Greenspan makes his case...again

I'm not even going to try to make a claim I have the slightest lick of economic expertise in comparison with former Federal Reserve Chairman Alan Greenspan, but I disagree with his latest defense that the persistently low federal funds rate - the Fed's short-term, benchmark interest rate - had nothing to do with the historically low, long-term mortgage interest rates that are blamed for contributing to a massive, unsustainable and unchecked expansion of housing credit.

Over-saving in growing Asian countries led to an excess of capital, which, after being reinvested in the United States and other economies to finance our deficits, pushed downward on long-term interest rates, he writes.

Greenspan does not mention that when interest rates are low, and banks can borrow from the Fed at dirt cheap prices, the ability to capture even higher profit margins sends banks looking for the high-priced goods, sub-prime mortgages and the like - at the very least, to beat inflation. The ability to get easy money in the short-term has spillover effects for the short and long term.

Mortgage rates may have been decoupled from short-term interest rate fluctuations as Greenspan contends, but don't low short-term rates spur inflationary growth and perhaps make people more confident about the economy and more willing to shell out cash for a long-term, debt-financed investment such as a home? The short-term and long-term may not be directly correlated, but doesn't the former impact a consumer's willingness to take risks in the latter?

He also neglects to mention the impact of short-term interest rates on the ability for banks to multiply money supply and expand other shorter-term vehicles of credit, from car loans to credit cards. This expansion drove up consumption to levels that, as we now see, were highly overblown (just look at how much the economy has receded without such free availability of cheap credit).

Finally, he barely mentions the Fed's utter inability to regulate banks' mortgage-lending practices. The crisis was as much a regulatory policy failure as much as it was a market failure.

Nevertheless, it may be difficult to pin the crisis on any one person or institution. The moral of the story probably is that the crisis is not Greenspan's or the Fed's fault, but that persistently low interest rates helped create a credit bubble - and the housing market was the first bubble to go bust.

The Most Trusted Name in Pseudo-News

It made for good comedy on "The Daily Show," but Jon Stewart's awe-inspiring, go-get-'em tirade against CNBC points to a larger, serious issue of integrity in the most important vein of the news media at the moment: the financial press.

Information is the lifeblood of efficient financial markets, and as a primary relayer of market-sensitive information, networks like CNBC have, above all, a journalistic responsibility to provide no-spin, accurate information on the daily intricacies of the world of finance, a world constantly in flux. CNBC's constant forward-looking, speculative, CEO-cheerleading, Wall Street-friendly analyses of economic policies before and since the outset of the crisis send a flagrantly incorrect impression to the American public that government policy can and will be effective only if it passes a Dow Jones Industrials Average litmus test - the up or down movement of the DJIA - and that government policy can only be effective if Wall Street thinks so. In any case, the current financial crisis and resulting government bailouts should be enough evidence that Wall Street does not always have the public's interest at heart).

Because CNBC, The Wall Street Journal, and other specialist business news outlets are now watched and read by more members of the average American public than ever before, the corporations that own these outlets are under pressure to "dumb down" business news. The result has been networks like CNBC moving toward the mainstream cable news model of opinionated talking heads running "news" shows at the expense of the boring, mundane, intricate, black-white-AND-gray, dynamic thing people used to call, "journalism."

This is unethical and too dangerous a risk when the investments of pensioners, workers, parents and others are on the line.

Transatlantic handshake, Day 2

UK Prime Minister Gordon Brown topped off his visit to the U.S. with a speech to a full Congress Wednesday to promote his "Partnership of Purpose" with the United States. In a gracious, laudatory and often deferential-to-the-U.S. speech, the PM was forthcoming and direct in his support of the American hegemony and its new chief, President Barack Obama.

In his speech, Mr. Brown also issued a sharp rebuke to the George W. Bush Administration, saying "this is the most pro-American Europe in living memory," suggesting that the U.S.' obvious inability to cooperate with European allies in recent years was not because of ideological differences but because of how the pre-Obama occupant of the Oval Office managed relations with Europe.

For one, Brown looked re-energized, despite the stagnation of his political agenda at home. He appears to be truly renewed by having a trans-Atlantic partner in President Obama with whom there can finally be a dialogue between the UK and US based on respect, debate and exchange of information. He was clearly basking in the limelight.

Mr. Brown's stated objectives on issues such as "expanding scientific research" and eliminating abject poverty around the world are admirable, but there is, with good reason, some skepticism about Mr. Brown's commitment to such policies -- for example, how can a government that wants to help lead the fight against climate change also build a third runway at Europe's busiest hub airport instead of upgrading London's 19th-century public transportation system or investing in newer, more efficient modes of inter-city mass transit?

Some other highlights:
-- Sen. Edward M. Kennedy, the "lion of the Senate," is now SIR Edward Kennedy, thanks to Queen Elizabeth II.
--"A worldwide reduction in interests rates" is needed because the UK and US can't do it alone. This is a sign that the economy's real bad and is going to get much worse. The Bank of England's benchmark rate is already down to a meager 0.5% ("who wants money for free?") and the Fed's federal funds rate is less than that.
-- The Republican side of the house was often slow to applaud to Mr. Brown's proposals. Mr. Brown's stated agenda mirrors that of his American counterpart, and the fissure in Congress is obvious. At one point, when the prime minister attacked offshore tax havens, it took the Republican side of the aisle a good 5 seconds to start applauding (simply out of respect to the Right Honourable guest and not out of agreement).

Transatlantic handshake, Day 1

UK Prime Minister Gordon Brown began his highly symbolic visit with President Obama Tuesday. The unelected Mr. Brown became the first European leader to meet with the new president, beating out formidable opponents in Angela Merkel of Germany and Nicolas Sarkozy of France. Here are some thoughts:

1. We didn't get much of a chance to hear from the prime minister - his formal news conference with President Obama was canceled because of snow in the White House garden (isn't there an indoor spot for news conferences??) - but he and Obama struck all the right notes of cooperation between the traditional Allied powers in a toned-down "pool spray" news conference, pledging to coordinate fiscal stimuli and financial sector re-regulation.

I can't help but think PM Brown, who as Tony Blair's chancellor presided over the UK's financial sector deregulation and expansion of financial services as a hub industry, is in a sticky spot partnering with a president who is farther to the left on the political spectrum and whose criticisms of financial sector regulation could easily apply to Mr. Brown himself.

And for once, a U.S. president dismissed the whims of the stock market. Obama said:

"What I'm looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing. And, you know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong."

I for one am tired of seeing day-to-day stock market fluctuations covered as "economic" news. The stock market is obviously a good indicator of long-term growth. But markets respond to information and the perceived implications of that information - so when the markets fall, it is due to more than one factor than merely the state of the economy at any one given moment.

2. The electoral effect - How will Brown's new relationship with Obama improve the Labour party's electoral prospects? Certainly Britons may want a leader who can mesh well with the new president, and we already know Obama isn't too impressed with the prime minister-in-waiting, David Cameron.

3. Brown challenged Obama to a tennis match while conceding he'd probably lose to Obama in basketball. The duo will meet again in less than a month at the G/20 summit in London - Obama should pack his racket.

Brown will address Congress Wednesday night - tune in here for a recap of Day Two.

A view from Mexico...

Yesterday I attended one of the more interesting lectures I've encountered here in London, a frank discussion with Jesús Silva Herzog, the former finance minister of Mexico (during the 1982 debt crisis, no less), among other things. Here are some highlights from his talk Monday evening:

(1) Mr. Silva Herzog sharply criticized neo-liberal orthodoxy, saying it has prevented Mexico's government from promoting full employment and economic development. He pointed to the escalating debt-to-GDP ratios of many industrialized countries (think U.S. and U.K.) as reason for why Mexico should allow its debt ceiling to increase slightly if it means preventing a total economic collapse.

(2) On the financial crisis - "We've been through it before, so a 2 percent drop in GDP [which has been projected] is not that bad." He expected Mexico, 80% of whose exports go the contracting United States economy, to suffer in 2010 as well. "This crisis is not a liquidity problem, it is about solvency."

(3) The banking sector - One of the main areas of vulnerability that Mexico has during the financial crisis is the opening of its well-capitalized, healthy banking sector to foreign ownership. For example, Banamex is owned by the ailing Citigroup. Further complicating this is that if the U.S. government takes a 30-40% stake in Citigroup as planned, that would break Mexican law, which bars any foreign government for owning a stake in domestic banks.

Liberalization of the Mexican banking sector (which was a bone of contention during NAFTA negotiations in 1993), was one of the greatest mistakes Mexico has made, he said. Mexico is the only G/20 country that has allowed such deep, widespread ownership of domestic commercial banks. The threat of foreign banks repatriating capital for their own survival in their home countries is an omnipresent threat Mexican officials must consider.

(4) On aid from the United States to fight crime related to the drug trade - "it's nothing. It's more of a symbolic thing, that the U.S. is helping us fight the drug cartels." He used this point to stress that unemployment, particularly in the maquiladores in the northern cities near the U.S. border, could help fan the flames of the drug trade.

(5) On Latin American unity - Mr. Silva Herzog said Latin American unity has been difficult to find during the financial crisis because of the lack of synchronicity. Unlike the Euro zone countries, which more or less share the same business cycle (a big reason why the Eurozone has been a strong monetary union), Latin American countries experience differing business cycles.

He was also a little bit of a comedian, at times cutting through serious topics with a little bit of humor. Like when he said Mexico needs to once again take the lead among Latin American countries (a role Brazil has now assumed), especially at the G/20 summit in London next month. He suggested the three Latin American representatives in the G/20 meet somewhere in South America or in Madrid, across the Atlantic, "and I don't mean in the middle of the Atlantic."