Greenspan: US 'Way Underestimating' the National Debt

Sunday, 07 Jun 2015

Allan Greenspan, former chairman of the Federal Reserve, said a Social Security Trust Fund does not exist and that the U.S. is “way underestimating” the size of its national debt.

“The notion that we have a trust fund is nonsense – that trust fund has no meaning whatsoever except for the fact as an all private fund to benefit programs, if it runs out of money, you can only pay out in cash flows that come in but the probability that will happen is not particularly high,” Greenspan recently told the Fiscal Summit held by the Peter G. Peterson Foundation, PJ Media reported.

“That means the trust fund is a meaningless instrument that has no function … it’s exactly the same thing as current expenses,” he said.

The United States Social Security Administration collects payroll taxes and uses the money collected to pay Old-Age, Survivors, and Disability Insurance benefits via trust funds.

When the program runs a surplus, there will be excess funding available for the Social Security Administration that year. The excess funds are diverted to one of the trust funds.

The money in the trust fund is used by the treasury in the form of treasury bonds. The treasury bonds provide interest on the money in the trust funds, and if the program sees a deficit, the excess funds from previous years plus any interest earned is used to pay beneficiaries. The trust funds do not represent a legal obligation to Social Security program recipients, and Congress could cut or raise taxes on such benefits if it chooses.

The trust fund that supports Social Security's disability program is projected to run out of money late next year, triggering automatic benefit cuts, unless Congress acts.

And a government watchdog claims Social Security overpaid nearly half the people receiving disability benefits over the past decade, raising questions about the management of the cash-strapped program, the Associated Press reported.

Meanwhile, Greenspan also said the U.S. is “way underestimating” the national debt, which is currently more than $18 trillion.

“Largely because we are not including what I would call contingent liabilities, that is the issue of, which is answered by a question: what is the probability that in today’s environment JP Morgan would be allowed to default? The answer is zero or less,” he said.

“Now, that means that whole balance sheet is a contingent liability. Now to be sure, while it’s contingent, there’s no interest payments but ultimately that overhangs the structure because we have committed in so many different ways to guarantee this, that and the other thing. It’s not only Fannie and Freddie but it’s a whole series of financial institutions and, regrettably, it is also non-financial institutions.” Source

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Humans Can Be Irrational, and Other Economic Insights

Books of The Times

‘The Map and the Territory’ by Alan Greenspan
By BINYAMIN APPELBAUM
Published: October 20, 2013


Alan Greenspan, the former Federal Reserve chairman, writes in his new book, “The Map and the Territory,” that he has been thinking about bubbles since the financial crisis of 2008. Specifically, he has been trying to understand why he and so many other economic forecasters failed to see the housing bubble that caused the crisis.

 

Alan Greenspan





THE MAP AND THE TERRITORY


Risk, Human Nature, and the Future of Forecasting

By Alan Greenspan

Illustrated. 388 pages. The Penguin Press. $36.


The mistake, he writes, is that forecasters treated humans as rational decision makers — a functional fiction that no longer seems functional. But Mr. Greenspan sees a way forward: Humans, he writes, are irrational in predictable ways. What economists like to call “the animal spirits” can be incorporated into economic models.

“I have recently come to appreciate that ‘spirits’ do in fact display ‘consistencies’ that can importantly enhance our ability to identify emerging asset price bubbles in equities, commodities and exchange rates — and even to anticipate the economic consequences of their ultimate collapse and recovery.”

This is promising stuff. It might even make an interesting book. But the subject barely holds Mr. Greenspan’s attention for a single chapter.

The rest of this book is instead devoted to a discursive tour of recent economic history, punctuated by conservative policy prescriptions. He declares that he no longer finds it possible to make economic forecasts because of “governmental restrictions against competition in domestic markets.”

This tour has its attractions. Mr. Greenspan, one of the nation’s most astute economic observers, has a rare talent for framing economic trends. He writes, for example, that as the value of the nation’s economic output has increased since the 1970s, the weight has not. He means this literally: If everything “Made in the U.S.A.” in 2013 was placed on a giant scale, it would weigh about as much as everything “Made in the U.S.A.” in 1977. It’s hard to imagine a more vivid illustration of what it means to say that the United States has shifted toward a “knowledge economy.”

Still, Mr. Greenspan has been talking about the weight of the economy for a few decades now, and much of this book feels similarly familiar.

Accounts of the financial crisis, in particular, have assumed the character of Mr. Potato Head kits. There is a box of standard explanations, and each writer picks the ones he finds most appealing. Mr. Greenspan’s Potato Head is made up of predictable parts: He blames the government for encouraging subprime lending but absolves the Federal Reserve’s policy of low interest rates.

He has not tried to enliven this account with any history of his involvement as Fed chairman from 1987 until 2006. He covered some of that ground in his 2007 memoir, “The Age of Turbulence,” but that book, written before the financial crisis, already seems dated.

In this new book, Mr. Greenspan writes that the crisis could have been entirely prevented by stricter capital standards, which would have limited the unstable reliance of financial institutions on borrowed money. But he does not explain that under his leadership, the Fed played the lead role in creating rules that let banks set their own capital levels, with predictable results.

“The marked increase in risk taking of a decade ago could have been guarded against wholly by increased capital,” he writes. “Regrettably, that did not occur, and the accompanying dangers were not fully appreciated, even in the commercial banking sector.”

The most provocative part of the book is Mr. Greenspan’s assertion that government spending on Social Security, Medicare and other entitlement programs is the reason that the American economy has grown more slowly in recent decades. He writes that taxation of upper-income households is reducing their ability to invest in new ideas and new machines and new buildings. Less investment yields less innovation, slower growth in productivity and less economic growth.

With an economist’s precision, he calculates that this decline in investment has reduced growth since 1965 by 0.21 percentage points a year — “a consequential difference,” he writes, of about $1.1 trillion in lost output.

Americans must choose, he writes: “Do we wish a society of dependence on government or a society based on the self-reliance of individual citizens?”

This is actually an optimistic view about the stagnation of innovation and growth. Robert Gordon, an economist at Northwestern University, has won a wide audience for his view that we’ve simply run out of transformative ideas. Mr. Gordon and other economists also see a wide range of other problems, including an aging population, declining educational achievement and rising income inequality.

Mr. Greenspan is suggesting that the problem can be fixed by throwing money at it.

Yet it is not obvious that the American economy has been suffering from a lack of financing. While Americans saved less, the rest of the world was only too happy to shovel money into the United States. Mr. Greenspan in this same book subscribes to the view that the housing crash was caused in part by an overabundance of foreign investment in the American economy.

Furthermore, taxation cannot be the reason Americans are saving less. The New York Times reported last year that most Americans in 2010 paid a smaller share of income in taxes than households with the same inflation-adjusted incomes paid in 1980. Mr. Greenspan notes that the wealthy are paying more in taxes — but that is only true because they are making more money. Households earning more than $200,000 saw the largest decline in taxation as a share of income.

It’s also worth noting that productivity and growth have sagged most dramatically since President George W. Bush cut taxes in 2001.

Maybe another round of tax cuts would turn things around.

Or maybe we really are just running out of new ideas.



A version of this review appears in print on October 21, 2013, on page C4 of the New York edition with the headline: Humans Can Be Irrational, and Other Economic Insights.

Source

Follow The Economic Failures To Fix The Mess

Follow The Economic Failures To Fix The Mess
Posted: August 1 2009


More pressure on the dollar, weaker and weaker treasury auctions, large majority in favor of auditing the Fed, electric car from China to hit US next year, Wall Street resists increased transparency even now, Higher prices for oil eventually
On Wednesday the Treasury’s five-year auction yield was 2.69% with 21.15% allotted at the high and bid to cover was 1.92 to 1. The average of the past ten auctions has been 2.20%. Indirect, central bank participation was 35.7% versus an average of 36.8%. Overall that was weak demand. Do not forget the Treasury has to raise $2 trillion by 9/30/09.

The result of these mediocre to poor auctions has to be more pressure on the dollar, as budget deficits continue to widen.

Mortgage applications fell for the first time in four weeks, driven by a drop in demand for refinancing loans. Both purchase and refi loans fell 6.3%.

This is an early appraisal of the Chinese visit to Washington. There is no question the Chinese have the Illuminists stymied. The big question is has China demanded the rest of our high technology expertise that Bill Clinton was unable to deliver to them? Or have they pledged government properties to the Chinese?

Unadjusted yoy labor Department jobless claims are up 35%.

Commercial paper outstanding fell by $27.6 billion to $1.066 trillion outstanding from $1.093 trillion the prior week. In August it was $2.2 trillion. Asset backed CP outstanding rose $900 million to $437.8 billion, after falling $4.6 billion the prior week.

The Treasury’s borrowing needs have been exploding and the auctions are getting progressively weaker. This presents a serious problem for the dollar. Once 78 on the USDX is broken the index should freefall. We expect the government will staunchly defend 78, but will lose the battle probably in October or at least by the end of the year. As a result you will see more bonds being issued in foreign currencies such as the yen, yuan and euro bonds. Wal-Mart just issued $1 billion in Samarai bonds in yen. Issuance of foreign currency denominated bonds by corporations and eventually by the US Treasury will signal that the day of the dollar as the world’s reserve currency will be coming to an end. Lenders will want to get repaid in a currency they know will have future value. This kind of issuance puts more and more pressure on the dollar. Issuance of bonds in a foreign currency will be a clarion call that dollar hegemony is ending. The result will be other currencies will gain in strength versus the dollar, but the flip side is that they are all fiat currencies and all will fall versus gold.

As we view the sham hearings of the CFTC and position limits on oil in particular, we are reminded that the hearings are a political cover for higher prices. Constituents are complaining of higher gasoline prices and government is more than willing to respond. What the insiders behind the scenes want to do is suppress oil prices not only to assuage the citizens, but also to keep gold from rising as oil rises. Today suppressing oil prices is truly an awesome task given the composition of sources of supply and demand. Exploration is at a low and that can only eventually bring higher prices.

The unemployment rate climbed in all of the U.S.'s biggest urban areas during June, and 18 places had joblessness of at least 15%.

"For the sixth consecutive month, all 372 metropolitan areas had over-the-year unemployment rate increases," the Labor Department said in its report Wednesday.

The numbers in the department's Metropolitan Area Employment and Unemployment report are not seasonally adjusted.

The report said 144 metro areas reported jobless rates of at least 10%, up from six areas a year prior.

El Centro, Calif., had the largest jobless rate from June 2008, at 27.5%. Yuma, Ariz., was second with 23.1%. The lowest rate was in Bismarck, N.D., at 3.8%.

So much for the ongoing secrecy of the nation’s independent central banking system. A new Rasmussen Reports national telephone survey finds that 75% of Americans favor auditing the Federal Reserve and making the results available to the public.

Just nine percent (9%) of adults think that’s a bad idea and oppose it. Fifteen percent (15%) aren’t sure. Over half the members of the House now support a bill giving the Government Accounting Office, Congress’ investigative agency, the authorization to audit the books of the Federal Reserve Board.

Support for the bill has grown now that the Obama administration is proposing to give the Fed greater economic regulatory powers. The Fed, which sets U.S. monetary policy, was created as an independent agency to keep it free of politically-motivated interference.

The United States has signed an agreement to forgive nearly $30 million in Indonesian debt in return for the large Southeast Asian country agreeing to protect forests on Sumatra Island. The deal is the largest debt-for-nature swap the U.S. government has organized so far under the U.S. Tropical Forest Conservation Act and its first such deal with Indonesia - one of the fastest deforestation rates in the world. VOA reports:


A tree is felled in the forests of Indonesia. A country which loses an area the size of Switzerland each year to logging. Indonesia's massive deforestation rate makes it the world's third-largest emitter of carbon dioxide behind the United States and China. Deforestation also affects the country's wildlife. These forests are home to some of the world's most endangered species including endangered tigers, elephants, rhinos and orangutan. In a new deal, the U.S. has agreed to trade $30 million in debt repayments for increased conservation of their habitat.

Coda Automotive said former US Treasury Secretary Henry Paulson will serve as an adviser to the start-up electric-car maker on partnerships in China.

Paulson has "deep, personal relationships in China and unique insights into the country and its people," the Santa Monica, Calif.-based company said in a statement.

Coda also said Paulson invested in the company earlier this year, without giving details.

Coda plans to deliver its first model, a sedan, next year. The company, which began operating in June, intends to make and distribute electric vehicles and battery systems for transportation use.

Paulson, 63, was Treasury secretary under President George W. Bush, and his department in December allowed GM Corp. and Chrysler LLC to receive an initial $13.4 billion in funding from the Troubled Asset Relief Program.

General Electric Co., Harley-Davidson Inc. and manufacturers with finance businesses should be allowed to keep them under a revision of rules to govern banking, US Rep. Barney Frank (D-Mass.) said in an interview.

Companies that already have finance arms or industrial loan businesses known as ILCs can keep them without having to be subject to Federal Reserve oversight of their manufacturing operations, Frank said.

GE said it has been "very active" in opposing any rules that might force it to split off its GE Capital finance unit, which has $557 billion in assets.

Economic crisis, and a crisis for economics - Following its failure to fix the current mess, economics has tumbled into a full-blown existential crisis. The fall has been something to behold. Not so long ago, the discipline seemed omnipotent: if you wanted to fix anything from environmental ruin to welfare policy, there was only one solution: call in an economist.

But late last year, Alan Greenspan, the former Federal Reserve chief and high priest of capitalism, was forced to admit in a Congressional hearing that he had "found a flaw" in the foundations of his economic understanding. Nice euphemism. And at the weekend, a panel of leading economists wrote to the Queen trying to explain why they got it wrong. If there were such a thing as a car-crash letter, this was surely it.

The world's financial system lies in ruins, as do the fiscal balances of almost every major Western nation, after having to bail out their banks and splash billions of dollars of rescue money into the broader economy. Everyone is suffering, as unemployment climbs, house prices fall, and companies rack up losses or even face collapse. Yet the economists have still failed to find their form again.

At a time when the financial industry’s credibility is at an all-time low, you would think Wall Street’s finest would break their necks providing transparency.

Not so. Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know.

Instead, their earnings estimates ignore often huge expenditures that can’t help but affect a company’s health.

In mid-June, respondents were evenly divided when asked whether they thought Mr. Obama's health plan was a good or bad idea. In the new poll, conducted July 24-27, 42% called it a bad idea while 36% said it was a good idea. Among those with private insurance, the proportion calling the plan a bad idea rose to 47% from 37%.

Thomas V. Cash, a well-known fraud expert based in Miami, has stepped down from his job with consulting company Kroll Inc. amid the hubbub over his connection to accused Ponzi schemer R. Allen Stanford, sources told The Post.

A company spokesman confirmed that Cash left the company late last week, but declined to elaborate. Messages left at Cash's Fort Lauderdale, Fla., home weren't immediately returned.

A former high-ranking official with the Drug Enforcement Agency, Cash has been at the center of allegations that Kroll lost investors millions of dollars by serving conflicting masters.

Cash, based in Miami, gave investor clients the green light to invest with Stanford. However, he failed to disclose that the company, through Cash, had once been "hired and paid" to consult for Stanford, according to a lawsuit filed by Electri International, a foundation for electrical workers that lost $6.3 million with Stanford.

"Defendant Kroll never disclosed Mr. Cash's connection with Mr. Stanford and the obvious conflict that his relationship presented," according to the suit, which was filed in Florida state court.

Electri said it paid $15,000 to Kroll, which prides itself on being a private eye for businesses and investors, to conduct due diligence on Stanford and issue a report.

But among the red flags that Electri claims Kroll failed to mention was a $20,000 penalty levied against Stanford by the Financial Industry Regulatory Authority, the brokerage industry's self-policing group.

Electri also claims that Kroll's report also failed to mention a 2006 lawsuit filed by a former Stanford employee "alleging that Stanford ran a Ponzi scheme." Several arbitration claims against Stanford and one of his companies were also missing from the report, according to the complaint.

A recent profile of Cash on Kroll's Web site, which has since been removed, refers to the 68-year-old as "an expert in a variety of investigative and intelligence services." It also lists among his credentials that he's chairman of the Fraud Prevention Committee for the Florida International Bankers Association.

Indeed, Cash is so well connected in Florida crime-fighting circles that a judge assigned to the Electri case had to recuse himself because he "has been a personal friend" of Cash's "for many years."

Stanford, who was knighted in Antigua and is referred to as Sir Allen, is awaiting trial behind bars in Texas.

Manufacturing activity in the Federal Reserve Bank of Kansas City's district was largely flat in July, according to data released by the bank on Thursday.

The bank's production index moved to 2 in July from 9 in June and from -3 in May, in a month-over-month comparison. From a year ago, the July production index deteriorated to -50 from -44 in June.

The index covering production expectations six months from now fell to 10 in July after jumping to 13 in June from 1 in May.

Index readings below zero denote contraction and describe the breadth of the retreat.

The July employment index dropped, to -13 from -10 in June. In March, the employment index hit a historic low of -41. From a year ago, the index dropped to -57 from -54.

The prices paid index ticked up to -6 from -8, while the prices received index decreased to -17 in July from -14 in June. On a year-ago comparison, the prices paid index fell to -27 in July from -20 in June, and the prices received index worsened to -24 from -11.

The number of U.S. workers filing new claims for state jobless benefits rose last week, but they remain below peak levels reached in the spring.

Initial claims for jobless benefits rose by 25,000 to 584,000 on a seasonally adjusted basis in the week ended July 25, the Labor Department said in its weekly report Thursday. The four-week average of new claims, which aims to smooth volatility in the data, fell by 8,250 to 559,000, the lowest level since January 24.

The tally of continuing claims -- those drawn by workers for more than one week -- fell by 54,000 during the week ended July 18 to 6,197,000 the lowest level since April 11.



Source: http://www.theinternationalforecaster.com/International_Forecaster_Weekly/Follow_The_Economic_Failures_To_Fix_The_Mess

Irrational Exuberance

Definition of Irrational Exuberance

Origin of the Term

The term "irrational exuberance" derives from some words that Alan Greenspan, chairman of the Federal Reserve Board in Washington, used in a black-tie dinner speech entitled " The Challenge of Central Banking in a Democratic Society" before the American Enterprise Institute at the Washington Hilton Hotel December 5, 1996. Fourteen pages into this long speech, which was televised live on C-SPAN, he posed a rhetorical question: "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?" He added that "We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability."

Immediately after he said this, the stock market in Tokyo, which was open as he gave this speech, fell sharply, and closed down 3%. Hong Kong fell 3%. Then markets in Frankfurt and London fell 4%. The stock market in the US fell 2% at the open of trade. The strong reaction of the markets to Greenspan's seemingly harmless question was widely noted, and made the term irrational exuberance famous. It would seem to make no sense for markets to react all over the world to a question casually thrown out in the middle of a dinner speech. Greenspan probably learned once more from this experience how carefully someone in his position has to choose words. As far as I can determine, Greenspan apparently never actively used the words "irrational exuberance" again in any public venue. The stock market drops around the world that occurred after his speech on December 6, 1996 have all been forgotten, eclipsed by bigger subsequent events, but it was those stock market drops that focused public attention on the phrase irrational exuberance and which caused it to enter our language.

The term irrational exuberance became Greenspan's most famous quote, out of all the millions of words he has uttered publicly. The term "irrational exuberance" is now often used to describe a heightened state of speculative fervor. It is less strong than other colorful terms such as "speculative mania" or "speculative orgy" which discredit themselves as overstating the case. I chose this phrase as the title for my book because many people know instantly from this title what this book is about.

Often people ask me whether I coined the term irrational exuberance, since I (along with my colleague John Campbell and a number of others) testified before Greenspan and the Federal Reserve Board only two days earlier, on December 3, 1996, and I had lunch with Greenspan on that day. I did testify that markets were irrational. But, I feel sure that I am not the origin of the words irrational exuberance. Actually, Greenspan is quoted in a Fortune Magazine article in March 1959, long before he became Federal Reserve chairman, about "over-exuberance" of the financial community. These are similar words. It appears that "irrational exuberance" are Greenspan's own words, and not a speech writer's. In his 2007 autobiography, The Age of Turbulence: Adventures in a New World Greenspan said "The concept of irrational exuberance came to me in the bathtub one morning as I was writing a speech." (p. 176.)

A computer search finds that the phrase "irrational exuberance" had virtually never been used before Alan Greenspan. It has been pointed out to me that the words "irrational exuberance" were used in a 1989 novel A Trap for Fools by Amanda Cross, E. P. Dutton, NY, Chapter 8, p. 99, ". . . she didn't just tumble out of that window in a moment of irrational exuberance," but this was a very rare exception.

But, the term did not spring full-born from the soul of Alan Greenspan either, for there were already common uses of the words individually to refer to speculative market excess. As early as 1931, Frederick Louis Allen, in his best seller Only Yesterday: An Informal History of the 1920s described "the profound psychological reaction from the exuberance of 1929." (p. 285). Two years before Greenspan's speech, an editorial in Business Marketing by Rance Craine contained the paragraph "The stock market has been behaving in a seemingly irrational way most of the year. Every time the Commerce Department puts out fresh data showing that the economy continues to strengthen, the stock market goes down in a dramatic fashion. And when retail or car sales go down, or factory orders slow from the previous month, the stock market can hardly contain its exuberance."

I believe that there is nothing essentially catchy about the phrase "Irrational Exuberance," but it lives on because the initial 1996 story of a stock market crash by nothing more than the utterance of those words led to a general interest in the phrase. The phrase survives in our language as more than a relic of one minor stock market episode because it has acquired a meaning that refers to the mindset that occurs during speculative bubbles like that of the 1990s.

Robert J. Shiller

Source: http://www.irrationalexuberance.com/definition.htm

AMERICA'S RISK MOTHER OF ALL MELTDOWNS

America's economy risks the mother of all meltdowns

By Martin Wolf

Tue Feb 19, 1:25 PM ET

"I would tell audiences that we were facing not a bubble but a froth - lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy." Alan Greenspan, The Age of Turbulence.

That used to be Mr Greenspan's view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University's Stern School of Business, founder of RGE monitor.

Recently, Professor Roubini's scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is "a rising probability of a 'catastrophic' financial and economic outcome"**. The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."

Prof Roubini is even fonder of lists than I am. Here are his 12 - yes, 12 - steps to financial disaster.

Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had "reckless or toxic features", argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks' ability to offer credit.

Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The "credit crunch" would then spread from mortgages to a wide range of consumer credit.

Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a "fat tail" of companies has low profitability and heavy debt. Such defaults would spread losses in "credit default swaps", which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.

Step nine would be a meltdown in the "shadow financial system". Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.

Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices".

These, then, are 12 steps to meltdown. In all, argues Prof Roubini: "Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe." This, he suggests, is the "nightmare scenario" keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.

Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about "decoupling". If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.

Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot***. (He really loves lists!) These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.

The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce.

The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

*A Coming Recession in the US Economy? July 17 2006, www.rgemonitor.com; **The Rising Risk of a Systemic Financial Meltdown, February 5 2008; ***Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not, February 8 2008

martin.wolf@ft.com

Source: http://news.yahoo.com/s/ft/20080219/bs_ft/fto021920081334359078;_ylt=AozoX8V3CwKFRV6c_RfR1f0E1vAI

ATLAS SHRUGGED BY AYN RAND

Ayn Rand’s Literature of Capitalism

By HARRIET RUBIN

Published: September 15, 2007

One of the most influential business books ever written is a 1,200-page novel published 50 years ago, on Oct. 12, 1957. It is still drawing readers; it ranks 388th on Amazon.com’s best-seller list. (“Winning,” by John F. Welch Jr., at a breezy 384 pages, is No. 1,431.)

Skip to next paragraph

Lester Kraus

Related

Atlas Shrugged Book Review: "A Parable of Buried Talents" By Granville Hicks (Oct. 13, 1957) (pdf)

Letters to the Editor: 'Atlas Shrugged,' By Alan Greenspan (Nov. 3, 1957) (pdf)

Times Topics:

Ayn Rand

Alan Greenspan

The 1957 novel was harshly reviewed and widely read.

The book is “Atlas Shrugged,” Ayn Rand’s glorification of the right of individuals to live entirely for their own interest.

For years, Rand’s message was attacked by intellectuals whom her circle labeled “do-gooders,” who argued that individuals should also work in the service of others. Her book was dismissed as an homage to greed. Gore Vidal described its philosophy as “nearly perfect in its immorality.”

But the book attracted a coterie of fans, some of them top corporate executives, who dared not speak of its impact except in private. When they read the book, often as college students, they now say, it gave form and substance to their inchoate thoughts, showing there is no conflict between private ambition and public benefit.

“I know from talking to a lot of Fortune 500 C.E.O.’s that ‘Atlas Shrugged’ has had a significant effect on their business decisions, even if they don’t agree with all of Ayn Rand’s ideas,” said John A. Allison, the chief executive of BB&T, one of the largest banks in the United States.

“It offers something other books don’t: the principles that apply to business and to life in general. I would call it complete,” he said.

One of Rand’s most famous devotees is Alan Greenspan, the former chairman of the Federal Reserve, whose memoir, “The Age of Turbulence,” will be officially released Monday.

Mr. Greenspan met Rand when he was 25 and working as an economic forecaster. She was already renowned as the author of “The Fountainhead,” a novel about an architect true to his principles. Mr. Greenspan had married a member of Rand’s inner circle, known as the Collective, that met every Saturday night in her New York apartment. Rand did not pay much attention to Mr. Greenspan until he began praising drafts of “Atlas,” which she read aloud to her disciples, according to Jeff Britting, the archivist of Ayn Rand’s papers. He was attracted, Mr. Britting said, to “her moral defense of capitalism.”

Rand’s free-market philosophy was hard won. She was born in 1905 in Russia. Her life changed overnight when the Bolsheviks broke into her father’s pharmacy and declared his livelihood the property of the state. She fled the Soviet Union in 1926 and arrived later that year in Hollywood, where she peered through a gate at the set where the director Cecil B. DeMille was filming a silent movie, “King of Kings.”

He offered her a ride to the set, then a job as an extra on the film and later a position as a junior screenwriter. She sold several screenplays and intermittently wrote novels that were commercial failures, until 1943, when fans of “The Fountainhead” began a word-of-mouth campaign that helped sales immensely.

Shortly after “Atlas Shrugged” was published in 1957, Mr. Greenspan wrote a letter to The New York Times to counter a critic’s comment that “the book was written out of hate.” Mr. Greenspan wrote: “ ‘Atlas Shrugged’ is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”

Rand’s magazine, The Objectivist, later published several essays by Mr. Greenspan, including one on the gold standard in 1966.

Rand called “Atlas” a mystery, “not about the murder of man’s body, but about the murder — and rebirth — of man’s spirit.” It begins in a time of recession. To save the economy, the hero, John Galt, calls for a strike against government interference. Factories, farms and shops shut down. Riots break out as food becomes scarce.

Rand said she “set out to show how desperately the world needs prime movers and how viciously it treats them” and to portray “what happens to a world without them.”

The book was released to terrible reviews. Critics faulted its length, its philosophy and its literary ambitions. Both conservatives and liberals were unstinting in disparaging the book; the right saw promotion of godlessness, and the left saw a message of “greed is good.” Rand is said to have cried every day as the reviews came out.

Rand had a reputation for living for her own interest. She is said to have seduced her most serious reader, Nathaniel Branden, when he was 24 or 25 and she was at least 50. Each was married to someone else. In fact, Mr. Britting confirmed, they called their spouses to a meeting at which the pair announced their intention to make the mentor-protégé relationship a sexual one.

“She wasn’t a nice person, ” said Darla Moore, vice president of the private investment firm Rainwater Inc. “But what a gift she’s given us.”

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Source: http://www.nytimes.com/2007/09/15/business/15atlas.html?em&ex=1190520000&en=d9d55a947a11e072&ei=5087%0A

GREENSPAN: MARKET MAESTRO

Friday, 27 September, 2002, 15:38 GMT 16:38 UK

Alan Greenspan: Market maestro

By Caroline Frost BBC News Profiles Unit

The chairman of the US Federal Reserve, Alan Greenspan, has been awarded an honorary knighthood. But, in his own country, he's finding his reputation a little tarnished.

At 5.30 every morning a lugubrious, 76-year-old American sits in the bath for an hour and a half, reading, thinking, and writing, while the hot water flows. His tub-time toilings send ripples around the globe.

Americans are in awe of the man described by columnist Christopher Hitchens as a "mousy, bespectacled accountant". After all, it's Alan Greenspan's task to set the interest rates for the country, and thus affect every penny spent or saved in the western world.

Nixon and Kissinger were both contemporaries

Greenspan has wielded his financial influence from Wall Street to Washington since 1968, when he worked on Richard Nixon's presidential campaign.

Since then, he has served, in some capacity, every president except Jimmy Carter, and his long tenure at "the bankers' bank" has seen him become one of the world's most powerful men.

His job requires him to go before Congress twice a year to give an economic assessment. Greenspan represents the public face of American capitalism; he carries totemic status when things are going well.

At the last session, he told the Senate not to worry about stock market volatility. Now, as US bankers watch their balance sheets suffer, so their almost superstitious belief in him is being tested accordingly.

The Queen has made Alan Greenspan an honorary knight

Greenspan's federal duties follow a lucrative business career as an economic consultant, dating from 1953.

Providing advice for such impressive clients as US Steel and JP Morgan, the young financier became an expert across the fields of industry, with an intimate understanding of the national balance sheet.

Half a century later, his job hasn't really changed, except now his role is the balancing of the books.

His knowledge of the economy is staggering, but he rationalises that, "after a lifetime of study, you should know how the system works".

Counting the bars

If all this number-crunching seems a little dry, away from the abacus, Greenspan cuts a more unconventional figure.

Financial markets hang on Greenspan's every word

As a Jewish teenager from New York with a passion for music, he initially dropped out of college to play clarinet and saxophone.

Greenspan only became interested in book keeping as a way of filling time between sessions with his swing combo, Henry Jerome and his Orchestra.

One of the group later remarked that he always knew Greenspan would leave them, as "he was just too good at doing their taxes".

Biographer Bob Woodward calls Greenspan "Maestro", both for his musicianship, and his method of financial guidance, his "awareness of every instrument in the political and economic orchestra".

Ayn's apostle

Although an alumnus of Columbia University, Greenspan's intellectual ideas were honed in the salon of Russian novelist, libertarian and right-wing ideologue Ayn Rand.

If I seem clear to you, you must have misunderstood

The ever discreet Alan Greenspan

Her novel, Atlas Shrugged, is currently impressing members of the UK's Conservative Party. Of his time in her ironically-titled Collective, Greenspan recalled: "She made me think why capitalism is not only efficient and practical, but also moral."

A lifelong Republican who went to the same school as Henry Kissinger, Greenspan has nevertheless proved deft at crossing party divides, and spreading his influence much further than the GOP.

Working in harmony with Bill Clinton throughout the former president's two terms ensured a period of prosperity and economic expansion for their nation. But it is this halcyon era that has now come back to haunt the financial guru.

Stock market stoic

The BBC's economics editor, Evan Davies, says Greenspan's double-edged achievement has been to "preside over a boom and bust".

"Although he has been accused of prolonging America's period of growth and therefore causing their current national low, Greenspan remains optimistic about the country's long term prosperity," says Davies.

"He doesn't give in to short-term fears, and he doesn't let stock market gloom get him down."

A regular on the Washington party circuit, Greenspan is an introvert who goes out to gather intelligence. As a man whose every utterance and smile can change spreadsheets across the world, he is inevitably careful with his words.

Revered in high places

His reticence is justified. In 1996, he delivered a speech, questioning the effect of "irrational exuberance on asset values". The Dow Jones index fell 145 points the next day.

Greenspan muses that he worries he "might end up being too clear". In fact, his speaking style has become so guarded and ambiguous that he reportedly had to propose twice before his wife understood the question.

Greenspan's reputation is going downhill

Nevertheless, Congress at home and financial markets everywhere continue to hang on his every word. During the televised debates of the 2000 presidential election, candidates Bush and Gore were asked what they would do first in an economic emergency.

The winning man, George W, replied without hesitation, "Get in touch with Alan Greenspan."

Whether the bespectacled accountant with the hang-dog expression will enjoy the same status of market master by the time of the next race for the White House in 2004, will remain to be seen.

Source: http://news.bbc.co.uk/1/hi/in_depth/uk/2000/newsmakers/2285287.stm

SIR ALAN, UK ECONOMIC ADVISER

Sir Alan, Britain's Newest Economic Adviser

By Nell Henderson

Washington Post Staff Writer
Thursday, February 2, 2006; Page D06

Not bad for the first day on the job.

As Alan Greenspan opened his new consulting firm yesterday, the British government's top economic official announced that he had retained the former U.S. Federal Reserve chairman as an unpaid adviser on economic issues.

Alan Greenspan, who left the Fed on Tuesday, will be an economic adviser to Britain's chancellor of the exchequer. (By Toby Melville -- Reuters) Alan Greenspan's Tenure In 1987, Alan Greenspan was sworn in as Chairman of the Federal Reserve. Look back at his more than 18-year career through four presidencies with analysis of his legacy, a compilation of stories about his tenure and archived photographs.

"I am delighted that Dr. Greenspan has agreed to be Honorary Adviser," Chancellor of the Exchequer Gordon Brown said in a written statement. "His advice on issues relating to global economic change will be much appreciated."

Greenspan, who left the Fed on Tuesday after more than 18 years running the world's most influential central bank, declined to comment. His spokeswoman, Michelle Smith, confirmed the arrangement with Brown.

The two men will confer "as issues of importance come up" said Charlotte Farrar, spokeswoman for the British treasury.

The two have worked closely together and spoken warmly of each other for years. Last month, Greenspan described Brown as his "good friend" when the two received honorary degrees from New York University. According to a text of his remarks at the ceremony, Greenspan said Brown "is without peer among the world's economic policymakers."

Greenspan is so well regarded in Britain that Queen Elizabeth II awarded him an honorary knighthood in 2002 in recognition of "his outstanding contribution to global economic stability."

Brown's announcement may be an effort to appropriate some of Greenspan's luster at a time when the British economy is slowing before a likely transition in political leadership, said James Forsyth, an assistant editor at Foreign Policy magazine who closely follows British politics. Brown is the likely successor to Prime Minister Tony Blair, who is widely expected to step down before the next general election, which has not been scheduled, Forsyth said.

Greenspan's cachet "enables Brown to argue that whatever problems the British economy is having are related to the broader problems of the global economy and that the world's greatest central banker says Brown's is the best hand to have on the tiller," Forsyth said.

That may benefit Brown -- if voters can understand what Greenspan is saying.

Last year, Greenspan praised Brown while delivering a speech in Kirkcaldy, Scotland, where Brown was educated and economist Adam Smith was born. "I am led to ponder to what extent the chancellor's renowned economic and financial skills are the result of exposure to the subliminal intellect-enhancing emanations of this area," he said.

Source: http://www.washingtonpost.com/wp-dyn/content/article/2006/02/01/AR2006020102142.html