I read this book from the perspective of an investor who specializes in real estate investment trusts (REITS). I was a REIT investor in 2008 when the economy failed, as I am today. I was near the financial center of the financial collapse of 2008 and able to observe it closely as it unfolded. Earlier in my career I worked as an IT company owner who studied the progress of business in the USA and globally by observing my client companies' businesses through the computer systems I developed.
Thus, I have a close up view of the financial collapse AND a broad-based view of the real world economy that underpins it. This perspective has made me a successful investor. But I do confess to having been blindsided by the 2008 collapse, as Mr. Greenspan and most professional economists were. This book explains Mr. Greenspan's opinion of WHY so many professional economists were caught napping during the Great Recession that began in 2008 and casts its long shadow over the economy today and for years to come.
Mr. Greenspan gets right to the heart of the question:
=====
On the face of it, the financial crisis also represented an existential crisis for economic forecasting. I began my postcrisis investigations, culminating in this book, in an effort to understand how we all got it so wrong, and what we can learn from the fact that we did..... What went wrong? Why was virtually every economist and policy maker of note so off about so large an issue?
=====
Having phrased the question in precisely the right words, Mr. Greenspan then proceeds to obscure the answer by giving the literary equivalent of the verbal "mumble" he made famous in giving indecipherable testimony to Congress while Chairman of the Fed.
The book begins with an essay on investor psychology, popularly known as "animal spirits" that delves into the psychological reasons why investors may commit or withhold their capital from the economy. That is followed by a chapter on banking regulation. Then there is a discussion on statistical analysis followed by a rambling chapter on THE ROOTS OF THE ECONOMIC CRISIS:
=====
The toxic securitized U.S. subprime mortgages were the immediate trigger of the financial crisis, but the origins of the crisis reach back to the aftermath of the Cold War. The fall of the Berlin Wall in 1989 exposed the economic ruin produced by the Soviet bloc's economic system.
=====
I did not find Mr. Greenspan's insight to be meaningful. I earn my livelihood managing the capital I accumulated as a business owner, which is now allocated to REITs. I'm not unsophisticated about business, real estate, or the financial markets. I just did not find anything in this book that told me anything that a person with "101" experience in any of these fields would not already know. The macro-economics "history lessons" that Mr. Greenspan relates have been covered much more lucidly in Paul Samuelson's economics books of the last few decades.
Having avoided answering (at least to my satisfaction) the question of WHY the economy failed in 2008, Mr. Greenspan proceeds to explain his theory of why the "recovery" remains so tepid five years later. Economic Conservatives will find this chapter UNCERTAINTY UNDERMINDS INVESTMENT to be in synch with their economic philosophy:
=====
That business had become markedly averse to investment in fixed long-term assets appears indisputable. The critical question is why? Although most in the business community attribute the massive rise in their fear and uncertainty to the collapse of economic activity, 16 many judge its continuance since the recovery took hold in early 2009 largely to be the result of widespread government activism in its all-embracing attempt to accelerate the path of economic recovery and regulate finance. The evidence tends to largely support the latter judgments.
=====
And yet it's curious why the stock market crashed and the economy failed in 2008 during an era of business-friendly governments (i.e. the Clinton Administration and the Conservative Republican Congress followed by President Bush whom I voted for twice).
During the 11 years from January 1, 1998 to January 1, 2009 --- while taxes were cut to 80-year lows and numerous free trade agreements were enacted --- the S%P500 fell from 1378 to 825, losing 41% of its value in non-inflation adjusted terms and 54% when adjusted for inflation.
Yet as soon as the "anti-business" President Obama was inaugurated in January, 2009 the stock market began a sustained rise that has GAINED 112% to date as the S&P500 has risen from 825 to 1750. And the gain did not come just because "the Fed is printing money." It came because corporations ARE MAKING RECORD PROFITS.
I would postulate that the economy failed in 1998 through 2008 for reasons unknown to ivory tower economists like Mr. Greenspan who have never operated in the real world economy of factories, offices, stores, and property:
1. Beginning in the late 1980s companies began stunting the consumption side of the economy with massive dis-employment of the American workforce. Millions of American jobs were shipped to Mexico and China. Millions of Americans were put out of work by excessive importation of foreigners on H1-B visas. Millions were put out of work by mergers and acquisitions and by improvements in machine technology and automation. Millions were put out of work because management found out that inefficiencies had crept into corporate bureaucracies. Millions were let go because company executives discovered that profits increased when they replaced high-paid senior career people with cut-rate hourly contract workers.
2. These millions of Americans were involuntarily removed from the labor force for reasons that might be considered to be good or bad, necessary or unnecessary, depending on one's point of view. An entire vocabulary of euphemistic terms like "rightsizing, downsizing, offshoring, outsourcing, early retirement, work force reductions, reengineering" was invented to explain the dis-employment phenomenon. Labor force participation peaked in 1999. That was the last year when any American who wanted a job could find one.
3. In order to fight rising unemployment Alan Greenspan lowered interest rates, believing that lower rates would boost corporate cash flows by allowing corporations to refinance their debt. The increased cash flows were supposed to encourage American companies to invest in expanding their businesses and hiring more American workers. President Bush also asked Congress to cut income taxes on capital gains and dividends to further boost business cash flow under the theory that it would be reinvested in growing the business.
4. Lowering interest rates and cutting taxes FAILED to grow the economy (in contrast to the success of these policies in reviving the economy during Reagan's years) because:
----- A) By 2000 many American companies were moving overseas and hiring foreign labor to replace Americans. Lowering interest rates and cutting taxes accelerated the process of dis-employing Americans.
----- B) The increased profits that resulted from replacing Americans with Third World labor went exclusively into the pockets of the business owners the bankers who lent them money. The incomes of the 1% soared while the 99% were afflicted with job losses and falling wages.
5. Consumer demand slackened due to the falling incomes of those put out of work or afflicted with falling wages.
6. With consumer demand falling , investors could not profit by investing in expanding production of goods and services. So, instead of creating real wealth by building factories that hire employees to produce goods and services, the 1% poured their money into real estate and leveraged real estate derivatives like collateralized debt obligations (CDOs) and credit default swaps (CDS). For a few years these paper "investments "soared even while American corporations hollowed out the economy by moving production overseas.
7. By the summer of 2007 the accumulation of job losses from layoffs and involuntary retirements made it impossible for large numbers of people to pay the mortgages on their homes.
8. When homeowners defaulted on their mortgages due to job losses, the leveraged CDO and CDS derivatives became defunct. The CDO's and CDS's had puffed up the asset ledgers of the banks. When they became worthless the banks discovered that they had only liabilities on their ledgers and no assets to offset them. The banks became insolvent.
9. The banks became insolvent and the stock market crashed. Business stopped dead in its tracks. The injection of several trillion dollars of printed/borrowed paper money by the government resuscitated the economy. Without that infusion every bank and business in the country would have failed and unemployment would have reached 100%. It would have been back to the Stone Age barter economy.
10. Five years later the jobs-creating side of the economy remains sluggish even though corporate profits are soaring to all-time record highs as are their publicly traded stocks. Is employment sluggish because:
----- A) Business won't invest in creating jobs because it is afraid of the allegedly "anti-business "policies of President Obama.
----- B) Business isn't creating enough jobs for the same reasons it hasn't been creating enough jobs since 1998 --- offshoring of American jobs to Mexico and China, excessive immigration of low paid foreigners on H10-B visas, downsizing, rightsizing, work force reductions, redundancies created by mergers and acquisitions, and early retirements.
Conservatives believe A) because it jives with their belief that free market capitalism cannot fail unless it is debilitated by a "Liberal" Democrat President. I would suggest that Greenspan doesn't understand why the economy failed because he can't get past his political lens to understand that B) is the correct answer.
If B) is the correct answer then cutting interest rates will have no effect in boosting employment. And so far, they haven't.
By failing to recognize that B) is the correct answer, Mr. Greenspan has developed an inside-out-view of the economy. He thinks that people aren't working because "entitlements have become too generous." In truth, people aren't working because corporations have shipped their jobs to foreign shores, replaced Americans with foreigners on H1-B visas, replaced fulltime workers with part-time workers, and forced millions into involuntary retirement.
Mr. Greenspan thus advocates economic policies that are OPPOSITE to what is required to recover the economy. He wants MORE tax cuts even though the enormous tax cuts of 1998-2008 failed. He wants MORE foreigners imported on H1-B visas at a time when millions of American-born engineers can't find work. He wants MORE free trade agreements even though our economy has been debilitated by ever-rising trade deficits with low-wage countries that suck American jobs out of the economy.
Thus, I would conclude that Greenspan's book misses the mark due to Mr. Greenspan's lack of acquaintance with real world economics. He has an inside-out view of the economy that is based on ivory tower political ideology. And even that viewpoint is not coherently expressed.
By Alan F. Sewell
Post a Comment