Monday, January 30, 2006

Denouement For The Maestro

Regular readers know my take on Alan Greenspan. With the Fed chief's retirement upon us, Barry Ritholtz weighs in with a few observations here. And it's appropriate that we got this news today, as reported by the AP:
Americans are spending everything they're making and more, pushing the national savings rate to the lowest point since the Great Depression.

Soaring home prices apparently have convinced people they don't have to worry about saving, a belief that could be seriously tested as 78 million baby boomers begin to retire.

The Commerce Department reported Monday that Americans' personal savings fell into negative territory at minus 0.5 percent last year. That means that people not only spent all of their after-tax income last year but had to dip into previous savings or increase their borrowing.

The savings rate has been negative for an entire year only twice before - in 1932 and 1933 - two years when Americans were having to deplete savings to cope with the massive job layoffs and business failures caused by the Great Depression.
Americans are saving less for many reasons. I believe the most important one is that Alan Greenspan's monetary policy has destroyed the incentive to save, and with it an important part of our national identity.

But perhaps the most pithy summary of Greenspan's tenure is this story, which alternatively I might have posted under the heading "For The Time Capsule." Reading it reminded me that in the early 1700's during the Mississippi Scheme, there was no higher honor for an artist in France than to paint John Law's portrait.

Plus ca change....

49 Comments:

Blogger wendyo said...

I'm curious, what are your thoughts about China having an impact on the economy?

1/31/2006 12:03 AM  
Anonymous Anonymous said...

Is there more information about the nature of the negative savings rate? For example is it negative because people are being spendthrifts, or because so many people have lost their jobs or homes that they were forced to go into their savings? Also are last year's natural disasters skewing the results? That is, is it possible that in many parts of the country the savings rate is positive but in other parts like New Orleans it's highly negative?

1/31/2006 10:23 AM  
Anonymous Anonymous said...

Her timing is great and certainly taking advantage of the rare opportunity. It does feel weird that people would idolize him. The piousness feels false, pushed.

Side note on art: Remember the Ohio Republican Congressman, James Traficant. He's in federal prison now. Well it seems he has become an artist. He was selling art work on the web, from prison for something like $50. When he started to get press, his works started to collect thousands. Art and Federal Chairman's, I guess, are in the eye of the beholder ;-)

NPR's OnPoint on Tuesday is having a show regarding the exiting of Greenspan. One of the guests is James Grant. I'm sure it'll be archived. Jeremy Siegel is also on the program so you get two views. I'm not a fan of Siegel's, but these were two good choices for guests.

Some interesting points:
o Why did Greenspan suggest people buy adjustable-rate mortgages just before raising rates? Why in the Spring of 2003 did Greenspan threaten to nationalize long-term bond? (How about what Greenspan did in the early 80's regarding Soc Sec. and what he says now.)

o Does the short-term rate manipulation smooth out business cycles? Should the fed be in the "price-fixing" business?

o Jeremy Siegel likes fiat money, gold too restrictive; but said it can be abused and it is imperative the fed stays independent.

o Bernanke has the nickname "Helicopter Ben"! - as in dropping money from a helicopter if they wanted.

o Does fiat money, money without collateral, always go to zero

o It will be interesting, since the late 80's we have been a net debtor (thanks Reagan), how will this play out in a Globalized economy and the 6.5 billion+ people competing for resources.

I don't think Greenspan is the only contributor to our problems; it is just our current culture and I hate to say it, Globalization (this word is becoming the "excuse" to all our problems - it's a scapegoat without understanding the real problem and more importantly providing solutions). The James Frey actions permeates our entire society, more so than not. Realtors lie to sell houses. A number of mortgage lenders have been caught cheating customers, Enron-ism, Halliburton-ism, you can't believe Wall Street (sorry) so people with real needs, short and long-term, are not being addressed properly, hedgefunds pretending risk doesn't matter; it sort of feels like the mania never left.

I was watching an Infomerical on Options (stocks are so yesterday, now its options ;-)); everyone is happy, making loads of money. They describe how much you can make with leverage. The wonderful powerful effects of leverage. Yeh, they never ever mention the opposite side of leverage. But are these guys any worse than the pharmaceuticals pushing drugs. We are bombarded constantly by false, exaggerated, manipulated (in the sense that are emotions are manipulated), and now politicized, claims in order to sell. Businesses were providing valuable services and goods to meet the needs of customers, and in return received a fair price. But more today markets are created by mostly imaginary claims and they are looking for customers and making up needs. My favorite informericals are the ones that say you don't have to buy anything or sell anything, and you'll make millions on this cash-flow system. Icks! :-) Even health-care incentive is to sell more drugs, more procedures, and they aren't necessarily needed and possibly cause problems. Even though preventative care is more beneficial, it is more lucrative to treat a disease or problem. It's our whole way of thinking; something has to shift. Capital is being misplaced and our infrastructures will fail; the focus is make money today and have fun.

The lack of savings could also be the environment of corruption coupled with real fear (i.e., nuclear proliferation) and made up fear (i.e., by politicians to get votes and control the populace), and insecure people, without hope, spend today because tomorrow will be worse.

It could also be that the middle-class is dying. There are either people living in debt, day-to-day and those with adequate or lots of disposable income. You are either doing well or not. I don't think Greenspan is responsible for all of this. I think our politicians, Democrats and Republicans, aren't providing leadership and doing too much pandering. If you are young, have money, and are healthy things are awesome for you. But if you don't have your health and you aren't independently wealthy, you are existing and desperate.

Saw an interview of an India man who became a citizen. Although highly educated he came to this country and started to work for his uncle at a 7-Eleven. He now owns several 7-Elevens himself, and hires other highly educated Indians who have immigrated here. They feel that even though they have an education and work experience that American businesses won't hire them. But now his kids are becoming doctors and lawyers. They focus on the future generations. They don't eat out, don't take vacations, and they save 35% of everything they make. Pretty impressive; but what would happen to our economy if all people lived that way ;-)

1/31/2006 12:35 PM  
Anonymous Anonymous said...

What would happen to the economy if everybody saved? Would we just buy less crap from China? Really? People will stop buying 'stuff' before they stop buying homes and food and whatnot. I bet 50% of the households in my neighborhood have big flatscreen TVs - they all refinanced their homes and built in some goodies. That, IMO, is where the trade deficit is coming from - the TVs, iPods, DVD players, and all of the other crap that people spend that extra money on.

Globalization isn't so bad - Toyota and Honda make cars in the US and GM makes them in Mexico. Who would you rather buy from anyway? Clearly the US can be wage competitive.

The problem for the middle class is that they have a choice and they don't realize it. You can either save like crazy and get in a position to take advantage of the upper-class benefits such as high market returns, tax perks, and so on. Or you can spend like crazy to act like you're upper-class with new cars while you slowly work your way toward poverty.

I live in SoCal in the heart of the 2nd most expensive housing/cost of living market in the US. I work for the state, so my benefits are good, but my salary sucks and I have job security. I'm the sole provider for a household of 4.

When my wife and I got married we both worked and one income went to the down payment for our first home. We at cheese sandwiches for lunch every day and carpooled to work in our one cheap car. Otherwise, we went about and did all the things we wanted and we saved around $30K per year. We bought a home from that. My wife stopped working when we had kids.

But we kept saving. Not as fast, but we kept saving. And we invested. We bought mutual funds and stock. We enjoyed the dot com boom and suffered through the hit after. But we kept saving and we're still saving. Last year we put 2x my annual income away thanks to those investments. That's college for both kids right there. We're not geniuses, but when you save enough, you get new opportunities to make your money work for you. You diversify. You buy bonds, and isn't it also beneficial for americans to hold the local debt? To buy munis, to buy treasuries, to buy US corporate bonds?

And we *do* spend. We eat out, we travel, we buy cars and tools and sewing machines and toys for the kids and clothes and all that. And while some of it isn't made in the US, I'd wager a higher percentage of what we buy is american made because we don't buy the WalMart crap that's driving consumption in this country. Instead, more of our money goes into *services* than stuff. And the services can't get outsourced and can't be globalized. Nobody in China or Mexico is going to take the job of my kids piano teacher.

Improving the US economy doesn't need to be dependent on the savings rate and the consumption of stuff. It does require a shift in thinking about saving and spending. Outside of food and a handful of other things, every dollar my family spends is viewed as an investment. We don't buy a TV, we invest in one. Your decision making changes a lot if you look at your habits in that way. Simply turning this country from a consumption economy to an investment one would make a massive difference.

The Indian described above has this mindset. He invests, but he's also contributing to the economy. He's providing jobs for people that will buy food and ultimately eat out and take vacations, but will also create doctors and lawyers that keep a lot of people employed. That's an investment as well. And I suspect that gentleman who now owns several 7-11s is dumping more money into the economy now each year than he would ever been able to do in a lifetime of being a simple 7-11 employee.

The problem with the economic policies in this country is that they favor the guy who owns the chain of 7-11s rather than the guy who aspires to own a chain of 7-11s. That's gonna kill us in a generation if it keeps up. The owner of the 7-11s has already proven he'll overcome the obstacles, and taxes won't slow him down. But if the guy starting out can't find a way to cover his healthcare, he'll never get there.

And that's the problem with the lower-class. There is almost no possibly way for them to become middle class and even get that middle class choice, so that population is assured to grow because it's a one-way trip in.

1/31/2006 1:16 PM  
Anonymous Anonymous said...

Greenspan was doing just fine until he answered a higher calling on 9/11 - that is, to save Israel by putting America into hock fighhting Israel's war.

1/31/2006 7:07 PM  
Anonymous Anonymous said...

thirdeye said...

"Greenspan was doing just fine until he answered a higher calling on 9/11 - that is, to save Israel by putting America into hock fighhting Israel's war."

So true. If the government didn't control the media we'd be dealing with an insurrection right now.... As it is, we're all asleep. We deserve what we're getting.

1/31/2006 8:33 PM  
Anonymous Anonymous said...

Third Eye & Anon-

Could you explain that one to me. I don't see the basis for asserting that prior to 9/11, Greenspan was a responsible Fed Chair. Nor do I see the connection between his post-9/11 opening of the floodgates and . . . Israel. Huh?

2/01/2006 8:29 AM  
Blogger Chris said...

This comment has been removed by a blog administrator.

2/01/2006 9:51 AM  
Blogger Chris said...

My comment turned into a post all on its own, so here is the link to my reaction/comments to your blog. Thank you TCR for your continued clear-thinking commentary.

My reaction to TCR

2/01/2006 9:53 AM  
Anonymous Anonymous said...

Greenspan supported a balanced budget when Clinton was president so the Republicans could spend more money when they took power.

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