Greenspan's Pact with the Devil

Last time Wall Street stocks were this low, Alan Greenspan was a god...

ELEVEN YEARS in the wilderness. How many more to go? asks Eric Fry of The Rude Awakening.

The Dow Jones Industrial Average tumbled this week to an 11- year low of 7,115. The last time the Dow traded near 7,000, Bill Clinton was president, Robert Rubin was Treasury Secretary, and Alan Greenspan was god.

With the passage of time, of course, investors and savers alike – along with politicians, bankers and business – have come to realize that Greenspan only seemed a god because he made a bargain with the devils of leveraged finance.

• Without the decade-long boom in credit creation that Greenspan nurtured, the US economy could never have mutated from boom to bubble;
• Without the spectacular growth of the exotic financial instruments that Greenspan praised, the $67,000 houses of Stockton, California could never have become $500,000 "investments";
• And without the housing bubble that Greenspan promoted, exotic credit derivatives could never have masqueraded as AAA securities, and the Wall Street wizards who concocted this fraud could never have received multi-million dollar bonuses year after year.

But the Wall Street wizards did collect their bonuses...while the old jazz-man in glasses nodded and smiled.

Assigning blame does not make today's credit crisis any more tolerable. So let it be understood that we do not come to bury Greenspan, but merely to tar him with an appropriate measure of scorn and disgust.

Unfortunately, slathering blame on Greenspan does not improve our situation. In fact, the blame game really doesn't do much of anything for us. No matter who got us into this mess, each of us has to figure a way to get out of it. But before devising your escape plans, you might want to obtain a couple of scouting reports about the terrain that lies ahead.

"Forewarned is better," as James Grant likes to say. So will the frightening wilderness that stretches out before us feature deflationary bogs or inflationary geysers...or both? Should we expect to pass quickly through this wilderness or to make camp for a long time?

I don't pretend to know the answers to these questions. I know only that economic survival seems a higher priority than prosperity at present. We can add zeros to our bank account balances later. For now, we simply wish to avoid losing everything down to zero itself. And stock-market investors might be roaming around in this wilderness for a long time yet. They might also encounter hazards to capital that are even more treacherous than those they have already encountered.

So a good defense seems like the best defense. Who cares about offence?

That's why we still like Buying Gold, even knowing that it is likely to suffer a severe correction or two on its way to higher prices. And we still don't like the stock market, even knowing that it is likely to enjoy a dramatic rally or two on its way to lower prices.

Admittedly, there are great stocks that are now available at "Depression-level" prices. So the forward-looking investor should probably buy a share or two. But since we suspect that today's Depression-level prices might take the elevator down another floor or two before this bear market exhausts itself, we'd suggest reserving some enthusiasm (and some cash) for the lower prices that might yet materialize.