving them with the dilemma of what to do about it.  If they tighten enough to really halt the rapid rise in home prices the economy could very well go into a nosedive, a particularly scary situation, considering that all the debt still remains on the books.  On the other hand if they do little or nothing, the boom could get even further out of hand, making the eventual economic and financial unraveling even worse.  So far the Fed is raising the fed funds rate at the so-called "measured pace", and, along with other agencies, recently started a policy of moral suasion.  If this doesn't work the question is whether the Fed will follow through with more actual tightening.  If Paul Volcker was still heading the Fed we would know the answer, but given Greenspan's consistent reluctance to pull away the "punchbowl" we just don't know.  Either way the outcome is likely to be extremely unpleasant for the economy and for stocks.


August 25, 2005-


Since 1999, when the financial bubble was in full bloom (due in large part to the Fed), we have been saying that the central bank faced a dilemma with limited choices-none of them good.  They could either kill the bubble, let the economy and markets take the hit and come out of it ready to resume healthy growth-or they could keep extending the bubble for a while longer with far worse consequences down the road.  The Fed, under Greenspan, chose the latter course, resulting in a dangerous housing bubble following the financial bubble of the late 1990s.  This is evident in the fragile unbalanced recovery, the massive trade deficit, low consumer savings rate and record household debt.  The standard measures of the economy indicate to many that Greenspan has won his bet, and the Jackson Hole symposium will probably be full of praise for his long tenure.  We hope that they are right, but we believe that the final word on Greenspan's reign as Fed Chairman is not yet written, and history may not view him kindly.


October 27, 2005-


It is indeed ironic that Ben Bernanke, upon his appointment as the next Fed chief, found it necessary to promise a continuation of the Greenspan policies that are likely to cause him a great deal of grief during his coming tenure.  While Wall Street is narrowly focusing on Bernanke's qualifications for the job and whether he is an inflation hawk or dove, the important point is that the new Chairman will be inheriting a mess that is probably beyond the capacity of any Fed chairman to solve without a damaging recession and financial crisis.It seems that after 18 years of cheerleading, the Chairman, in his last months in office, is now acknowledging the potential negative consequences of his policies.  He leaves, however, with the knowledge that cleaning up the mess will fall to his hapless successor, and not to him.  Whether Bernanke, despite his acknowledged brilliance, knows what's awaiting him is not known, but he will find out soon enough.

February 2, 2006-

Don't be lulled into a false sense of security by the near unanimous gushing over Greenspan's legacy.  In our view the Chairman's legacy is still open to question, and upcoming economic and market developments are likely to result in a much harsher assessment of his lengthy tenure-unless, of course, future historians blame his hapless successor instead. 

March 2, 2006-

In our view the derivatives mess described above is another potential time bomb (among many) that could throw the financial markets into a severe crisis.  In the last 30 years every period of monetary tightening has eventually led to financial crisis.  These included the Penn Central bankruptcy in 1970; the Franklin National Bank failure in 1974; the First Pennsylvania bank failure in 1982; the Continental Illinois bank failure in 1984; the savings & loan crisis in 1990, the Mexican Peso crisis in 1994; the Asian, LTCM and Russian crises in 1998; and the bursting of the Nasdaq bubble in 2000.  The derivatives market is a leading candidate to trigger the crisis on this cycle, although there are obviously many other candidates as well.


August 31, 2006-


Although the conventional wisdom has only recently caught onto the fact that the housing boom is over, a spate of recent company announcements indicate that the problems are rapidly spreading to the companies involved in mortgages.  H&R Block's sub-prime lending subsidiary had to set aside $60 million due to borrowers falling behind in payments.  Countrywide Financial stated that customers were slow in paying their loans.  Similar statements were made by Impac Mortgage and Accredited Home Lenders.  First Horizon National said it would miss its earnings targets because of declining mortgage volume.The problem is that the housing decline has just started and the above revelations are most likely only the tip of the iceberg.  With home prices likely to move lower, a lot of homeowners are going to be in real danger of defaulting with widespread foreclosures a distinct possibility.  This is in addition to the coming diminution of mortgage equity withdrawals that have been so pivotal in spurring recovery from the 2001-2002 recession.  The great danger is the potential unwinding of the massive debt that has built up over the past decade and the accompanying threat of damaging deflation that was averted after 2002 only with the help of the housing boom that is now definitely over.


October 9, 2006-


Widespread reports that the housing industry is stabilizing are just too incredible to believe.  Affordability remains at a 15-year low; inventories are at record levels, new housing permits are plunging; and industry executives are telling us every day how bad things really are. All in all, the evidence indicates that the decline in housing still has a long way to go. This is likely to have significant adverse effects on both consumer spending power and the large percentage of the labor force directly and indirectly dependent on the housing industry for jobs.  In our view, therefore, the odds on a rare soft landing for the economy remain quite low.


February 8, 2007-


Contrary to those who assert that that the housing decline is over, the worst is yet to come and the ripple effects are becoming increasingly evident. A significant tightening of mortgage lending rules is likely to lead to a dangerous rise in foreclosures.  Over the past few years the banking system has sold off hundreds of billions of dollars of mortgage loans and these have been sliced, diced, distributed and resold to a point where nobody knows who is actually at risk and by what amounts.   This could result in a major financial crisis for the banks and anyone else in the intricate financial system holding these risks.  Today, strategists, economists and bubble TV went to great lengths explaining how the HSBC and related sub-prime problems are isolated events and that the macro economy looks great.  We wish that things were really that simple.

February 15, 2007-

Major banks and Wall Street firms are trying to force mortgage originators to take back loans that they purchased in the past few years.  It is likely that many of these firms cannot take back all of these loans without going under.  In addition the banks and Wall Street firms made loans to the sub-primes that are in great danger of not being paid back.  Much of the loans were chopped up and sold to various investors throughout the world.  All of this is probably only the tip of the iceberg, and has the potential to develop into a full-fledged financial crisis comparable to some we've witnessed in the past.


April 5, 2007-

Although the consensus of strategists and economists vigorously insist the subprime woes are just a headline scare story that will quickly be forgotten by the stock market, we think their case is weak.  In our view they fail to explain to why the substantial drop in housing starts combined with the sublime lending problem will be isolated this one time, when a major housing decline alone was enough to cause a recession in the overwhelming majority of past cycles. The subprime lending problem is not an isolated event, but merely the first crack in an unprecedented boom that is in the process of becoming a bust.


June 21, 2007-

The near-collapse of two big Bear Stearns hedge funds heavily invested in highly-speculative packages of subprime mortgages indicates that the severe housing recession is spreading to the financial arena and is threatening the occurrence of systemic fallout. There are undoubtedly a large number of other hedge funds with portfolios similar to those of Bear Stearns, and it appears that, in the vast majority of cases, the securities have not been marked to market.  The big fear is that any auction of the Bear Stearns holdings will expose the true price of all these holdings and result in immense losses with an unknown, but potentially dangerous chain reaction throughout the financial system.

August 16, 2007-

The carnage is far from over.  Amazingly, one guest on bubble TV today casually referred to the recent market turmoil as "financial gamesmanship" as opposed to what he termed "solid economic fundamentals."  This is a widely-held view that has minimized the market decline so far and has prevented widespread capitulation.  The implication is that the credit problems and stock market decline is merely a tempest in a teapot caused by some panicky investors who can't see a great buying opportunity.  In our view, nothing could be further from the truth.




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