The biggest blow-up ever

Not much action in stocks yesterday. Gold continues to fall – down $13 yesterday, to close below $1,300.

Meanwhile, Alan ‘Bubbles’ Greenspan is back in the news. At 88 years old, his mind is still sharp as a tack. That is, he sees his own interests clearly and is clever enough to distort the facts to suit them.

Specifically, when asked in an interview what he thought of Janet Yellen’s IMF speech, in which she maintained that bubbles should be addressed with more regulation, he replied: “Bubbles are functions of unchangeable human nature. The obvious question is how to manage them. All bubbles expand, and they all collapse.”

You see, it wasn’t his fault that the largest bubble in half a century blew up a year after he left his post as manipulator-in-chief of the world’s largest economy. It was just human nature.

Of course, human nature is implicated in bubbles. But human nature is always with us. Bubbles are not. So, when we talk of the ‘cause’ of a bubble, we have to look further, to the specific conditions that cause prices to get out of control.

There was no bubble in 50s. Nor in the 60s. There were some important price movements, but the first thing that would qualify as a bubble was the extremely gaseous price of gold in the 70s. Then, gold rose from $42 an ounce to $800.

What caused that? Human nature?

Yes, in a sense. But it was the natural cupidity and larceny on the part of US officials. In 1968, they defaulted on their obligation to citizens and taxpayers to exchange dollars for gold at a fixed rate. In 71, they reneged on this obligation with respect to foreign central banks.

This – and double-digit inflation rates – so worried investors that they shifted assets suddenly and emphatically to gold to protect themselves.


Bill Bonner on markets, economics & the madness of crowds

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That proved to be a bad move, when Paul Volcker pricked the bubble in the early ‘80s, as Greenspan himself acknowledges: “When bubbles emerge, they take on a life of their own. It is very difficult to stop them, short of a debilitating crunch in the marketplace. The Volcker Fed confronted and defused the huge inflation surge of 1979 but had to confront a sharp economic contraction. Short of that, bubbles have to run their course.”

But, “how they are financed is critical”, he added. Follow the money. Who caused the inflation surge in the 70s? Where did the excess money come from?

Mr Greenspan shows no interest in sniffing after the trail of cash. The old hound gives up the hunt even before he begins, changing the subject to what the feds did after the bubbles blew up: “… on Oct. 19, 1987, the Dow Jones Industrial Average fell 23% — an all-time one-day record, then and since. Goldman was contemplating withholding a $700 million payment to Continental Illinois Bank in Chicago scheduled for the Wednesday morning following the crash. In retrospect, had they withheld that payment, the crisis would have been far more disabling.”

Yes, allowing the markets to run their course would have been ‘disabling’. It would have disabled the Bubblemobile.

Investors and speculators would have been on notice: you’re on your own!

Instead, Greenspan intervened. The central bank let it be known that it had Wall Street’s back. This is where the ‘Greenspan put’ concept came into play.

In case prices fell, the cronies knew that the Fed would bail them out.

So, the bubbles kept coming.

The dotcom bubble blew up in 2000. The real estate/finance bubble blew up in 2007.

And now, prepare yourself for the biggest blow up ever – when the credit bubble finally reaches its limit.

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