Maximus Greenspan

"We can't ensure success, but we can deserve it"

George Washington

George Washington's remark comes to us from a curious provenance. Valery Giscard d'Estaing has been trying to figure out how to organize the European Union. Currently, the union is held together by a series of treaties. When it suits them, member states simply ignore the treaties or find reasons to explain why they do not apply.

The situation is similar to the original days of the American republic, when Virginia or Pennsylvania still had the gumption to conduct themselves like the sovereign states they were supposed to be. Giscard spent his summer reading about Adams, Washington, and Madison and the gang that created the strong, central American government. There, he discovered Washington's remark.

Today's letter, you will be relieved to hear, has nothing to do with the European Union. Money is our beat, not politics. But we can't help but notice the similarities. Both involve mob sentiments and events that are unpredictable...and very hard to understand, even after they've happened.

"What was that all about?" we ask ourselves, and then spend hundreds of years wondering.

When Henry Kissinger famously asked Deng Xiao-Ping how he thought the Napoleonic Era had affected Europe, the Chinaman replied: "It's too soon to tell."

It will always be too soon to tell, for all of history is conjecture mixed with lies.

Still, things happen and people try to make sense of them. They try to learn from the mistakes, or like Giscard, from the successes, of others. And so they spin their lies, embellish their myths, and conjecture late into the night...until they run out of cigarettes and alcohol and there is no where else to go but to bed. And even there, in their sleep, they dream of glory and defeat...of sturm and drang...of greed and fear. Of the monuments...or follies...they have built, or should have built.

What must Alan Greenspan, alone in his bath, think of himself, we wonder? What will be history's judgment of the man? What is his own verdict?

In the late '90s, you will recall, he was one of three members of the "Committee to Save the World." Then, Larry Summers left for Harvard. And Rubin disappeared when administrations changed. But Greenspan was still there...the last man standing of the triumvirate...the Caesar of the world's financial system.

Greenspan, it was thought, wouldn't allow a serious recession. Nor would he let the stock market collapse. And even after stocks did collapse, he was still there...and still credited with having saved the world. But for his prompt action in cutting interest rates - and thus encouraging consumers to go even further into debt - the mini-recession of 2001 might have been much worse...and who knows what might have happened to stocks.

And was it only a few weeks ago that we learned that he was to be knighted by the Queen?

The Queen's honor's committee may be a very lagging indicator. Or perhaps the news has not yet reached them... that Greenspan's bubble may not have been such a good idea after all.

"If the central bankers, government officials and economists who gathered here last weekend for the Federal Reserve Board's annual retreat agreed on anything," reports the International Herald Tribune, "it was that economic policy has little success when used to fine-tune the economy."

But the nation's top central banker, Alan Greenspan, went further. The only member of the 'Committee to Save the World' still at his post claimed, according to the IHT, "that there was nothing the central bank could reasonably do to avert or deflate a stock-market bubble."

We have begun today's letter, as we did our last one, with a quote from George Washington. His remark fills a big hole in our philosophy of essentialism...and our approach to investing.

We have observed that people rarely get what they expect from life or from the investment markets; instead, they get what they deserve.

But in the second part of that sentence we take a guess, and make a wish...for we know too many people with far more money than they seem to merit. We do not doubt the wisdom of the old adage, "a fool and his money are soon parted." What we can't explain is how they ever got together in the first place. And, too often, the assassin goes to his grave fat and happy, leaving us with only a prayer: that all the torments of hell will singe his corrupt, larded soul.

And so we turn to Alan Greenspan. What does the Fed chairman deserve, we wonder? Greenspan, we have been told, spends an hour a day in his bath. Perhaps it was there that he realized he bore no responsibility for the biggest credit bubble the planet has ever seen. Perhaps a central bank cannot be expected to fine tune an economy. But it must do something. What it is supposed to do is play nanny to the nation's money.

As pointed out in this space many times, the Fed has taken up this responsibility as a nasty little boy takes up the task of getting rid of a spider - killing it little by little. In the century preceding the Fed's creation in 1913, not a penny was worn away from the value of a dollar. In the 89 years since, fully 95 cents have disappeared.

Other Fed chairmen have stood watch as the dollar lost more value than it has during Chairman Greenspan's tenure, but none has ever made such a vigorous effort to destroy it. According to Jonathan Van Eck, since Greenspan has been the Fed's top banana, more new money has been created than under all the other Fed chiefs combined. Not only that, in Greenspan's reign more new money has been created than under all the Treasury secretaries in America's history.

Could there be a link, we ask, between all this new money and the biggest asset bubble in world history - for which Mr. Greenspan claims neither credit nor responsibility?

Mr. Greenspan, we have been told, spends at least an hour each day in his bath. Maybe it was among the fluffy suds that he came to believe that the nation's capital markets had been transformed by a 'productivity miracle.'

And maybe, while searching for the soap in the warm, slippery embrace of his own tub, he allowed himself to believe that there was no need to raise margin requirements, or to warn investors about the dangers of a bubble market, or to try to prick it himself.

And perhaps there too - among his bubbles - did the chairman come to think that the solution to a bear market and recession, though caused by too much credit, was to provide even more credit!

He must have hardly waited to dry himself off that day in January 2001 when the Fed began cutting rates like a lumberjack at a chainsaw contest. Down they came - faster than ever in history...a full 475 basis points over the next 12 months.

The poor mom and pop patsies, reaching for the new credit like a subway bum for a free drink, went further into debt with bigger cars and bigger mortgages. And thus was the bubble sustained...and Mr. Greenspan's day of judgment deferred. But for how long?

We do not know what accolade history will accord Mr. Greenspan. But we think we know what the chairman deserves. Recently, Queen Elizabeth announced that she would grant him a knighthood. But as an economic indicator, the Queen's Honors Committee must be among the most laggard of all. As the bubble deflates, criticism of the Fed and its chairman mounts. Mr. Greenspan would do well to leave the stage now, in our opinion. In fact, there are few men for whom cardiac arrest would be a good career move; the Fed chairman may be one of them.