Greenspan 'Turned Boom to Bubble'

With friends like Bill Fleckenstein, who needs enemies?

That's what Federal Reserve Chairman Alan Greenspan might be asking himself today after Fleckenstein penned a scathing 1,000-word hit piece for MSNBC.com yesterday titled "Greenspan: The Worst Fed Chief Ever."

Fleckenstein must have scoured his pocket thesaurus, judging from all the derogatory terms he uses to convey the depth of his disgust with the Fed Chair.

Among some of the author's sharper barbs, Fleckenstein refers to Greenspan as: "The world's biggest serial bubble blower," "the most incompetent, irresponsible Fed chairman of all time" - a man who is "rewriting history."

After savaging Greenspan, the author notes that he's looking for an objective source to "set the record straight," and naturally Fleckenstein identifies himself as just the man for the job.

Fleckenstein, president of Seattle-based hedge fund Fleckenstein Capital, gets right to the point, proceeding to cite a recent speech Greenspan gave called "Economic Flexibility."

Fleckenstein claims the title is a thinly disguised smokescreen designed to allow the Fed Chair to tee up potential successor Ben Bernanke (the subject of an Oct. 18 MoneyNews story) as the scapegoat for an economy that could start sliding downhill in a hurry.

Fleckenstein points out that these economic troubles are the sole responsibility of Greenspan and his "yes men" at the Fed.

He alludes to a portion of Greenspan's speech in which the Fed chair claims that the significant monetary tightening of 1994 did not prevent what by then must have been the beginning of the 1990s bubble. Greenspan also states that equity prices continued to rise during policy tightening that took place between mid-1999 and May 2000.

"His observation of when the mania really took hold and mine are exactly the same," Fleckenstein writes.

"It did start in late 1994. Of course, as with everything, he recognizes the end result but has absolutely no clue as to its cause. The reason for the continued rise in equity prices was that the Fed panicked in mid-1995 and reversed its tightening course after Orange County (and other leveraged entities) blew up," writes the author.

"Next, the Fed bailed out the Asian crisis in 1997, Long-Term Capital Management in 1998 and fears of Y2K problems in late 1999."

Next, Fleckenstein contests Greenspan's assertion that the equity market's ability to withstand periods of tightening arguably reinforced the bull market's momentum in the 1990s.

"No, it was his endless bailouts that caused folks to believe in the notion of a "Greenspan put," says Fleckenstein. "Purely and simply, it was his practice of bailouts and market cheerleading (which reached fevered pitch at the peak) that turned the boom to bubble."

The author discusses Greenspan's "incredible" statement that the FOMC knew that tools were available to choke off the stock market boom, but those tools would only have been effective if they undermined market participants' confidence in future stability.

In his "Economic Flexibility" speech, Greenspan adds that "relying on policymakers to perceive when speculative asset bubbles have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic."

"It can't be done. It's impossible. Now, of course, it wasn't impossible. I wrote about it until I was blue in the face. Most people with an ounce of common sense knew there was a bubble under way. And, by what I've already shown, the Fed knew too. And yet, Greenspan is still trying to say that it would be unrealistic to attempt to identify bubbles."

Fleckenstein closes with a haymaker.

"So, the fallout from the housing boom, the unfinished business from the stock boom and all the derivatives he's championed for his beloved deregulated financial system will combine to hit with full force somewhere down the road. By then, of course, Greenspan will be long gone."

Presumably, mop up duty will fall to the hapless Bernanke, should he get the Fed post.

While Fleckenstein is by no means a fan of White House economic adviser Bernanke, he doesn't think Greenspan should be able to blithely skate away so easily.

"He, as well as everyone else who's incapable of understanding what really happened, will be blaming our problems on the next Fed chairman," he writes. "I will have no sympathy for Ben Bernanke, assuming he moves from the White House Council of Economic Advisers to the Fed."

"But we must understand what actually took place and not let this arrogant buffoon get away with his attempt to rewrite history."

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The explosion of the hedge fund industry begs the question: Are high net-worth dollars better served by hedge funds, or mutual funds?

"Many investors don't realize that mutual funds now offer many of the same popular features of hedge funds - such as exposure to alternative asset classes - at much lower cost and risk," says Adam Bold, founder and chief investment officer of The Mutual Fund Store in Kansas.

"Mutual funds now offer exposure to international stocks, real estate and much more. With a lower barrier to entry, they also offer more transparency than hedge funds, stronger fund manager backgrounds and less likelihood of investor fraud."

While hedge funds are not monitored at all, mutual funds are regulated by the SEC and the mutual fund industry is certainly a better place for investors in the wake of recent crackdowns on abuses within the sector, explains Bold.

Bold's conclusion: Better safe than sorry.

NewsMax.com's MoneyNews reported that U.S. Treasury Secretary John Snow is visiting China this week, along with Defense Secretary Donald Rumsfeld.

Their mission is to thaw relations - both political and economic - between the two superpowers.

But if Snow & Co. were to take a trip to Shanghai during their visit, they'd find what is currently one of the hottest real estate markets in the world - one full of buyers and sellers who couldn't care less about the United States but are solely concerned with cutting the best deal they can.

According to an article in the Oct. 18 New York Times, the Chinese city is also planning to build new towers along the Shanghai skyline that will boast more space than all of the office buildings in New York City. Shanghai already has 4,000 office buildings - roughly twice as many as New York. And The Times reports that Shanghai has plans to build 1,000 more buildings by 2010.

The newspaper says this is just more evidence that the China real estate market is heating up.

"China's real estate market is so hot that miniature cities are being created with artificial lakes, and the country's nouveau riche suddenly seem eager to put down as much as $5.3 million for a luxury apartment in skyscrapers with names like the Skyline Mansion," says The Times.

Leaders of the Communist country suppressed growth during much of the last half of the 20th century. Real estate observers say it wasn't until the 1990s that the country began aggressively expanding its city skylines. In 2005 alone, China will complete more than 4.7 billion square feet of construction, up from 2 billion in 1998.

"There's no doubt what is happening in parts of China is on a scale we've never seen before," said Richard Burdett, professor of architecture and urbanism at the London School of Economics. "But more importantly, it's the fastest pace of development in the past 50 or 100 years."

But in the Asian country's madness to build the next skyscraper, there could be some economic advantage for Snow and for the U.S. economy.

As The Times reports, China is scouring the globe in search of the steel, glass, metal and other resources needed for its numerous building projects.

And that could mean a bigger market for American goods if the United States and China can manage to remedy that country's export imbalance and import more goods from the West.

"Everyone wants to build a Manhattan," said Jun Xia - a principal at Shanghai's Gensler, a global architecture and design firm - in an interview with The Times. "In China, I say 'smaller, smaller' and the clients say 'wider, wider.' "

Like their American counterparts at the beginning of the U.S. housing boom, Chinese consumers don't seem to mind.

In fact, it appears they relish the country's ever-expanding financial clout.

"Many Chinese are acting as if the housing boom will not fizzle anytime soon," says The Times. "The economy is soaring, income is rising, Ikeas and Wal-Marts are popping up in second-tier cities and tens of millions of people are giddy about the prospects of owning their own homes, driving their own cars and adopting a more modern lifestyle."

"You know, for a half-century nothing was built in China," Jun added.

"Now there's a lot of excitement and demand for new houses, and excitement about a new way to live."

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