Alan Greenspan is making headlines again this morning after statements he made in a speech in Saudi Arabia. The former Fed Chairman said that economic growth in the US has stalled and that the recovery, when it happens, will take longer than usual. Even more interesting, however, are Mr. Greenspan's comments regarding oil. Even though he sees a more protracted than average decline in US economic growth, he believes the boom in oil prices is likely to "go on forever" because demand for the commodity is unlikely to weaken.
Before we all go out buying oil futures on Greenspan's comments, we would remind readers of some of his other calls. First, in December 1996 he made his famous irrational exuberance speech where he implied that the market, especially tech, might be overvalued. The bull market went on for another three plus years. While Greenspan seemed to be bearish on tech stocks in 1996, in March 2000, he couldn't stop singing tech's praises. As a result of technology's productivity enhancing characteristics, he said that "it has become increasingly clear that this business cycle differs in a very profound way from the many other cycles that have characterized post-World War II America." We all know what happened next.
Regarding interest rates, in February 2004, Greenspan highlighted the evolving trends in the mortgage industry and said "there are lots of innovative programs, especially targeting low-income and first time buyers." He went on to suggest that homeowners could save thousands of dollars by switching from fixed-rate to adjustable rate mortgages (We won't even go into how those comments were basically an endorsement about what is going on in the sub-prime mortgage industry).
Below we highlight a chart of the Fed Funds rate over the last eight years. Almost right after Greenspan suggested homeowners switch to adjustable rate mortgages, the Fed then went on to raise the rates that these adjustable rate mortgages were tied to! While his ill-timed calls regarding the stock market are understandable, Greenspan's comments regarding short-term rates are especially puzzling. Unlike the stock market where he had no direct control, Fed Chairman Greenspan had ultimate control of where the Fed Funds rate was headed. Suggesting that homeowners migrate out of fixed rate and into adjustable mortgages right before a three-year 5.25% increase in the key short-term rate was not only a bad call, but also irresponsible.
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