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Is Alan Talking Ben's Book?



February 26, 2007 – Comments (4)

In a speech via satellite today Alan Greenspan held-out the possibility of the US economy moving towards the possibility of "...recession in the later months of 2007."

Sure, he apparently couched it in vintage Green-speak so just about anyone with any agenda could make ANY argument using his words and maybe some will accuse me of doing just that here. However, what I find interesting is just that he SAID it. It seems unlikely to me that the Former Fed Chair whose almost every word much of the market seemingly hung-upon for going-on two decades would have uttered the "R word" without just a little prior consult with the current Fed Chair. And when I pair this statement with recent public words from Mr. Greenspan seeming to call for a 'bottom' in the US housing market decline, I find the two statements thematically consistent and therefore I'm only led to further speculation about Alan and Ben having friendly little late-night telephone conversations. The reality is that there is little, very little, history in the US to indicate precedent for such a short-lived and shallow housing "slowdown".

There is, of course, speculation aplenty amongst market participants that Mr. Bernanke might have a penchant for fast-'n-loose monetary habits [a current google search on "helicopter ben" returns 27,000+ hits]. Many of the events of Bernanke's first 4 to 5 months at the helm can be better illuminated in the context of the markets not having faith in him as an "inflation fighter". Ultimately the new Bernanke-led-Fed chose to raise rates once or twice more last year than many in the market expected at the time. The broad commodities markets and precious metals markets in particular were 'calling his bluff' Q1 and Q2 2006. Many had gone parabolic. A perfect time for a new Fed Chair to drop the hammer and bring those unsustainable curves down with nothing more than 'an extra 25 basis points' [when the realities of bell-shaped curves would do the job anyways].

I speculate that Mr. Bernanke's true leanings in his first months at the Fed were to hold-fast on rates and not risk any "financial accidents" in a highly over-leveraged economy. Market psychology ultimately forced his hand and he had to "show them who's boss" and we got a little more than expected at the time. But the worries of unexpected financial dislocations...interlinked credit defaults...the opaqueness of massive derivatives markets...are still in-mind. Many in the market found Mr. Bernanke to sound particularly 'dovish' in his most recent House and Senate testimony just a couple of weeks ago. While the occasional FOMC member is allowed to trot-around and sound continually 'hawkish' and the FOMC meeting minutes released also maintain the appearance of the 'good fight', I think I hear Mr. Greenspan saying a few of the things that Ben simply can't this early in his tenure...yet.

4 Comments – Post Your Own

#1) On February 27, 2007 at 7:35 PM, HistoricalPEGuy (65.46) wrote:

Very interesting to see the market's reaction to Alan's statements. What a sell off! Let's see if Ben decides to play the hero role and lower interest rates. Doubtful.

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#2) On February 27, 2007 at 9:15 PM, Greshm (85.42) wrote:

Well, this break raises the odds they'll lower rates...that's for sure. Until about two weeks ago, if anything, I thought they might be inclined to raise them again once more this year just to *show 'em who's boss* but--with Ben's testimony on The Hill and then what Alan said yesterday--add to that a whole bunch of paper wealth that just went *poof*--the odds they'll lower rates this year just went WAY up. If the market *correction* [isn't that such a NICE antiseptic name for something so painful?] accelerates or becomes *disorderly* [to use another of their euphemisms], they'll lower the rate between FOMC meetings...we're ALL *playing the market* now!

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#3) On March 06, 2007 at 3:27 PM, ThatGuy73 (83.70) wrote:

The "correction" isn't going to drive the rate cut, it'll be housing and the subprime blowup. Whatever causes it, I think you're right that it'll be coming in 2Q. The only thing stopping them from doing it now is the weak dollar, which appears to continue getting weaker. The unwinding of the yen carry trade is only going to make it worse. The stronger the yen gets the more of the carry trade unwinds creating more demand for yen (and a glut of dollars) to pay off those ZIRP loans. It's a vicious circle. Ben has nowhere to go, he either sacrifices the economy or the dollar. My bet is on the dollar.

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#4) On March 07, 2007 at 11:50 AM, Greshm (85.42) wrote:

Yep, at some point something gives. Pick your poison. I'm operating forward under the assumption that they showed their hand in 2000, ' 01, '02...They saw reason (legit or not) to fear a *deflationary accident* and dropped rates down to almost BOJ rates. Selling dollars for 97, 98 cents. That tsunami of dollars fed the housing spike and now is the asset bubbles before it.

So, one has to assume they'll continue the same bias for fear of facing the other crisis: deflation and cascading credit defaults. But, at some point, they are pushing on a string...

Is the last asset bubble for these serial bubble blowers the precious metals? The asset class that creates the least incremental economic growth?

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