The Bubblespan Dynasty

Posted by Mark Jasayko, CFA, Portfolio Manager

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McIver Wealth Management Consulting Group / Richardson GMP Limited

The “Bubblespan Dynasty” at the U.S. Federal Reserve is going through its second succession during a reign that has now extended past a quarter of a century.

The Dynasty began when Alan Greenspan replaced Paul Volcker in 1987. Volcker was more of a career civil servant than an academic or a professional economist. Greenspan started his career has a practicing professional economist and then, by virtue of political connections, became Chairman of President Ford’s Council of Economic Advisers for a couple of years in the mid-1970s. He was always a politically-friendly guy. This contrasts sharply with the astoundingly apolitical Volcker who had absolutely no sympathy for politically-legislated fiscal policy and completely tuned out the election cycle, much to the chagrin of President Reagan and his Treasury secretaries.

With the original appointment of Greenspan a politically-friendly era at the Federal Reserve returned after an eight year hiatus.

One feature of the political friendliness was a greater degree of cozy alignment between fiscal and monetary policy. Rather than opposing and challenging the White House and Congress, the Fed accommodated the growth in spending with progressively greater liquidity that would lower the cost of borrowing to finance that spending.

It was this regime with all of its rationales for greater liquidity that ran headlong into Subprime Mortgage Crisis, the Global Credit Crisis, and the Great Recession. Its forecasting missed everything. All the while, they were enlightening us with platitudes of what it thought was the new era of the Great Moderation, a fiscal and monetary nirvana where politicians and central bankers would become the paragons of global economic growth.

Those at the Fed during the run-up to the crisis appeared to fully believe their own headlines. They were not modest about the role of monetary policy in the economy. This includes the new Federal Reserve Chairman nominee, Janet Yellen.

Now that Yellen has inherited the post-crisis monetary quagmire, it would be a stretch to think that she would be able to bring some fresh perspective to the challenges. To be that objective would raise the possibility of self-indictment. She was one of the navigators that flew the American economy into the side of Mount Subprime. Don’t expect her to tell us what went wrong.

With that, the question is “How effective of a leader can she be if she was part of the problem that she is now charged with fixing?”

It is akin to promoting an arsonist to Fire Chief to put out the fires that they started. Her predecessor, Ben Bernanke, famously said last year that he did not think that low interest rates, which he had advocated in the early 2000’s, contributed to the Housing Bubble and the Subprime Mortgage Crisis that ensued. That provided some pretty good insight as to why his policies weren’t enough to solve the lingering mess six years after the height of the panic.

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Richardson GMP Limited, Member Canadian Investor Protection Fund.

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