It remains to be seen if his "securitization revolution was a 'bridge too far,' " spelling the beginning of the end of US dominance as an economic power. The "true significance" of today's crisis (nowhere near resolved) lies right in his lap. Engdahl lists his menu of malpractice in serving the "Money Trust," meaning Wall Street and big banks. In each case, it yielded big short-term gains, greater long-term losses, and successively greater crises. A new Fed Chairmen has to solve them. Bailout is his strategy. It may help in the short-term. The jury is still out. The policy is flawed. It assures greater crises ahead, and at some point the music stops.
Bernanke may end up being too smart by half. We're awash in problems that one analyst calls three simultaneous imploding bubbles:
-- a property, mainly housing, price one;
-- a mortgage finance one; and
-- an alphabet soup of CDOs, SIVs, SPVs, and a whole menu of levered-up, high-risk securitized assets amounting to financial alchemy.
Grantham also takes aim at them and sees lots more write-downs and defaults ahead before it ends. He cites a longer-term problem as well - "that all debt standards fell so that losses will accumulate right across the entire credit system." Even worse, it came at a time equities were overpriced, still are, and particularly higher-risk ones. Further, "profit margins are spectacularly above average" in some sectors, margins are being squeezed, and markets finally caught on that "all risk is dangerous."
Grantham's research shows that all markets eventually revert to their means and for months have been "well into a massive repricing of both risk and asset prices" to get there. Before it started last July, we reached "the lowest risk premium, by far, ever recorded." It needs lots of heaving lifting to return it to more normal levels. And, of course, it's a painful process, a drag on the economy, and will likely take years to fix. In Grantham's judgment, through 2010 "to clean house completely," and when it ends "the amount of write-downs (may likely) start with a 'T.' "
Blame it on a Fed Chairman whose name starts with "G," and Grantham has been unsparing on him before. Referring to the 1990s dot.com and tech excess, he blamed him for engineering the largest ever stock market bubble and bust in history through incompetence, timidity, dereliction of duty or a combination of all three. It didn't matter because Wall Street types made fortunes, then got plenty of early warning to exit to let small investors take the pain.
Undeterred, Greenspan was at it again in the current cycle that's now being unwound. But this time, multiple bubbles were created, with housing and mortgage ones most affecting households. Grantham (like Gross) calls them "much rarer and more dangerous than stock bubbles" because they affect so many people. Even worse, with over half of all housing wealth borrowed and "on much less credit-worthy terms," it's very much "more dangerous than normal."
It's the Fed's job to watch over:
-- mortgage quality;
-- the soundness of repackaging mortgages; and
-- off balance sheet commercial banking that should have been stopped or curtailed.
"And what did Alan Greenspan do this time? Absolutely nothing" except whine about a little excess in housing when it was already out of hand. Even then he implied not to worry because "the housing boom will soon simmer down." And Bernanke is even more feckless with comments like "The housing market merely reflects a strong US economy." Grantham portrays him as a Greenspan clone, just as incompetent, and someone having "extraordinary faith in efficiency to the point of denial." Above all, like Greenspan, he's there to serve the "Money Trust" that appointed him.
And he's done it since taking over. First, by "stimulat(ing) at all costs" and repeating the same mistakes as his predecessor. Grantham calls 2008 "the year of Santayana: we ignored history and (are) condemned to repeat it." Housing price deflation is its most notable feature. It's what affects households most, and that, in turn, reverberates through the economy. Greenspan and Bernanke paid it no heed. Each now accepts no blame, and Grantham calls it "shameful." It's far worse than that at a time people are suffering, and the current Fed Chairman gets accolades for bailing out bankers while paying only lip service to homeowners.
By creating asset bubbles, Fed policy caused their dilemma, and Grantham believes their deflating may be the greatest of all threats to financial and economic stability. It stands to reason that efforts must be made to avoid the worst possible outcome. That means curbing speculation is key. Minsky was right that short of that financial crises are inevitable and excess is always the cause.
I am a 72 year old, retired, progressive small businessman concerned about all the major national and world issues, committed to speak out and write about them.
Must Read (
Well Said (
News (
Touching (
Funny (
Supported (
Interesting (
Inspiring (
Valuable (
