Alan Greenspan States the Obvious

Alan Greenspan says that if the CBO is wrong about the cost of Obamacare that may be a problem.

Former Federal Reserve chief Alan Greenspan warns the economic impact of the new healthcare reform law could be disastrous if the Congressional Budget Office’s
(CBO) projections prove inaccurate.

Greenspan told ABC News’ “This Week” on Sunday CBO is a “first-rate” operation, but significant danger exists should their projections prove inaccurate over time.

“And when you're dealing with an economy in which debt is becoming, federal debt is becoming ever increasingly a problem, it strikes me that when you're dealing with public policy and you're in a position where you have to ask yourself, ‘What happens if we are wrong?’” Greenspan said in response to a question from ABC’s Jake Tapper
regarding his thoughts about the newly passed healthcare reform act.

Medicare was supposed to cost less than $100 million when it was rolled out. It was supposed to quadruple in price by now. It's in excess of $100 billion yearly now. That should give everyone an idea just how out of control Obamacare may be.

Greenspan: More Oversight of Banks

Now he tells us. Alan Greenspan famously gave millions of novice home owners the green light to jump into adjustable loan mortgages is now advising more oversight over banks.

After more than six decades as a skeptic of big government, the former Federal Reserve chairman, now 84, is gingerly suggesting that perhaps regulators should help rein in giant financial institutions by requiring them to hold more capital.

Mr. Greenspan, once celebrated as the “maestro” of economic policy, has seen his reputation dim after failing to avert the credit bubble that nearly brought down the financial system. Now, in a 48-page paper that is by turns analytical and apologetic, he is calling for a degree of greater banking regulation in several areas.

Greenspan argues for higher reserves, a return of Glass Steagall, and he wants a requirement that banks hold bonds that automatically convert to equity when their equity falls below the required level.

Under capitalization is one of the untold stories of the financial crisis. Banks were not only taking massive risk but they were highly leveraged in that risk. A return to Glass Steagall is something I have endorsed as well. The third idea is most interesting since it's not been proposed anywhere I've seen. It's a way to make banks more accountable for their risk and it would reduce moral hazards.

Greenspan continued to insist that his own low interest rate policy didn't get the ball rolling on the crisis.

Fed Raises Discount Rate

Is this the beginning of the Fed's turnaround and tightening?

The Federal Reserve on Thursday raised its discount rate to 0.75% from 0.5%, an effort to return its lending facilities to more normalized levels.

The Fed said the move, along with other recent modifications to its credit programs, does not signal a change in its outlook for the economy or for monetary policy, and the more important fed funds rate remains in its range of 0% to 0.25%.

The Discount Rate is what the Federal Reserve charges banks to borrow in order to meet reserve requirements.

The Fed chairman, Ben Bernanke, was very careful to use mild language in describing the future stance. The Fed Funds Rate was held at 0-.25%. So, it's still unclear if this is small augmentation or if it is the beginning of more serious.

The equity markets will be of great interest over the next few weeks. When Alan Greenspan raised rates suddenly, that popped the internet bubble. This was also a mild surprise and futures are already down on the news. So, it will be interesting to see what sort of a reaction equities will have.

The Politics of Bernanke's Renomination

If you've read this site some, you know I have no use for the Federal Reserve. I also believe that Ben Bernanke is wilfully repeating the mistakes of his predecessor, Alan Greenspan. Still, I am watching most of the opposition, from both sides, to the renomination of Bernanke and almost all is political in nature.

The folks are ticked off. They are looking for someone to blame and the Fed Chairman is an easy target. It's also the wrong target. The Federal Reserve itself has plenty of blame, in my opinion, for the current financial crisis. Furthermore, I believe that the Bernanke's current loose money policy will have a devastating effect on our economy down the road.

What most politicians are trying to do is blame Bernanke for the current crisis. That's, of course, nonsense. Bernanke took over at the end of 2006. By then, the wheels were already long in motion for our current crisis and nothing was going to stop it. It's clear, however, that most in Congress haven't the faintest clue what the role of the Fed is and what Bernanke has done in his office. Here's what Boxer said.

In a statement Friday morning, Senator Barbara Boxer, Democrat of California, came out against Mr. Bernanke, who was named to his post during the Bush administration. She said she had “a lot of respect” for him and praised him for preventing the economic crisis from getting even worse. “However, it is time for a change,” she said. “It is time for Main Street to have a champion at the Fed.”

“Our next Federal Reserve chairman must represent a clean break from the failed policies of the past,” Ms. Boxer said.

I'd ask Senator Boxer two questions. First, what Fed Chairman represented the interests of Main Street and second, how can we have a Fed Chairman that has a clean break with the past. The Federal Reserve is the bankers' bank. By nature, he represents the interests of the banks. Ordinary citizens can't get a loan at the Fed's window. Only banks can. How would a Fed Chairman represent the interests of Main Street as Fed Chairman? Given that this crisis touched all parts of our financial world, how exactly would we get someone with a clean break from the past. To do that, we'd need to get a Fed Chairman entirely void of financial experience over the last ten years.

Both Jeff Sessions and Jon Cornyn have put some of the blame for the current crisis on the shoulders of Bernanke, and here's how Oregon Senator Jeff Merkey characterized the scenario.

Oregon Sen. Jeff Merkley said Friday he would vote against granting a second term to Federal Reserve Chairman Ben Bernanke, concluding that Bernanke was partly to blame for the nation's deep recession and that he is ill-equipped to lead a recovery.

In explaining his decision in a floor speech, Merkley credited Bernanke for the major role he played in keeping the nation from tumbling into a depression.


That is not enough to justify another four-year term, Merkley said, suggesting that that Bernanke was too close to bankers and Wall Street financiers. Merkley, who serves on the Senate Banking Committee, also opposed Bernanke's nomination for a second term when the question came before the committee.

Let's try and put this into perspective. What Fed policies caused the crisis? Wasn't it the loose monetary policies that caused interest rates to be kept far too low far too long? This is what Merkey blames Bernanke for even though it was Greenspan's leadership that had these policies. What policies is Merkey crediting Bernake for in lessening the current crisis? Isn't it the same loose money policies that have caused interest rates to be even lower for an even longer period?

Senator Merkey is blaming Bernanke for the policies of Alan Greenspan. Worse than that, he's then congratulating Bernanke for instituting the same policies. This is the level of political thought on the Federal Reserve out of Congress.

In 2002-2003, these same Senators were congratulating Alan Greenspan for saving the same country from the brink for the exact same policies. Now, years later they are blaming the same Fed for the policies of the past. At the same time, they are congratulating the same Fed for those very same policies in the present.

The Fed Won't Rule Out Repeating History

Fed Chairman Ben Bernanke says that stricter regulations would have prevented the current crisis. He downplayed the Fed, and his predecessor's involvement, and then threw a financial shot across the bow.

Bernanke said, however, in a speech to the American Economic Association, that policy makers can no longer eliminate rate increases from their arsenal to prevent future crises.

"If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplemental tool for addressing those risks,'' he said.

Bernanke conceded that efforts by the Fed and other regulators beginning in 2005 came too late or were insufficient to slow the housing bubble.

That's nice. The last time the Fed raised rates to stop a bubble was in 1999-2000. That certainly did pop the asset bubble in the internet and technology sectors. That also lead directly to the recession of 2001-2003. Then, the Fed lowered rates furiously leading directly to the bubble that's caused the current crisis.

Now, the Fed has lowered rates so low that they can't go any lower. They're now telling people that future bubbles will be popped by the Fed itself. Of course, last I checked, popping bubbles wasn't in the job description of the Fed chairman. At least this one is being honest. When Greenspan popped the internet bubble, he claimed he was raising rates to head of inflation, which was of course non existent at the time.

Bernanke Named Time Person of the Year

Ben Bernanke has been named Time Person of the Year.

Federal Reserve Chairman Ben Bernanke, who helped steer the nation through the worst economic crisis since the Great Depression, was named TIME Person of the Year 2009 on Tuesday, eclipsing finalists who included President Barack Obama and House Speaker Nancy Pelosi.

“He didn’t just reshape U.S. monetary policy; he led an effort to save the world economy,” Time’s Michael Grunwald writes in the cover story, which will be on newsstands Friday.

Asked by Time in a Dec. 8 interview if bankers make too much money, Bernanke replied: “I think that bankers ought to recognize that the government and the taxpayer saved the financial system from utter collapse last year. And in recognizing that, I would think that bankers ought to look in the mirror and decide that perhaps there should be some more restraint in how much they pay themselves, given what the government and the taxpayer did to protect the system.”

Bernanke certainly has transformed monetary policy. He has taken it to new levels, however, whether that's a good thing or something dangerous is still a matter of debate. Did Bernanke keep the U.S. economy from going into a tail spin? He probably at least contributed. How did he do this though? He lowered the Fed Funds Rate to zero and created more than two trillion dollars worth of new money? Is that bold and courageous or reckless? That's a question that remains.

There was a time that Alan Greenspan was seen as an oracle. He was similarly seen as saving the U.S. economy in 2001-2002. He's now viewed by many as the villain that created the current crisis. The same may wind up being seen of Bernanke.

It's important to note that what Bernanke did was neither bold nor innovative. Anyone can lower rates until they can't go any lower. Anyone can create trillions of dollars in new money. That's not bold or innovative. What would be bold and innovative would be to keep the economy from collapse without doing these things. This sort of monetary policy has all sorts of unintended consequences that haven't materialized yet. So, today's man of the year can be tomorrow's villain very quickly.

UPDATE:

Speaking of Bernanke,the Fed minutes just came out. The rates remain unchanged. The language says that the economy remains weak. The Fed Funds Rate is now at zero for just over a year. The Fed just called inflation "subdued".

Perpetual Zero Rates?

The President of the Fed in St. Louis is hinting that the Fed Funds rate will be at zero until early 2012.

Federal Reserve Bank of St. Louis President James Bullard said past experience suggests policy makers may not start to raise rates until early 2012, while facing a “too low for too long” argument that may “weigh heavily” on the central bank.

“If you look at the last two recessions, in each case the FOMC waited two and a half to three years before we started our tightening campaign,” Bullard said today in a speech in St. Louis. “If we took that as a benchmark, that would put us in the first half of 2012.”

That would mean that this Fed Funds Rate would be at zero for more than four years. To put that into perspective, Alan Greenspan kept the same Fed Funds rate at .75% about a year and a half, and many, like me, believe that loose money policy lead directly to the current mortgage crisis.

We're already facing an unprecedented loose money policy. We're already facing continued zero Fed Funds rate for the indefinite future. Now, that future might not end until 2012.

Giving banks the ability to borrow for nothing leads to all sorts of consequences, namely having those same banks take risks they normally wouldn't. That's good if you want to stimulate the economy but it can also lead to over stimulation. That can lead to inflation and bubbles.

It's clear the Fed doesn't think we're anywhere near a recovery. It also believes that monetary and not fiscal policy will lead us into a recovery. Yet, it also could be a sign of recklessness and desperartion. This sort of monetary stimulus is unheard of. Before Greenspan dropped the fed funds rate below 1%, that was unheard of. Now, Bernanke has not only dropped it to zero but will keep it there at least two and half years and maybe as many as four years.

It doesn't take all that much financial knowledge to know that such looseness in monetary policy leads directly to a new crisis. All such policy requires some semblance of balance. The problem by the Federal Reserve is that its been so aggressive that for each problem solved it created a new problem Greenspan popped the bubble and that caused the recession. Then, Greenspan dropped rates below 1% to get us out of the recession. Now, Bernanke is trying to get us out of this crisis with even more extreme monetary policy.

At some point, some other folks might point out that the Fed is the problem not the solution.

Fed Creating Another Bubble

So says famed economic analyst, Nouriel Roubini,

The Federal Reserve is running the risk of creating another bubble, and needs an exit strategy from its credit easing policy, says former Clinton White House economist Nouriel Roubini.

The sharp increase in the stock market and commodities, and narrowing of credit spreads since March, are partly due to a wall of global liquidity chasing assets and already causing asset inflation, Roubini writes in The Wall Street Journal.

Now, it's important to point out that Nouriel Roubini is nicknamed Dr. Doom because he's much more apt to take a negative position than a positive one. He's also now famous because he's one of the few economists that called the bubble and collapse of the housing market while others were chasing money.

I bring this up only because Roubini is echoing things I said months ago.

Back in 2002, the Fed Chairman Alan Greenspan lowered the Federal Funds Rate to .75%. The Federal Funds Rate is the rate at which banks borrow from each other. At the time, we were still recovering economically from the internet bubble popping. The pop of the internet bubble eventually cost three trillion Dollars in paper lost. The bubble burst was topped by the economic devastation of 9/11. About one million jobs were lost in October, November, and December of 2001. Then, this was followed by the revelations of accounting malfeasance at Enron et al. I bring this context because when Greenspan lowered the Federal Funds Rate this low so called experts justified it as an appropriate response to extreme economic weakening.

...

Now, new Fed Chairman Ben Bernanke has lowered the Fed Funds Rate to 1%, just .25% higher than Greenspan lowered it to. The reason no one is crying bloody murder is once again so called experts believe that Ben Bernanke is responding with aggressive action to an unprecedented economic weakness. The reason this is happening is that most people don't blame Alan Greenspan for even starting the mortgage crisis.

Bernanke is repeating very recent Fed history and he's repeating it even more aggressively. I had a very simple explanation. Bernanke, as Greenspan before him, is creating loose money. (that is money that's too easy to borrow) Once money is too easily available, it's borrowed and spent to accomodate the relative ease with which its gotten and not because there's necessarily a good place to put it. This, in my opinion, is a common trigger for bubbles. Roubini is far more technical but both of us believe that current Fed policy is creating the next bubble.

Some Thoughts on Bernanke's Re Nomination

The president will nominate again Ben Bernanke to be Federal Reserve chair. It's a story that will get a little coverage and even less analysis. Most people will nod and move on their way. Just think about that for a minute. The Fed chairman controls the money supply in the country and by extension the world, and this story will get little mention and even less analysis.

The Federal Reserve chairperson is arguably the most powerful person in the world and yet the dynamics by which they are nominated and nominated again receives less attention than a story on Brittney Spears. By many, Fed Chairman Ben Bernanke is credited with pulling the economy back from the brink. This is a dubious analysis for several reasons. First, it's still not clear the economy is back from the brink. Second, it's impossible to prove what pulls an economy back from the brink. Third, and most importantly, no one has talked about what the effects will be of his loose money policy.

Back in 2002-2003, most of the same folks now praising Bernanke were also praising then Fed Chairman Alan Greenspan. Back then, Greenspan dropped the Fed Funds Rate to below one percent, a level not seen in a very long time. He left it there for more than a year and when the economy boomed in late 2003 and continued to hum for four plus years, Greenspan was given a great deal of credit. Of course, by lowering the rate that much, Greenspan actually created loose money. Loose money leads to irresponsible behavior and that's exactly what happened. Some, like me, put a lot of the blame for the crisis on to Greenspan. Yet, Bernanke has doubled down on loose money policies in dealing with this crisis.

Not only has Bernanke lowered the fed funds rate to zero but he has stepped in to buy about $1.5 trillion bonds, both mortgage and treasury, in order to not only pump money into the system but to keep rates artificially low. In fact, history says that such enormous loose money policies only creates a series of booms and busts and continues to keep the economy in a state of chaos. That's exactly what Greenspan's aggressive monetary policy has created and now when Bernanke has continued with it he is being lauded for "saving the economy".

This morning we are expecting an announcement that earlier projections for budget deficits over the next ten years are about $2 trillion light. The government was already spending at unsustainable rates and now we learn that they have been spending at even more massive rates. How is the government able to get all this money? In part it's because the Federal Reserve is buying the bonds the Treasury uses to borrow. In other words, the Fed acts as the drug dealer to feed the Treasuries insatiable appetite for spending. This is what is being lauded by much of the public as "saving the economy".

Now, I am not saying this to proclaim I am right and the Fed Chairman is wrong. What I am saying is that Fed policy affects all of us and it affects all of us in a very significant way. Yet, this policy receives less scrutiny than a story on Brittney Spears. Today, the Fed Chairman will be nominated for another four year term and no one will bat an eye. There will be little analysis or debate as to whether or not he deserves it. Then, he'll spend the next four years making decisions that will have a significant effect on each and every American and there will likely be just as much analysis of that.

Finally, let me play a clip that I think is important for everyone to see. This is Rep Alan Grayson grilling the Fed Chairman about a policy in which he creates a "shadow currency market". Maybe, after watching this, we should all think twice about just how great Bernanke is.



Frankly, that this video has been a viral sensation but not a media sensation says all everyone needs to know just how critically the media treats fed policy.

What the Fed Said and What it Means

That's a historical chart of the Prime Rate. Keep in mind that the Fed Funds Rate is 3 percentage points below prime. Starting in late 2002, the Fed lowered the prime rate to levels that were unprecedented, and, as I've said often, that lead directly to the crisis we have today, in my opinion at least.

Today, the Federal Reserve pronounced that the weakened economy means that they will maintain their current interest rate levels indefinitely.

The Federal Reserve on Wednesday held monetary policy steady and said the U.S. economic recession was easing, as it signaled its worries over a possible troubling downward spiral in prices were fading.

The Federal Reserve headquarters in Washington, DC.

Concluding a two-day meeting, the central bank said it had decided to hold overnight interest rates in a zero to 0.25 percent range—the level reached in December—and repeated that they would likely stay unusually low for some time.

With the benchmark interbank lending rate virtually at zero, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and U.S. government bonds.

Now, as you can see, the Federal Reserve only kept rates at levels that put the fed funds rate at about 1%, and even below, for about a year, and that created so much loose money that it lead directly to the housing bubble. We're already in the seventh month of having the fed funds rate at zero, or well below even those extraordinary low levels. It's clear we will be here for many more months.

I continue to worry that our current aggressive monetary policy is merely setting the stage for the next bubble. The Fed currently sees little risk of inflation. Of course, inflation can come in many forms. For instance, from 2003-2006, it was created almost entirely in real estate and it turned into a bubble.

In my opinion, the Fed has been overreacting to current problems since 1999 when Alan Greenspan supposedly raised rates in order to combat impending inflation. Each and every overreaction caused an even bigger problem. Greenspan's overreaction caused the internet bubble to burst and that lead directly to the recession in 2001. Then, his overreaction to the recession caused the housing bubble. Now, I fear this overreaction will lead us right into another bubble.

The Fed's Power Grab Continues

Let me put the Fed's power into perspective. The Federal Reserve controls the money supply in the country. Of course, since the U.S. leads the world, in effect they control the money supply in the world. That's because most actions on interest rates, their primary method for controlling money supply, are usually followed by similar actions by the central banks of the rest of the world. Think about that. The Federal Reserve Chairman, currently Ben Bernanke, controls the money supply for the entire world. I, for one, think that's enough power.

President Obama disagrees. As such, he wants to give the fed even more power.

The Federal Reserve could become the super cop for "too big to fail" companies capable of causing another financial meltdown under a proposal being seriously considered by the White House.

The Obama administration told industry officials on Friday that it was leaning toward making such a recommendation, according to officials who attended a private one-hour meeting between President Barack Obama's economic advisers and representatives from about a dozen banks, hedge funds and other financial groups.

Treasury Secretary Timothy Geithner and other officials made it clear they were not inclined to divide the job among various regulators as has been suggested by industry and some federal regulators. Geithner told the group that one organization needs to be held responsible for monitoring system wide risk

.

So, now not only will the Fed control the WORLD'S MONEY supply, but it will be there to measure "systemic risk" of the entire financial system. (this is on top of their duties of regulating the banking industry) Keep in mind that the Federal Reserve is SELECTED not ELECTED, and as such, the chairperson is answerable only to the President. Of course, since most presidents aren't nearly as financially astute as the fed chairmen, in reality, they are answerable to no one.,

I, along with others, put much of the blame for the fruits of this crisis on the schizophrenic interest rate policy the Fed has championed since the late 1990's.










In other words, for the last ten years, and thus, the Fed hasn't done a very good job managing its main function, controlling the money supply. Apparently the answer to their incompetence is to give the Fed even more power.

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For my views on how to reform the Fed, go here.

Rethinking the Federal Reserve

A couple days ago, I began reading a piece from the Nation and was totally startled. I was startled because I appeared to be in total agreement with the piece. (given my conservative leanings and the far left leanings of the magazine, that's why I was startled) The piece correctly identified that the Fed has become a serious problem to financial stability. It even correctly pointed out that the Fed's pschzonphrenic interest rate policy has lead directly to economic instability. (over the last ten years no less than four times did the Fed raise or lower rates only to have to reverse course because its action boomeranged and created a new problem) Then, the article got to solutions and all order was restored.

This analysis is drawn from the work of Jane D'Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit. (Read her recent essay, "Setting an Agenda for Monetary Reform.") D'Arista proposes operating reforms at the central bank that would be powerfully stimulative for the economy and would also restore the Fed's role as the moderating governor of the credit system. The Fed, she argues, must create a system of control that will cover not only the commercial banks it already regulates but also the unregulated nonbank financial firms and funds that dispense credit in the "shadow banking system," like hedge funds and private equity firms. These and other important pools of capital displaced traditional bank lending with market securities and collaborated with major banks in evading prudential rules and regulatory limits. "Shadow banking" is, likewise, frozen by crisis.

In my opinion, the biggest problem with the Fed is that we consolidate an enormous amount of power into the hands of one person, the Federal Reserve Chairman. I would argue with anyone that it is the Fed Chairman that is the most powerful person in the world. That's because they control our nation's money supply and the one that controls the money controls everything.

A colleague of mine once told me that the creation of the Fed made it much easier to make war. That's because the Fed can very easily print money through a variety of sources. By doing so, waging war no longer requires raising taxes like it used to.

What this piece proposes to do is to make the regulatory umbrella of the Federal Reserve even large and include all financial institutions rather than just banks. The problem, in my opinion, is that the Fed Chairman has too much power.

As such, here is my proposal. I would remove the Fed Chairman. Instead, I would continue the current Federal Reserve Board Districts of which there are twelve. There will need to be a head of each district. Each head will be chosen by a Congressional Committee made up of each Congress Person and Senator that serves the district. Most importantly, a super majority of seven would be required for any action worth more than a billion Dollars. Currently, each governor must agree with the Fed chairman however that is almost always a rubber stamp. By creating a decentralized system rather than a rubber stamp, we will have a democratic form of decision making. Furthermore, for any action, the Fed will be required to also publish the dissenting opinion (if there is one) much like the Supreme Court does.

The danger here is that it would make monetary policy less nimble and rather rigid. In my opinion, that current Fed policy is so nimble is part of the problem. The Fed is so nimble that it is at the mercy of its Chairman. If the Chairman is right then all is well, but if they are misguided then disaster strikes. It was the nimble nature in which then Charman Greenspan lowered rates and kept them there that lead to us being here. It's true that often Fed policy must be nimble, however if that policy is clear there would always be agreement. Much more often, the future policy is less clear and rather than being at the mercy of the Chairman, we would have a vigorous debate among its regional Chairmen. Rather than someone taking on a leadership role because they were chosen, leaders would emerge from their efforts in crafting policy.

Furthermore, by localizing their selection, it also makes the Fed more answerable to the citizens. The selection of future Fed District Charimen would become a campaign issue. What this would do is educate the public on the nature and role of the Fed. Rather than being a nebulous organization that is understood by almost no one but those that run it, it will become an organization that will be an issue that voters will consider.

Doing this will also allow the Fed to take on more responsibility without giving one person too much power. As such, we could have the Fed take on the responsibility of oversight and regulation of all financial services, as the article suggests, without consolidating too much power in the hands of one person. By doing this, it solves the two biggest problems of the Fed, too much power and an organization that is misunderstood.

Deconstructing Alan Greenspan

Before I begin my analysis, I want to put the reader into the shoes of Alan Greenspan at the time in question. We have heard ad nauseum that this current economic crisis is the worst since the Great Depression. We have heard it so often that we forget just how dire things were at the beginning of the mlllenia. We entered the millenia with the bubble bursting on the internet revolution. Throughout the nineties, it looked as though our economy would be revolutionized all through the internet, and then all of that was put to an end when the bubble burst. Still, the economic downturn was predictable because it still had all the similarities to other speculative bubbles. Then, just as the economy was attempting to turn the corner and recover from this speculative bubble, an economic storm hit that had no historical context. That economic storm was 9/11. There was no playbook for the economic impact of that event. To top it off, it was only months before it was first revealed that Enron had cooked their books, and this started a domino of several large companies that also admitted to cooking their books throughout the 1990's as well.

As you can well imagine, our economic leaders, lead by Greenspan himself, faced an economic situation for which there were no easy answers, no textbook solutions, in the beginning of 2002. I have before said that Greenspan was reckless to lower the Fed Funds Rate below 1% and leave it there for so long. I think this might be a rather harsh assessment. After all, he was facing an economic downturn of a new magnitude. There were no easy answers and Greenspan must have felt that he needed to take steps of the magnitude of the crisis. That's exactly what he did when he lowered the Fed Funds Rate below 1% and kept it there for well more than a year.

It has become a fairly mainstream theory that the loose money created by Greenspan's lowering of the Fed Funds Rate below 1% was the driver that started the mortgage crisis. That's because the loose money created by these low rates were used by banks to borrow from each other and then to lend. Since real estate was one of the few industries that was booming at the time, most of this money went into real estate. Because the loose money made banks flushed with cash, they had more money than loans. This started the sub prime revolution and the rest is history.

On this point, there is little debate. After all, what is lowering rates if not loosening money? Lowering rates below one percent loosens money a lot. If Greenspan wasn't trying to create loose money, what in the world was he trying to do. It appears he saw an economic crisis in front of him and wasn't nearly as worried about the consequential future of what he was doing. Given the economic perfect storm I described, would anyone blame him.

I point all of this out to set the context of Greenspan's explanation for the drivers of the crisis.

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

Greenspan continues to insist on just about any boogeyman besides himself as the culprit for starting this crisis. He has in the past, and in this piece, blamed globalization, and now he has found a new boogeyman. The financial crisis was caused by extremely low mortgage rates. This is a dubious explanation on many levels. First, low mortgage rates didn't necessarily translate to low mortgage rates on sub prime. Just because prime mortgages were booming doesn't mean that banks wanted to necessarily go into sub prime. The nexus of this crisis was the explosion of subprime loans, not prime loans, and there is no explanation for why low prime rates would necessarily mean an explosion in sub prime.

All of this is very important because Greenspan says it is important.

How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.

Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical. And on rare occasions it can break down, with consequences such as those we are currently experiencing. It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently.

However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living. Remember, prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance. To achieve that with a modest level of combined domestic and borrowed foreign savings (our current account deficit) was a measure of our financial system's precrisis success. The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud -- not increased micromanagement by government entities.

Greenspan attempts to give suggestions for moving forward. Here is something that Greenspan fails to mention. The prime rate has gone up and down no less four times over the last ten years. How in the world can any economy develop in anything near a reasonable way if the monetary policy that oversees it is so pschzophrenic?

The Consequences of Today's Massive Rate Cuts

Today, the Federal Reserve took more aggressive action to curb the financial crisis by cutting the Federal Funds Rate to .25%.

The Federal Reserve on Tuesday cut its federal funds target rate by more than three-quarters of a percentage point to a range of between 0 and .25 percent. The decision signals that Fed Chief Ben Bernanke is more concerned with the rapidly deteriorating economy--which has been mired in a recession since December of last year--than the prospect of stoking inflation

The implications of this are massive and they are also very difficult to understand. First, here is what the Federal Funds Rate is.

In the United States, the federal funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight.[1] Changing the target rate is one form of open market operations that the Chairman of the Federal Reserve uses to regulate the supply of money in the U.S. economy.[2]

The first thing to know about the Federal Funds Rate is that it is a short term rate. In fact, it is very short term. The Federal Funds Rate is used generally for OVERNIGHT borrowing. In other words, it's a way for financial institutions to raise cash for short term liquidity shortfalls. If someone is in need of Federal Funds, it's usually because they are overextended and need to recapitalize.

First of all, its implication on mortgage rates is difficult to gather. Mortgage rates are long term. After all, you get a mortgage for up to thirty years. The Federal Funds Rate is for very short term borrowing. As such, just because one went down dramatically doesn't mean the other followed suit. In fact, lowering the Federal Funds Rate this dramatically is eventually inflationary and so often the mortgage market reads such rate cuts as long term inflationary and you see the mortgage rates go up. Today, mortgage rates were fairly steady and so this news was inconsequential to the market in the short term.

Second of all, this is meant to stimulate more lending by banks because they can get access more easily to short term money. In my estimation though, what this does is give banks a license to practice in the same risky behavior that got them here. By making it so easy to borrow short term, it gives banks far too much incentive to engage in exactly the sort of behavior that causes them to need funds overnight. When a bank needs to borrow using the Federal Funds, it's almost always to cover some risky behavior.

I believe in many ways that exactly what the Federal Reserve wants. Banks are afraid to lend and the Federal Reserve wants them to throw the proverbial caution to the wind and take a chance on giving credit again. What this will do is give them incentive to take far too much chance. It was the lessening of this very Federal Funds Rate in the early part of this decade, that I believe lead to this mess. Banks took far too much risk and now we are here. They took far too much risk because it was far too easy for them to cover short term liquidity problems. Now, the Fed is making it three quarters of a percent easier than even Alan Greenspan made it back seven years ago.

I believe this rate cut along with much of the government's action lately will create another speculative market somewhere soon enough. That's because in their desire to create stimulus to the economy they are creating far too much of it. All these bailouts, rate cuts, and government intervention isn't just stimulus but far too much stimulus. When the government stimulates too much, that extra stimulus eventually leads to speculation somewhere. That's what Ben Bernanke guaranteed today, and soon enough we will be dealing with the aftermath of the crisis he created today.

A Monetarist's View of Fiscal Policy

If you really want to impress your friends and colleagues with your knowledge and sophistication about politics and business, then attempt to engage them in a debate over which is the best economic policy, monetary policy or fiscal policy. Monetary policy manipulates the economy, for lack of a better word, by increasing and decreasing interest rates and thus borrowing. Fiscal policy manipulates the economy by lowering or raising both taxes and government spending. In high school, when I first learned the differences, I immediately became a monetarist, one that favors monetary over fiscal policy, because I viewed monetary policy as that which can be implemented immediately to deal with market forces. Monetary policy is exclusively applied by the Fed chairman and they determine this policy by fiat. Fiscal policy must be created through the legislative process and it can take much longer to create. While I continue to believe this to be true, the last eight years have also shown me the limitations of monetary policy.

Steve Chapman, on the other hand, is clearly a monetarist. I do, however, believe that his piece is more propaganda than reality. Let's examine.

There are only two drawbacks to the proposals offered by both the right and the left. First, they would cost a lot of money, either in lost revenue or additional federal expenditures, further bloating our gargantuan national debt. That cost would be worthwhile if it were essential to stave off a total economic collapse. But there is a second problem: These plans are not likely to work.

Shoveling cash into various public programs sounds like a surefire way to boost total demand and thus juice the economy. But the money doesn't sprout from trees in Tim Geithner's backyard. Any funds it wants to spend, the government will have to borrow. The people who lend the money will no longer have it to spend. So the total amount of spending may not change much, if at all.

Timing is another glitch. Putting crews to work on roads and bridges doesn't happen overnight -- plans have to be approved, bids have to be solicited and contracts have to be signed. The Department of Transportation says that even with projects that are primed and ready, only one-fourth of the money gets spent in the first year. By the time an infrastructure program gets rolling, the downturn will almost certainly be shrinking in the rearview mirror.

...

Tax cuts also promise disappointment. The Bush administration claimed its 2001 tax cut had a tonic effect on a weak economy, but it turns out that most of the money went to increase savings or reduce debt, not to unleash spending. Likewise with this year's tax rebates.

Even some experts who favor keeping tax rates low doubt that extending the Bush tax cuts beyond 2010 would do anything for the economy right now. "As a tool for dealing with this crisis, I don't know," Nobel Laureate economist Robert Lucas of the University of Chicago told me. "It's misleading to advertise them as an anti-recession device."

...

Everyone wants to do something. But holding off on a fiscal stimulus package wouldn't exactly mean doing nothing. Monetary policy has historically had a more potent and predictable effect on the economy than fiscal policy, and in recent months Ben Bernanke has been spraying money with a fire hose -- cutting interest rates, boosting bank reserves 15-fold since August and taking radical steps like buying up short-term commercial debt.

All those steps will pay off, but they take time. Adding fiscal measures would probably be superfluous. If you want to go to the 10th floor on an elevator, punching the button over and over won't get you there any faster. We can throw a lot of money at the recession, but in the end, what we'll get is no hastening of recovery and a big stack of bills.

Now, I am no proponent of increased government spending as the form of fiscal policy. I agree with Chapman that a lot of government spending can also take years to implement. Government spending is only one form of fiscal policy though. Tax cuts, in my opinion, is much more fruitful economic stimulus using fiscal policy.

Chapman dismisses tax cuts by saying that the Bush tax cuts of 2001-2003 went mostly to savings. I would take issue with this characterization. He offers no evidence or proof of this theory. Furthermore, there is a certain lack of logic to it. If the tax cuts went merely to pay down debts, why would he favor monetary policy? Monetary policy is supposed to stimulate borrowing. If Bush's tax cuts stimulate paying down debts, people weren't going to then turn around and borrow more were they?

Then, Chapman invokes the cryptic "some experts" to claim that extending the Bush tax cuts won't have stimulating effect. I don't who Robert Lucas is but I do know that he doesn't hold a monopoly on sound economic forecasting. Just because he thinks that extending the Bush tax cuts won't work, doesn't actually mean it won't work.

Chapman's biggest propaganda is in claiming that monetary policy has "historically had a more potent and predictable" outcome. Where is his evidence of this? The Fed has been furiously dropping rates since last September and in the meantime the economy has only gotten worse. Furthermore, Chapman's characterization of tax cuts as "throwing money at the problem" is a total distortion. By giving people and businesses a tax cut you aren't throwing any money anywhere. You are letting folks keep more of what they have earned. That's why I support tax cuts as the best sort of stimulus. The characterization that a tax cut is throwing money at something is totally without merit.

Chapman also says nothing about the relationship between Greenspan's furious drop of the Fed Funds Rate and the current crisis we are in. I have surmised that when Greenspan dropped the Fed Funds Rate below 1%, this started the ball rolling on the current mess, and I am not the only one. While I agree that my theory is only a theory, if you are going to hold up monetary policy as the beacon good economic stimulus, you need to address its role in the current crisis at least. For Chapman to not say anything at all is the sort of selective evidence that propagandists are known for.

Finally, Chapman says nothing about the stimulating effect of Reagan's tax cuts in the early 1980's. If fiscal policy is inherently counter productive, why was it so successful then? Again, Chapman fails to address something that is inconvenient to his argument.

The debate between monetary and fiscal policy is an excellent one to have, but it should be done honestly and Chapman's article is rank propaganda.

The Limits and Danger of Monetary Policy

When dealing with economic turmoil, the federal government has two options,Fiscal policy and Monetary policy.

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.[1] Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is essentially the manipulation of interest rates. The last two recessionary periods, 2001-2002 and this current period, have shown policy makers the limits of monetary policy.

In the last recessionary period, then Federal Reserve Chairman Alana Greenspan furiously dropped interest rates until the Federal Funds Rate was dropped below one percent to a low of .75%. The current Federal Reserve Chairman, Ben Bernanke, has dropped nearly as much so far to a current level of 1% with most expecting it to go even lower.

The purpose of monetary policy is to lower interest rates so much that it spawns borrowing from lenders like banks to small businesses to consumers. The limits of monetary policy is that if the economy is weak enough no entity, bank, businesses or consumers, want to take on any extra obligations in the form of debt. As such, the Central bank could drop rates all the way to zero (something currently being contemplated) and borrowers will still not bite because the act of borrowing is something that the current economic environment makes all entities averse to.

The recession at the beginning of the decade showed two limitations of monetary policy. Then, the recession began with the popping of the internet bubble which eventually caused three trillion Dollars in paper losses in the equity markets. This was followed by the events of 9/11 which caused one million job losses in the immediate aftermath. Finally, this was combined with the revelations of accounting malfeasance of Enron et al. The continued reduction of interest rates proved useless against this economic malaise until they were combined with tax cuts by the Bush administration. Then, when the tax cuts expanded the economy, the obscenely low interest rates wheels in motion for the current mortgage crisis.

The current crisis is also showing the limits the limits of monetary policy. Currently, there is far too much fear for lenders to borrow themselves and to lend. Furthermore, borrowers and other entities became so leveraged during the boom in between that they are fearful of taking on any new debt.

Fiscal policy is the process by which the government manipulates the economy through tax policy. Unlike monetary policy which attempts to manipulate by getting entities to use other people's money, fiscal policy attempts to manipulate the economy by allowing entities to keep more of their own money. It is one thing for an entity to spend more of their own money, and it is quite another for an entity to borrow more money from someone else to spend. The last two recessionary periods show the limitations of monetary policy.

Why Another Stimulus is Now a Bad and Dangerous Policy

Federal Reserve Chairman Ben Bernanke is calling for another economic stimulus package.

Federal Reserve Chairman Ben Bernanke told Congress Monday a fresh round of government stimulus is a good idea because there's a risk the country's economic weakness could last for some time. AP

Bernanke's remarks before the House Budget Committee marked his first endorsement of another round of energizing stimulus, something that Democrats on Capitol Hill have been pushing.

One of the many negatives of the Wall Street bailout was that it would make calls like this even more likely. It's times like this that I remind everyone what the definition of insanity is...doing the same thing over and over and expecting a different result. The last stimulus passed in the summer did absolutely nothing to jump start the economy. Now, the economy is in worse shape and the powers that be think this stimulus package would be any different. Frankly, if all it took to jump start an ailing economy was for the government to print and send out money, we would no longer have any debates about the proper role of government in economic stimulus. Everytime the economy weakened, the Federal Reserve would simply print money and send it out to the folks. Of course, it isn't that simple.

The main problem with an economic stimulus package is that it gives people extra money for one month. Give someone an extra $600 one month and they will spend it. So what? What will they do the next month? If our economy was so "strong" that all it took was one month of everyone spending an extra $600, then Barack Obama is significantly overstating the economic challenge we face.

The main problem with the stimulus check is that it doesn't come from out of the air. What is given to the public is spent by the government itself. That means that the government, now in deficit, gets even more in deficit. Governments going into deficit can be a small problem or it could be a large problem. If inflation and the deficit are under control, then it is a small problem. If, on the other hand, the government is already taking on a large deficit, then anymore only puts unnecessary inflationary pressure. That's what this stimulus is going to do. We are about to take on $750 billion in new debt from the Wall Street bailout. Now, we are going to take on more debt with this stimulus. All this will do is weaken the Dollar, increase interest rates, and make things more expensive.

Furthermore, the stimulus idea is made even more dangerous with this idea.

Now that the US consumer has finally hit the wall, there’s growing speculation the Federal Reserve will push its interest rate pedal to the floor.

September’s 1.2 percent decline in retail sales and downward revisions in the two previous months virtually assure the first quarterly decline in consumer spending in 17 years. That's something economists have been worrying about for some time, when it appeared the government’s fiscal stimulus package was having a limited effect.

“I've said since the summer that a ‘dark period’ of economic data lie ahead,” Miller & Tabak’s chief bond market analyst Tony Crescenzi told clients in a note.

Short term rates are already at dangerously low levels. Now, Bernanke is thinking about going even lower. At the same time, the Treasury will print new money. This is all terribly inflationary. The short term effect of such moves is to increase long term rates like the U.S. Treasury bonds and along with them mortgage bonds.

In other words, all of this stimulus will push mortgage rates higher. That will make it even more difficult to get an affordable mortgage. That will put even more pressure on the housing market. Ultimately, everyone in the government needs to realize one thing. There is no stimulus without a stable housing market. If a stimulus puts downward pressure on housing it is counter productive one. A stimulus package that prints money only pushes mortgage rates higher because the market views such action as inflationary. It's rather pointless to give people $600 if by giving it to them, you also raise mortgage rates by a quarter to a half a percent.

Had we not had the previous "stimulus" of the previous central bank rate cuts, mortgage rates would likely be below 5.5% right now. We would be going through a mini refinancing boom that might have on its own stimulated the market. Instead, the central bank cut its short term rate along with a coordinated effort by most central banks. This pushed mortgage rates higher. Now, not but three weeks later, the central bank sees its previous action as not enough and wants to cut it even further. The reality is that this is exactly how Alan Greenspan wound up cutting the central rate so much that the Fed Funds Rate fell below one percent, and in my opinion this lead directly to the mortgage crisis that is now gripping our nation. There is at some point a diminishing return on stimulus and we long ago reached it. Rather than piling up stimulus on top of stimulus maybe the government should analyze just how much previous stimulus has helped.

A Stunning Statement from the Federal Reserve

Today, I saw an interesting headline about Federal Reserve policy and was then stunned by the content of the article. The headline was "Fed Rethinks Stance on Popping Bubbles". Now, I expected to find that the Federal Reserve had seen the light and saw that its role in popping the internet bubble meant that such action was unwise by the central bank. Not so...

The Federal Reserve and academics who give it advice are rethinking the proposition that the Fed cannot and should not try to prick financial bubbles.

"[O]bviously, the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the economy, and there is no doubt that as we emerge from the financial crisis, we will all be looking at that issue and what can be done about it," Fed Chairman Ben Bernanke said this week.

The bursting of this decade's housing bubble, which was accompanied by a bubble of cheap credit, has wrought inestimable economic damage. The U.S. economy was faltering before the crisis in credit markets recently intensified, rattling financial markets and sending home prices down further. Even if the government's decision to take stakes in major banks works, it could take weeks for money to flow freely again.

In other words, not only does Fed Chairman, Ben Bernanke, think that the Federal Reserve should be given new powers to pop market bubbles, but furthermore, he won't even recognize that previous Fed action already did this and it had disastrous results.

First, let's review. Back at the end of 1999, then Federal Reserve Chairman Alan Greenspan began a series of Prime Rate increases. These increases lead directly to the bubble bursting on the internet boom. There is absolutely no doubt that one action lead to the second result. The only doubt is whether or not this was actually the intention of Alan Greenspan. Some, like me, argue that popping the bubble was his intention all along. Greenspan has always maintained that he was concerned about inflation. Regardless, there is no doubt that his interest rate increases lead directly to the bubble bursting.

As such, for the Federal Reserve Chairman, Ben Bernanke, to say that the Federal Reserve should look in the future to pop bubbles seems to dismiss what previous action has created. When Greenspan's rate increases popped the internet bubble, that lead directly to a recession. Furthermore, within a year of furiously raising rates, Greenspan was forced to drop them even more furiously to try and stimulate the economy from the recession his own rate increases lead directly to. That was the wreckage wraught the last time the Fed popped a bubble, intentionally or not, and yet, it appears that the same Federal Reserve is now considering making such action a matter of policy.

Let's look at this issue and see how frightened we should all be. First, the Federal Reserve Chairman is likely the most powerful person in the world already, and that's when their duties are "only" managing the money supply and regulating banks. Now, the same Fed wants to increase their power by adding the duty of popping market bubbles as well. Furthermore, they want to do all of this while simply ignoring that previous Fed action did exactly this and it caused a recession.

I am convinced that the all powerful Federal Reserve is also held in far too high esteem. What this causes is not only for the central bank to have far too much power, but it insulates the central bank from much needed criticism of its action. I doubt you will find one mainstream writer that points out what should be obvious to everyone. For the Fed to claim that popping bubbles would be a new policy would also be for the Fed to ignore recent Fed history. For the mainstream media not to point out how stunningly dishonest such a statement is would also insulated the Federal Reserve from criticism that it is vital the media must make in relation to much of its action.

For full analysis of the last ten years of disastrous fed policy take a look at this link.

Dow 5000?...Or What Happens When Government Action Fails

The early verdict from the markets on the bailout is a decided failure. Yet, the bailout is only one in a series of progressively more active steps by governments world wide that have proven completely ineffective in stemming this crisis. For months, I was critical of the Federal Reserve's drastic set of rate cuts. I was concerned when the Federal Reserve cut interest rates by a full .75% at one time. Then, I was very troubled when the Federal Reserve stepped in to take on the multi role of investment banker, rainmaker, and Federal Reserve in bailing out Bear Stearns. Then, the Federal Reserve picked and chose which companies to bail out. Then, the Treasury stepped in to buy up $750 billion worth of bad loans. When that also did nothing to calm the market, the Central Banks stepped in to produce massive rate cuts in unison. Now, the Treasury is planning on nationalizing banking. In Britain, the wheels have already been set in motion to nationalize their failing banks.

This is exactly what happens when progressively more extreme government actions continue to fail to do what they are intended to do. Governments rarely think that they are helpless to stop such things as market dynamics. For instance, in 2001-2002 Alan Greenspan continued to lower the Prime Rate lower and lower while the economy continued to sputter. He finally dropped the Prime Rate so much that the Fed Funds Rate (normally 3% lower than the Prime Rate) dropped to .75%. None of his rate cuts did anything. Once he couldn't drop rates anymore, he simply kept rates at this obscenely low level. (I believe this was the pre cursor to the mortgage crisis.) The same thing is happening now. When massive rate cuts were ineffective, the Fed made sure to save companies that would have failed without it. When that failed, the Treasury bailed out companies to the tune of $750 billion. Now that this hasn't been effective, the Treasury will simply nationalize them.

As such, when subsequent consolidations of power prove ineffective in stemming the tide of a weakening economy, what we get is the push toward socialism. The bailout was pseudo socialism, and when that failed, the government decided to remove the pseudo. We've seen this before. During the Great Depression, FDR thought that the usurption of power into the hands of the Federal Government was the way to get the country out of the depression. He nationalized banks, industry, and even parts of real estates. Our country still faces the wrath of policies started during FDR's administration. Programs like Social Security, the Federal Farm Bureau, and Fannie Mae were all created under FDR. Furthermore, the nation still faced 10% unemployment when we entered WWII. Our country only began to blossom economically when we went to war. FDR's efforts were ultimately unclear in combatting the depression, but the effects of his policies can still be felt today.

The same is true of today's action. Nationalization of industry is not something that you can easily undo. As the old saying goes "you can't get a little pregnant". As our government has been progressively more and more ineffective in stemming this financial crisis, they have also progressively usurped more and more power. As they have done that, our entire country is now one step closer to socialism. The nightmare scenario of failed government policy is here, and it happened because of a the progressively failed government policies.

The Fed's Disastrous Ten

Unfortunately, when pundits analyze economic policy, there is far too much partisanship for there to be any real analysis. As such culprits like "deregulation", or social engineering through the Community Reinvestment Act, or even the Bush tax cuts are blamed for the economic woes. I firmly believe that once economist have the benefit of time, the bulk of the blame not only for the current crisis but for the economic uncertainty that has infected the economy for most of the last decade will fall mostly on the shoulders of the Federal Reserve. In fact, while I haven't study the history of the Fed enough to make a fair judgment, I believe these past ten years have been the worst in its history.

Beginning in late 1999, the Federal Reserve has embarked on a series of actions, and non actions, that have devastated the economy, set in motion new crises, and failed to act to limit crises. At the end of 1999, Alan Greenspan decided on setting in motion a series of Prime Rate increases. Much has been made of his motivations, including by me (detractors like myself believe he was attempting to pop the internet bubble which would an enormous, unnecessary and dangerou usurption of power), however what this rate cut did do was set in motion an economic slow down that lead to a recession. Whatever his motivations were, one thing is clear. If he was attempting to limit inflation, which is what he said he was doing, and he wound up contributing to a recession, which is what he wound up doing, this Fed action backfired spectacularly.

By the end of 2001, after furiously raising rates to avoid inflation that never materialized, Alan Greenspan set off on nearly two years of furiously dropping rates.

Just look at the chart as it speaks for itself. The Fed Chair raised rates furiously for almost two years, then took about six months off, and spent the next nearly three years lowering rates even more furiously. This is an indefensible, uncontrolled, and reckless period of rate policy. He barely had enough time to see what his rate increases would do when he immediately had to reverse course and decrease rates. What's the point of increasing rates furiously if it only immediately causes you to decrease them even more furiously.

In my opinion, his furious decrease of rates set in motion what we now call the mortgage crisis. By the time he was done, the Prime Rate was at 3,75%. The Fed Funds Rate, usually and more importantly then, traded three points below the Prime Rate. That meant the Fed Funds Rate, the rate banks borrow from each other, was less than 1%. That allowed banks to borrow for literally next to nothing. Of course, banks borrowed furiously. What exactly did he expect them to do? What he did was cause what we call loose money. Banks had far too much money. This irresponsible action lead to irresponsible actions by the banks. Could he predict the course of the mortgage crisis? Of course not. Could he predict that one irresponsible action would lead to more. He had better or he isn't qualified to be Fed Chair.

Then, as the mortgage crisis materialized, Alan Greenspan stood by and did next to nothing. Sure starting in 2004 he began to raise rates again, but by then, it was the sub prime niche that was moving. That niche wasn't affect so much by his rate cuts. What did he do to affect irresponsible lending and borrowing in sub prime. He perpetuated it that's what. In February of 2004, Greenspan made this stunning pronouncement.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," Greenspan said.

By giving his blessing to Adjustable Rate Mortgages, he perpetuated a problem that was starting sub prime. Far too many people were using ARM's to buy properties the couldn't afford. Now, the king of economics was giving their irresponsible behavior his blessing. This statement was stunning on many levels. Most importantly, he was not qualified to give such a statement. The choice of a consumer of an ARM or a fixed rate is entirely due to personal factors. It depends on someone's risk tolerance, how long they plan on living in the property, and what sorts of job prospects they have. Making a blanket statement on the viability of ARM's was reckless and irresponsible, and his greenlight gave millions of novice borrowers all the greenlight they needed to proceed in exactly the sort of risky behavior that has jeopardized the economy. Meanwhile, the irresponsible bubble that was forming housing was never addressed or dealt with by Greenspan.

By the February of 2006, Greenspan was out and in stepped Ben Bernanke. Bernanke finished off a furious rate increase. The furious rate increase was of course necessary because Greenspan's equally furious rate decrease blew up the housing market so that the economy began heating far too fast. Once again, and for the third time in a row, Fed action caused an equal and greater reaction. The Fed, again, was forced to counter act its own behavior in order to avoid the reverberations of previous rate cuts.

Of course, by the end of 2006, the sub prime market was beginning to tank. Within months, the entire niche had nearly disappeared. Yet, the Fed did nothing. The seeds of this downturn were laid in early 2007 and yet the Fed didn't take any action until the end of the year.

Of course, the action the Fed took was inconsequential at best and counterproductive at worst. The Fed's furious rate cuts at the end of 2007 did nothing to halt the slowing economy. The only thing the rate cuts did was continue a pattern of fixing a problem that previous rate policy created. Once again, the Fed was furiously reversing course on rate policy. It did, however, weaken an already weak Dollar. As a result, food and gas, both priced in Dollars, both exploded in price. As such, right as the economy was weakening the middle class was faced with exploding gas and food bills.

When their rate cuts proved ineffective, the Fed had to take even more aggressive action. At the end of March of 2008, the Fed stepped in to save Bear Stearns from failing. In one weekend, the Fed brought Bear Stearns together with JP Morgan Chase, brokered a deal, and even backed the deal up with their own capital. Such a deal would take months to consummate on its own, and yet the Fed forced both parties to agree over one weekend. The Fed justified this enormous usurption of power (the Fed took on the role of investment banker, rainmaker, and creditor all at once) because it was an extraordinary circumstance and this one time action would calm the market.

Of course, no such thing happened. Over the next several months, the Fed began to pick and choose which companies to help and which companies to let die. AIG got an $85 billion credit line, while both Merrill Lynch and Lehman Brothers were left to their own devices. Suddenly, as the Fed began to realize that no matter what they did, their actions were ineffective, the finally threw their hands up. As we all know, in the last three weeks, Fed Chairman Ben Bernanke has backed a plan to allow the Treasury to buy about $750 billion worth of bad mortgage bonds. In other words, the Fed Chairman is saying that each and every enormous move by the Fed were ultimately for nothing. What if Bernanke had realized in September of last year just how dire the circumstances were? What if this action was proposed then? The country could have debated it properly. Instead, after furiously dropping rates, taking on multiple roles to consummate a merger, and then picking and choosing which companies died and/or got bailed out, Bernanke suddenly realizes that none of it is enough. Now, Bernanke, pointing a financial pistol at the nation, says that we need a $750 billion bailout or else.

The stunning incompetence isn't merely troubling but disastrous. In the last nine months Ben Bernanke has shown the incompetence of a middle manager not the head financier. Track things back for ten years and all you see is a series of missteps and oversight. The Fed, over the last ten years, has been in the middle of causing a recession, a bubble, and finally helplessly usurping enormous new power only to find that no matter what they did they were now suddenly powerless to stop the very problem they were instrumental in creating. I, for one, hope both sides of the aisle stop their partisan thought and examine the situation more closely. For the single biggest culprit in creating economic chaos over the last ten years has been the Federal Reserve.