Greenspan's Oil Call

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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Comments

[Jeff]

I'm not going to defend Greenspan the forecaster, but I think the ARM accusation is a bum rap. I discussed this, quoting at length from Bob McTeer, last September. http://oldprof.typepad.com/a_dash_of_insight/2007/09/getting-it-righ.html

The speech was about a pricing model, not market timing. It did not get presented to consumers as advice. Most people know about the "advice" only by reading the many Greenspan critics.

As McTeer put it,

"Somehow, I doubt the chairman's geek speak sent Joe Six-pack running off to apply for an ARM he couldn't afford."

[Wayfarer]

I remember that Greenspan comment like it were yesterday... It came in fact as I was running to my mortgage broker to lock in a 30-year fixed refinance about as fast as I could. I mean, this was a time of interest rates at half-century lows!

How Greenspan could have suggested or even said that still to this day remains beyond me... It was a multi-generational low-water mark and he postulated to go floating.

[Generic Viagra]

I would say that the levels of oil price will keep increasing. I agree with that. On the other hand, don't you think that we should start looking for some other way to produce our energy, considering that oil will not last forever.