Oh Alan! You ol’ devil, you!
Yes, the dearly beloved former Chief of the Central Bank of the United States of America… more than four score years in age… and still full of mischief!
According to TIME magazine, Alan Greenspan was part of the committee that saved the world following the collapse of Longterm Capital Management in 1998. Then, after the dotcoms blew up… and after the Twin Towers came down… the Maestro saved the world again.
But only a little more than a week ago, it was he who practically destroyed it! That’s what some of the papers said. Greenspan, talking to a group in the Far East who paid $150,000 to hear the great man speak, said he wouldn’t be surprised to see a recession in the United States before the end of this year. Whether it was a coincidence or a matter of cause-and-effect we don’t know, but soon after all hell seemed to break loose in the Asian markets.
Here at Markets and Money we took a philosophical view: All hell has been caged up for a long time; it was bound to break loose sooner or later. But a number of commentators scoured the scene of the break – and found the old man’s fingerprints! Mr. Greenspan himself didn’t seem to know if he was innocent or guilty. But he immediately moved to put some distance between himself and the pandemonium that seemed to be spreading throughout the world.
“I didn’t say recession was probable,” he noted carefully, “I only said it was possible.”
Then this week, when asked for clarification, he said he put the odds of a recession at one in three – directly contradicting his successor at the Fed, Ben Bernanke, who is telling everyone who will listen that today’s prosperity is eternal.
“We are in the sixth year of a recovery; imbalances can emerge as a result,” Bloomberg quoted Greenspan as saying.
Bernanke and Treasury Secretary Paulson are ready to say whatever investors want to hear. Yes, the economy is healthy. Yes, it may even be healthier by year-end. No, the trouble in subprime lending will not affect the broader credit market. No, there’s no need to worry about last week’s market jitters. Prices go up and prices go down; this is just a hiccup in a bull market, not the growl of a bear phase.
“Credit issues are there, but they are contained,” Paulson said to reporters in Tokyo during a four-day tour of Asia, speaking of problems in the subprime market. Goldman, his former employer, has seen its stock fall from 222 in February down to 190 this week. But, it’s not a concern, Paulson opined. The U.S. financial sector is robust and most institutions won’t feel ‘a big impact.’
We weren’t born yesterday – and, as far as we’re concerned, the two government shills are merely ‘talking their book.’ The last thing they want is a credit crisis. They’ll say what they have to in order to avoid it. As for what is ahead, they know no more than we do.
As predicted, the soothing words worked. Hell was backed in its cage yesterday. The Dow rose 157 points. Gold rose too – to $646.
Investors seem content to pin the blame for last week’s wobbles on Greenspan… or on the trade deficit… or on subprime mortgage troubles… or on the rising yen. Any culprit will do – except the real one.
The real devil is not an isolated, limited, or containable creature. He cannot be shut out, ignored, or rendered obsolete by sophisticated mathematics. Man is clever… but not that clever. He can invent such wonders as heavier-than-air flight and aged whiskey. But give him a laboratory and he can’t stop himself from inventing such nuisances as TV, NegAm mortgages and the Denver boot.
Alas, this devil is as much a part of the market system as night is a part of a 24-hour day. Credit expands… and then contracts. Prices go up… and then go down. Sometimes the going is good… sometimes it is not. People are subject to periods of irrational exuberance… and to periods of irrational despair. As the world turns, there are bound to be times of darkness.
Today’s question is merely this: Are we looking at the sunset of the credit cycle… or just a passing cloud?
We will find out soon.
for Markets and Money