Famed money manager Jeremy Grantham says that the continuing credit crisis hampering global economic growth is largely the fault of poor leadership at the Federal Reserve and U.S. Treasury — a small clique of financial policymakers that now includes new Treasury Secretary Tim Geithner.
"Reviewing the last two years, of course, it's a misplaced trust in the competence of our leadership, from the very top. But certainly, notably, the Fed, the arch villains of this piece; Treasury, little better; the SEC," said Grantham in an interview with Steve Forbes in Forbes Magazine.
"They were cheerleaders, all of them. And they encouraged reckless leverage and low-quality debt. Complicated, unresearched, generally disgraceful."
Grantham said that Geithner, who was president of the New York Federal Reserve Bank, current Fed Chairman Ben Bernanke, and even former Fed Chairman Alan Greenspan, as well as former Treasury Secretary Hank Paulson, must share the blame.
"They made no effort to resist it in any way. Even jawboning would have been a great advantage over nothing," said Grantham.
"Greenspan encouraged, admired the ingenuity of the new instruments for subprime. I mean, went out of his way to encourage it. Some, as in Greenspan, beat back an attempt to do some regulating of subprime markets. And I think it looked pretty bad."
According to Grantham, former Treasury Secretary Hank Paulson did not move fast enough to recognize that the impending decline of house prices would create some problems.
"And Bernanke couldn't even see the house bubble. On our data and Robert Shiller’s, it was a three-sigma, one-in-100-year event. After 100 years of being flat, it soared after 2000. You could not miss it. And right at the peak, October '06, Bernanke said — quote— 'The U.S. housing market merely reflects a strong economy' — unquote," said Grantham.
"What was he looking at? Where were his statisticians? These are the guys we picked out of millions to lead us in a crisis. And they can't see a three-sigma bubble? Every single bubble of that kind has broken."
Grantham said that some asset classes are incredibly dangerous when they form a bubble and when the bubble breaks.
"And of course, it was the ancestor of the current problem and the housing bubble. The housing bubble is even more dangerous because more people own houses. It's more for the ordinary people. And borrowing is so much easier. So, that is really the most dangerous," said Grantham.
Globally, investors will have lost $20 trillion of perceived wealth, said Grantham.
While that figure may be accurate, many economists still do not believe that the economic stimulus programs being bandied about in the Congress are going to solve the problem right way, and that it could take two years to work out the economic problems.
"Rather than producing free, effortless prosperity, stimulus spending is to economics what a perpetual motion machine is to physics," Heritage Foundation economist Robert Book wrote on the organization's Web site.
"If you look at one part of the machine and ignore the rest, it can look like it’s giving you something for nothing. But when you look at the whole picture, it’s actually wasting energy, leaving you worse off than before, due to friction or some other source of thermodynamic inefficiency."
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