Greenspan’s interview in today’s Daily Telegraph can be read here. It’s pretty bearish on the problems in the financial markets (and he thinks the problems will be greater in the UK than in the US, thanks to the number of variable rate loans), and also on the prospects for long term inflation, which could stabilise around 5%. Putting aside the issue of who created many of the problems in the first place, and we’ve pointed the finger in his direction several times before on these pages, he could well be right on both counts. Ambrose Evans-Pritchard, in an adjacent column to this interview in the print edition of today’s Telegraph, does an excellent job of dismantling the Greenspan myth. He quotes from Greenspan’s 1966 paper Gold and Economic Freedom: "The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: by 1929 the speculative imbalances had become overwhelming."
Former MPC member Willem Buiter has laid into the bail out of Northern Rock by the Bank of England, just a couple of days after it talked tough about the importance of not supporting lenders who made risky decisions.
“Following the bail out of Northern Rock, I can only conclude that the Bank of England is a paper tiger. It talks the ‘no bail out’ talk, but it does not walk the talk. It does not matter whether the decision to bail out Northern Rock was initiated and/or actively supported by the Bank, or whether the Bank was bullied into it by the Treasury and the FSA. Moral hazard has received a boost in the UK banking sector and in the UK financial system as a whole. We will all pay the price in the years to come, when the next wave of reckless lending washes over us.”
You can read his full (lengthy and technical) comments here on his blog. Thanks to Citywire for initially highlighting them.
"In the 3 1/2 years I’ve been trading these markets, I’ve never seen it so bad".
Ho hum. Elsewhere, it appears the US mortgage market is not completely closed for business, and a few other lenders could probably take some marketing lessons from Ric Flair Finance.
Here is a link to our Credit Crisis teleconference replay. It’s approximately 20 minutes long, with slides, and there’s a further 10 minutes of Q&A afterwards. We cover the problems in the global money markets, the falling US housing market, and the prospects for corporate bonds and high yield if there is a recession or significant global slowdown.
Here’s a bit of proof of our assertion that the bond market is better at forecasting recessions than the Wall Street economists. Apparently in March 2001, the first month of the last US recession, 95% of US economists were predicting that there wouldn’t be one, and the average forecast growth rates for Q2 and Q3 were 2.2% and 2.3%. This New York Times article suggests that because recessions are relatively rare "it’s like asking people who spend their time in Alaska to start forecasting tropical storms". I prefer Merrill Lynch’s chief economist David Rosenberg’s comment in today’s FT when he states that telling a client that there’s going to be a recession "is like looking a client in the eye and telling them that their child is ugly. It’s not what people want to hear". For the record, Rosenberg, along with Richard Iley of BNP Paribas have been rare contrarians for the last year or so, and have been predicting tough times ahead.
Those of you listening in to our Credit Crisis conference call on Friday will have heard me suggest that the unemployment numbers would have to catch up with our expectations of an already softening American economy. We didn’t expect it to be such a rapid turnaround. Payrolls shrank by 4000 jobs in August, and back revisions meant that the economy has 200,000 fewer workers than the market expected. The "R" word is coming out thick and fast now. We will be putting link to the conference call on this site tomorrow if you missed it first time round – for those who did listen in, thanks, and apologies for the web freezing in the last minute of the Q&A. The World Wide Web is designed only to cope with the aftermath of a nuclear strike, not a fully blown credit crisis.
We’ve mentioned the crystal ball-like qualities of the US yield curve a couple of times on this blog. In May Jim showed that it can be a good predictor of recession (read article here), and the San Francisco Fed has recently published this interesting piece that adds weight to the argument.
There is some statistical analysis within the article, but in short it concludes that the yield curve is a better predictor of recessions than the professionals. There’s the old joke about the bond market predicting 9 out of the last 5 recessions – but the fact is that the economists employed by the investment banks predicted none of them. Nobody on Wall Street likes a bearer of bad tidings – just unleash the Rally Monkey and everything might be alright.