The Irony Bubble Bursts

Alan Greenspan says there are “Bubbles in Stocks and Bonds”.

“There are two bubbles: We have a stock market bubble, and we have a bond market bubble,” the former Federal Reserve chairman told Bloomberg TV on Wednesday.

The trouble in the bond market “will eventually be the critical issue,” Greenspan said, adding that “for the short term it’s not too bad.”

How Would He Know?

The above is a book image clip that came up when I did a search for “greenspan you can only detect bubbles after they burst”.

In August 2002 Greenspan gave a speech at the Fed’s conference in Jackson Hole. In this speech, which Jim Grant called “self-exculpating revisionism,” Greenspan offered this rationale for the Fed’s actions during the late 1990s:

The struggle to understand developments in the economy and financial markets since the mid-1990s has been particularly challenging for monetary policymakers. … We at the Federal Reserve considered a number of issues related to asset bubbles — that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact — that is, when it’s bursting confirmed its existence.

Less than two years later, in January 2004, Greenspan would congratulate himself on the apparent success of the Fed’s strategy. In doing so he would expose the Fed’s role in creating the far more ruinous housing bubble.

There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful. … As I discuss later, much of the ability of the U.S. economy to absorb these sequences of shocks resulted from notably improved structural flexibility. But highly aggressive monetary ease was doubtless also a significant contributor to stability.

In July 2005 and in his capacity as head of the president’s council of economic advisors, Ben Bernanke was asked on CNBC if there was a housing bubble. He does not answer by saying bubbles can’t be seen until after they burst. Instead, he says the following:

*Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in housing prices on a nationwide basis, so what I think is more likely is house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it will drive the economy from its full employment path.

Amazingly, Alan Greenspan would eventually completely contradict Greenspan! Here is “Mr. Chairman,” as CNBC lovingly refers to him, discussing the Lehman Brothers failure in October 2013, “We missed the timing badly on September 15th, 2008 [the day Lehman Brothers went bankrupt]. All of us knew there was a bubble.” So which is it Mr. Chairman? Can bubbles be “obvious” or something “everyone knew” to exist before they pop — as you indicate here — or do you have to wait until after they pop to confirm their existence as you said in Jackson Hole?

Here is a link to the Greenspan Video on CNBC in which Greenspan massively contradicted himself.

Vision Improved

Despite those thick, heavy glass, Greenspan’s vision seems to have improved a bit.

Fed Chairs can never see straight. Their job is not to see, but to blow bubbles for the benefit of the banks when the banks get in trouble. That’s something they will never admit.

Bernanke said letting Lehman collapse was his biggest mistake. Ironically, it was the only thing during the crisis he did right.

All Bernanke did was reinforce “too big to fail”.

And here we are again, in an obvious stock market bubble that the Fed cannot see.

The article was republished with permission from Mish Talk.