Asia Times Online
Greenspan's formula of reducing market regulation by substituting it with post-crisis intervention is merely buying borrowed extensions of the boom with amplified severity of the inevitable bust down the road. The Fed is increasingly reduced by this formula to an irrelevant role of explaining an anarchic economy rather than directing it towards a rational paradigm. It has adopted the role of a cleanup crew of otherwise avoidable financial debris rather than that of a preventive guardian of public financial health. Greenspan's monetary approach has been "when in doubt, ease". This means injecting more money into the banking system whenever the US economy shows signs of faltering, even if caused by structural imbalances rather than monetary tightness. For almost two decades, Greenspan has justifiably been in near-constant doubt about structural balances in the economy, yet his response to mounting imbalances has invariably been the administration of off-the-shelf monetary laxative, leading to a serious case of lingering monetary diarrhea that manifests itself in runaway asset price inflation mistaken for growth.
Paul Volcker, as chairman of the Fed before Greenspan, [...] adopted a "new operating method" for the Fed in 1980 as a therapeutic shock treatment for Wall Street, which had been spoiled fearless by the brazen political opportunism of Arthur Burns, Volcker's predecessor during the Nixon-Ford era. Wall Street had lost faith in the Fed's political will to control inflation.
Volcker's new operating method reversed the traditional mandate of the Fed, which, as a central bank, was supposed to be responsible for maintaining orderly markets, meaning smooth, gradual changes in interest rates. The new operating method was an attempt to induce the threat of short-term pain to stabilize long-term inflation expectations. The reversal was necessary because the market had come to expect the Fed only gradually to raise interest rates to keep even an unbalanced economy from collapsing.
Targeting the money supply generates large sudden swings in short-term interest rates that produce unintended shifts in the real economy that then feed back into demand for money. The process has been described as the Fed acting as a monetarist dog chasing its own tail. Unlike the Keynesian formula of deficit financing to reduce unemployment in a down cycle, the Fed's easy-money approach since the administration of president Richard Nixon had been to channel the funny money to the rich who needed it least, rather than to the poor who would immediately spend it to sustain aggregate demand to moderate the business cycle. This supply-side easy-money approach led to an economy of overcapacity, with idle plants unable to produce goods profitably for lack of consumer demand. Say's law, that supply creates its own demand, is inoperative unless there is full employment, which sound money deems undesirable.
Greenspan's measured-paced interest-rate policy is a reversal back to the Fed's tradition of gradualism. The trouble with a measured-paced interest-rate policy in a debt-driven economy of overcapacity is that the debt cancer is spreading faster than the gradual doses of medical radiation can handle. Yet fatality is a poor tradeoff for the avoidance of hair loss from radiation. Greenspan's measured pace represents a lack of political courage to acknowledge that it is preferable by far for the finance sector to take a huge haircut preemptively than for the whole economy to collapse later. Moral hazard is increased unless risk takers in the finance sector are made to bear the consequences of their actions, and not be allowed to pass the pain from risk on to the economy at large.
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What Greenspan did was to punish the general public by devaluing their future pension and cash flow, to pay for the sins of the aggressively investing rich who continued to add to their wealth with Greenspan's blessing as long as the ill-gained riches from speculation were reinvested for more speculation for more ill gains.
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When a homeowner loses his or her home through default of its mortgage, the homeowner will also lose his or her retirement nest egg invested in the securitized mortgage pool, while the banks stay technically solvent. That is the hidden network of linked financial landmines in a housing bubble financed by mortgage-backed securitization to which no one is paying attention. The bursting of the housing bubble will act as a detonator for a massive pension crisis.
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