Sunday, December 7, 2008

Greenspan and Bernanke....... then and now!!

Recently i started reading a biography of Former Fed Chairman Alan Greenspan -"MAESTRO - Greenspan's Fed and the American Boom" (published in 2000-2001). This book was given to me by a professor during my MBA at Birminham Biz School. I didnt took this book seriously until recently when I put my hands on it. Since I started, I have completed reading approx 25% of the book and interestingly, I found striking similarities in Financial Mkt situation during and after appointment of both Greenspan and Bernanke.

*As per the book, within few weeks of Greenspan's appointment, the Fed Chairman just witnessed history being made with a record fall and rise of US equity markets and crisis situation..... similar to what just Bernanke saw in past couple of months.

*During late 80s, US faced problems of high bankrucpties of Saving and Loan (S&L)institutions due to their investments in so called Junk Bonds and Latin American bonds and exposure to real estate, which led to confidence crisis between banks and liquidity problems....... similar to what we are going through currently, but this time it is mortgage backed securities. However, the common thing between both situations are the real estate industry.

*Book mentions that during the THRIFT (S&L) crisis, Citigroup was on verge of a collapse due to the confidence crisis, foreign loans and S&L exposure. Fed Res rescued Citigroup and then CEO of Citigroup Mr. John Reed similar to what we saw recent rescue of Citigroup by Fed under CEO Mr. Vikram Pandit.

*Due to liquidity crisis, Greenspan infused lot of liquidity in market and convinced mkts thts Fed Res is there to supply enough liquidity in mkt. Bernanke is doing the same. The end result of this....... a huge deficit faced by both chairmans.

*Only a few years into his chairmanship, Greenspan saw the Kuwait invasion of Iraq with retaliation from US, slowdown in the economy and quick cut in interest rates. Bernanks has already felt the slowodown and cut interest rate quickly, only thing he has not seen is the war..... With India and Pakistan at loggerheads with recent attacks in Mumbai and support from US.... I might not be surprised it India attacks Pak occupied Kashmir (PoK) or Pakistan itself... just to divert market from economic scenario to geo-political scenario.

*The difference this time is that US already has a "HUGE" deficit while during Greenspan era... the war itself lead to some increase in US deficit and then the US govt (under Bush in 1990) decided to cut down its deficit (after Iraq war) with legislations being passedin US Congress. During election campaign, the then President Bush promised no increase in tax rates (similar statements by Obama) but was forced to do so due to commitment of reducing deficit. We might see this being repeated under Obama administration. This time, US might not use its own troops to that extent it did during Iraq war.

*Greenspan was lucky to have high interest rates (arounf 9%) when he joined the Fed so he had more to go on the downside.... which is not in the case of Bernanke with current fed funds rate already @ 1% and expected to be reduced to 0.5% on Dec 16 2008 FOMC meeting.

So these were the similarities and a few difference I spotted out reading this book. My only aim to writing this article was to spot out the main similarities Greenspan and Bernanke faced and share the knowledge I got with this book and the recent experience. I know, things have change since then with globalisation but I still feel history has been repeated and going forward, I feel it will repeat itself.

I have only completed 25% of the book so far and I have already learnt so much.... so keep in touch with this blog for more info from the book and my experience.

Happy Trading week!!!