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Possibly what bothers me most about Ben S. Bernanke is that I fail to detect in him any of the agony that has characterized Alan Greenspan’s speeches in the last year.
There are many things - race, religion, etc. - that are irrelevant to predicting how a Fed chairman will conduct policy. But the generation into which a man is born is very relevant.
We can see that right away in their policy priorities.
Greenspan was born in 1926, and grew up surrounded by massive starvation and homelessness in the Great Depression, so his priority at the Fed has been to contain the damage from the 1990s bubble.
Bernanke was born in 1953 and grew up during the 1950s, when America had already defeated the Depression and defeated the Nazis, and no goal was out of reach. He was in college in the 1970s when high inflation was the major problem, so naturally inflation is his highest priority policy issue today.
Bernanke doesn’t worry about bubbles, because to him those were all fixed in the 1930s, and now they always take care of themselves. In October 2002, he said:
In view of those remarks, it's not surprising that Bernanke testified to Congress's Joint Economic Committee last week that although housing prices have risen 25% over the last two years, these increases "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.
Actually, Bernanke doesn't even think that the 1929 crash was much of anything. In October, 2000, he wrote that the crash was caused by Fed policy errors, specifically raising interest rates in the early 1930s. He wrote:
But the generational difference between Bernanke and Greenspan goes far deeper than simple policy priorities. Bernanke belongs to the arrogant, narcissistic “Boomer Generation” that humiliated Greenspan’s generation in the 1960s-70s, and forced two Presidents (Johnson and Nixon) to leave office in disgrace. This is where the Boomer generation gets its “nothing is ever my fault or my responsibility” attitude.
That explains Bernanke’s incredible remark last year that America’s exponentially increasing rate of public debt is everybody’s fault but ours, because other nations are guilty of a a "global savings glut." Only a Boomer would say something like that.
But the scariest (to me) of Bernanke’s views are the ones that economists this week have been most abundantly praising: His belief, as laid out in a speech he made on October 7, 2004, that the Fed strongly influences the stock and bond markets merely by publishing the Open Market Committee minutes earlier and more often.
This is crazy. You can read investment advice in a million places on the Internet, but I’d like to see just one place where it says, “Before deciding whether to buy this stock, check to see whether the Open Market Committee minutes have been released yet.”
Stocks, credit and risk continue their bubblicious rise: The stock market has reached a fresh record high almost every day... (19-Nov-06)
As stock market bubble skyrockets, risk premiums are collapsing: Desperate investors appear willing to take any risk these days to get returns.... (10-Nov-06)
Alan Greenspan blames the housing bubble on the fall of the Berlin Wall: Meanwhile, the stock market keeps skyrocketing and appears unstoppable to many investors.... (25-Oct-06)System Dynamics and the Failure of Macroeconomics Theory : Mainstream macroeconomic theory, invented by Maynard Keynes in the 1930s, has failed to predict or explain anything that's happened since the bubble started, including the bubble itself. We need a new "Dynamic Macroeconomics" theory. (25-Oct-2006)
August trade deficit reaches fresh historic high -- that's GOOD NEWS, say economists: The deficit, up 2.7% from July's historic high, exceeds even the highest of economists' estimates,... (12-Oct-06)
Following the real estate bubble, the commodity bubble appears to be deflating: As real estate prices collapse, prices of oil, copper, sugar and other commodities reverse four years of record price increases.... (23-Sep-06)
Corporate profit growth slowed substantially in second quarter: This may be the start of the long-term "mean reversion" cycle that readjusts corporate earnings substantially downward.... (31-Aug-06)
Housing market is collapsing faster than economists expected: Both existing home and new home are falling much more sharply... (25-Aug-06)Speculations about a stock market panic and crash : Will there be a stock market panic next week, next month, or next year, and will it lead to a crash? We speculate on some possibilities. (31-May-2006)
As stock markets melt down, the question is: Where's all the money going?: For the first time, analysts are debating whether the stock market is crashing.... (21-May-06)
Housing prices continue to fall: Sales volume partially recovered, indicating that you can still sell, if you lower the price enough.... (28-Apr-06)
India Sensex stock market reaches historic high in record time.: Startled analysts are debating whether the market is close to a crash.... (21-Apr-06)
New home sales and prices fall dramatically four months in a row: This appears to confirm that the housing bubble burst four months ago.... (26-Mar-06)
Trade deficit again worse than expected, reaches a fresh historic high: Related: US Treasury bond prices fall dramatically on news from Japan... (11-Mar-06)
Sudden collapse of Iceland krona portends bursting of "carry trade" bubble: I don't normally write about international interest rates because... (27-Feb-06)
New Fed Chairman Ben Bernanke gives predictable upbeat testimony to Congress: Pundits are smiling today, happy that they can understand "plain-speaking" Bernanke.... (17-Feb-06)
China reports 2005 economy still overheated at 9.9% growth: Like a railroad train careening down the track out of control,... (26-Jan-06)
Wall Street Journal's page one article on Bernanke contains the usual errors and omissions: Let me try and explain this a different way.... (8-Dec-05)
Alan Greenspan gives another harsh doom and gloom speech: Saying that "the consequences for the U.S. economy of doing nothing could be severe,"... (4-Dec-05)Ben S. Bernanke: The man without agony : Bernanke and Greenspan are as different as night and day, despite what the pundits say. (29-Oct-2005)
Fed Chairman Alan Greenspan says that the deficit is out of control: France's Finance Minister Thierry Breton quoted Greenspan... (25-Sep-05)
Pimco's Bill Gross recommends selling all, buying only short-term Treasuries: Meanwhile, Morgan Stanley's Stephen Roach says, "The world as we know it must come to an end."... (18-Sep-05)
Departing Fed Chairman Alan Greenspan sings schizophrenic swan song: Is the economy strong or is it in danger? Greenspan played both sides... (30-Aug-05)
A new mystery: Why is the P/E ratio remaining constant?: If you look at the bottom of this web site's home page,... (11-Aug-05)The 11% Solution: An article in Barron's says the stock market is very overvalued : New research by analyst Adam Barth finds that average earnings over any 20-year period are surprisingly constant. (11-Jul-2005)
The mysterious Baltic Dry Index reveals a great deal about the Chinese economy: China is causing wild volatility and turmoil in shipping, iron ore and steel prices,... (5-Jul-05)
Alan Greenspan predicts major losses by hedge funds: But still says he doesn't have a clue why 10-year Treasury bond interest rates are falling.... (8-Jun-05)
Fed Governor Ben Bernanke blames America's sky-high public debt on other nations: I'm normally wary of applying specific generational archetypes to individuals, but Bernanke is acting like a Baby Boomer.... (14-Mar-05)Alan Greenspan warns that global economic dangers are without historical precedent : In a speech on Friday, Greenspan buried a major change of position in a speech admitting that his assumptions about the economy for the last decade were wrong. (6-Feb-2005)
Federal Reserve congratulates itself on jawboning policy: Fed says it propelled the economy upward merely by promising to keep interest rates low.... (17-Sep-04)
Real estate is in an overpriced bubble all over the world: A study by investment bankers Morgan Stanley warns that the bubble will burst with devastating results.... (30-Jul-04)
I’m all for more information from the Fed, but publishing meeting minutes cannot possibly affect the markets for more than a day or so, or until the price of oil per barrel changes, whichever comes first.
Alan Greenspan would never (I hope) make a speech like that. He grew up surrounded by people in the G.I. generation who beat the Depression and beat the Nazis by making real sacrifices and real compromises and risking their lives. How many battles were won by releasing meeting minutes?
Boomers in general don’t realize how they’ve been protected by people in the G.I. generation and in Greenspan’s Silent Generation. In the 1980s, Democratic and Republican senators put party politics aside to agree on a plan to save Social Security, and then again to agree on a plan to reduce the budget deficit. In 1996, Democratic President Clinton compromised with the Republican-controlled Congress to eliminate the budget-draining welfare entitlement.
But those people are gone now. Republicans and Democrats from the Boomer and Gen-X generations are incapable of compromising on anything. All we get today are bitter political battles, but no important agreements or compromises. That’s why the credit markets are out of control. (Did you know that the plan to spend $2 billion on Hurricane Katrina recovery would amount to over $1 million per affected family?)
So it’s worth taking a minute to look at how the tone of Greenspan’s public statements in the last two years has been starkly different from that of Bernanke’s statements.
In January, 2004, Greenspan was quite positive and hopeful when he bragged in a speech:
Greenspan began to express mild alarm at the increasingly serious economic situation in October, when he referred to the debt level and housing bubble:
These mild expressions of concern continued even through the November publication of Greg Ip’s Wall Street Journal article on Greenspan’s legacy, in which he laid out at length his detailed strategy in dealing with the 1990s bubble. The strategy was flawed, as I wrote at the time, but at least Greenspan had a strategy. (Bernanke doesn't believe that a strategy is needed.)
By January, 2005, Greenspan's statements became increasingly alarming. In one speech, he said:
A careful reading of that speech reveals that, because of unexpected globalization of the economy, Greenspan was completely repudiating the strategy that Greg Ip had described in November in the Wall Street Journal.
For some strange reason, neither Ip nor any other major financial reporter discussed this repudiation. At least Greenspan’s “conundrum” remark, referring to the puzzling worldwide fall in long-term bond rates, has been widely reported
Through 2005, Greenspan has seemed to me to be increasingly in agony, as he’s seen the stock bubble of 2000 morph into a stock bubble and a housing bubble. This was beginning to look all too familiar to him; things he hadn’t seen since his childhood. It’s not surprising that Greenspan privately told France’s Finance Minister last month that “the United States has lost control of their budget.”
His public remarks were at their starkest in his “swan song” Fed speech at the end of August.
In that speech he commented favorably on the economy’s flexibility because it encourages investor risk, but warned about the stock market and housing bubbles, and added:
When Greenspan says that “history has not dealt kindly,” he’s referring to the 1930s Depression, and he’s telling us that he thinks it’s going to happen again. Just reading his words you can almost hear the agony in his voice, as he realizes that the horrors he suffered as a boy are going to happen again – and that he’ll be blamed for it, and that it will be his legacy.
The stock market today is priced at Dow 10,300, but the underlying book value of the market is Dow 4,500 according to my computations – and according to computations performed using a different method by analyst Adam Barth in an article appearing in the July 11, 2005 issue of Barron’s.
So the market is priced at 228 per cent of book value today, which is about where it was just before the 1929 panic. Bernanke undoubtedly believes that a new panic today wouldn't do any more harm than the 1987 panic that he's old enough to remember, but the market was at 102 per cent of book value at that time, so it's not surprising that the market recovered quickly then. A panic today would be as bad as 1929.
In his heart, Greenspan knows that. The youthful Bernanke, incredibly, doesn't have a clue.
Maybe it’s just as well. Whatever’s going to happen is going to happen, no matter what Bernanke does at this point. I don’t know if he's religious or not, but if he is religious then he might wish to start praying.