Everyone wants to dance with Rosy Scenario – just ask Chuck Prince, ex-CEO of Citigroup. All the other potential scenarios look drab, unpleasant or even scary when compared to Rosy. Whether dressing balance sheets or risk management models, everyone dresses for Rosy. Rating agencies and monoline insurers chase Rosy too, profiting from her dependence on cosmetics and support garments as she begins to age and look tired. And rather than challenge the courting of Rosy Scenario as wary chaperones might do, the central bankers and regulators too often join in the pursuit as ardent admirers.
Rosy has had few suitors as loyal and determined as Mr Alan Greenspan. We can trace his fascination with Rosy Scenario back to 1973, when he declared two days after the stock market peak, “It is very rare that you can be as unqualifiedly bullish as you can now.” The market proceeded to fall by over 50 percent during the recession that followed, the deepest since the Great Depression. Greenspan was rewarded by appointment as Gerald Ford’s Chief Economic Advisor.
Not put off by fickle Rosy for long, Mr Greenspan returned to court her to the exclusion of all other eligible scenarios. In 1984, he praised the role played by deregulation in promoting record profitability at 17 named thrifts, including Townsend Greenspan client Charles Keating’s Lincoln Savings & Loan, in a letter to Ed Gray of the Federal Home Loan Bank Board. Four years later, all but two of those 17 thrifts were bankrupt, costing FSLIC over $3 billion. Mr Greenspan was elevated to Chairman of the Federal Reserve.
Rosy Scenario kept entrancing Mr Greenspan, even as others became wary of her seductive charms. In 1990, on the eve of the Drexel Burnham Lambert and Washington Bancorp failures, which roiled the junk bond and commercial paper markets respectively, Mr Greenspan said, “Such imbalances and dislocations as we see in the economy today probably do not suggest anything more than a temporary hesitation in the continuing expansion of the economy.” The 1990-91 recession duly ensued as credit contracted.
In March 2000 the ardent and hapless suitor embraced Rosy Scenario again, with a speech entitled, “The Revolution in Information Technology.” The dotcom crash and another recession promptly followed.
Still passionately devoted to Rosy Scenario, despite years of bitter experience, Mr Greenspan followed Rosy into the sub-prime quagmire, praising the deregulation, securitisation and innovation in sub-prime mortgage lending as early as 2000, pushing Adjustable Rate Mortgages in 2004 and praising sub-prime lending as late as 2005: “With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. “ We now see the results of that enthusiasm in writedowns and indictments.
As late as March, 2007, he remained faithful to Rosy and said, “I have no regrets.”
Each disappointment made Mr Greenspan more determined. He courted Rosy Scenario with trillions of credit creation and zealous deregulation. Each time Rosy spurned him, he promised greater freedom and inflated a new and bigger bubble to win Rosy’s favors.
It would be nice to think that later central bankers might learn from Mr Greenspan’s experience and grow wary of Rosy’s undoubted charms, but Ben Bernanke began courting Rosy Scenario as soon as Mr Greenspan was pensioned off. His declaration that the sub-prime crisis was “well contained” was consistent with an ardent Rosy preference. And his leveraging of the Fed’s balance sheet with extraordinary liquidity infusions to Wall Street is the sort of showy extravagance Rosy Scenario often inspires in those too captivated to make inquiries about her past conduct or future intentions.
Most recently, Mr Bernanke has boasted that he has learned “hard lessons” and that thanks to his courting of Rosy with cash and Treasuries to buy off Rosy’s Wall Street admirers we can be sure he will win Rosy this time.
Not all central bankers are captivated by Rosy Scenario. Mr Mervyn King, Governor of the Bank of England, appears staunchly immune to Rosy’s charms. He keeps preaching doom and gloom, inflation and recession, constraint and capitalisation. He seems determined to ensure that Rosy Scenario remains the belle of the Fed, where she has so many devoted admirers.
Hat tip to William A. Fleckenstein, author of Greenspan’s Bubbles.
By the time you read this, I will be sailing somewhere in the Baltic between Tallinn, Estonia, and Oslo, Norway. I am of a generation that still finds it rather amazing that I can fly to a capital formerly behind the Iron Curtain and move freely once there.
When I first visited nearby Vilnius, Lithuania, a few years ago, I felt the same sense of wonder. That trip was a birthday present to receive instruction on a Kalashnikov AK-47 from a former Soviet Special Forces commander, an example of how capitalism has co-opted the former military elite, and the service economy has displaced the military-intelligence economy in Eastern Europe. We were struck then by the rapid integration of the Baltic States within the European Union. Large grants from Brussels were restoring the classical buildings in the capital centre, and infrastructure investment was rapidly bringing services and communications up to date. Along the central mall, the young people hung out on the summer evenings, playing the same music, sporting the same hair styles, displaying the same body piercings and tattoos as our own youth back in London. As we returned to the airport, I asked our 50ish cab driver what he remembered about the period before the Wall came down. He said that living in Lithuania then had been like living in a prison, a constant struggle with grim deprivation and arbitrary authority. He felt disconnected from the Westernised young Lithuanians of today because they had no memory of the life he and others had lived in those darker times.
As troubling as we may find the abuses of government we criticise today, it is worth recollecting just how fortunate we are to live in an age and in societies where we can express those criticisms largely free of fear of arrest or state retribution.
If I am an optimist about the course of human events it is because the polity of Europe has evolved during my lifetime to coalesce former warring enemies into firm allegiance, East and West, North and South, capitalist and socialist, Protestant and Catholic. We all subscribe to the same Charter of Human Rights, the same pact of collective security, and the same rule of law. It gives me hope that progress in the coming generations could unite the world, all regions, all races, all religions, on the same path of tolerance, peace and progress.
To get in the spirit of sailing Northern climes, I have re-read The Riddle of the Sands, penned by Erskine Childers in 1903. The fictional evocation of traitors, spies and a German plot to invade the United Kingdom helped to inflame a public hysteria leading to the founding of the British Secret Service and permanent coastal defences. It marked the first example of outright lies and exaggerations used to promote a bloated intelligence budget. Childers was later arrested on trumped up arms charges during the civil strife of Irish independence and executed by firing squad. Although the propaganda and political methods of today may echo those of the past, the violence at home is much less. For that we should remain grateful – and vigilant.
Being aboard a small, private yacht, I will likely lack regular access to the internet. When and as possible, I may check in and comment. Forgive me if the scenery of the Baltic and the company of my shipmates take precedence over blogging for this interval.