A True Horror Tale

The “maestro” was neither the monster’s creator nor its handler, but he did preside over much of what followed the standard horror story template. Alan Greenspan said the words “proliferation of products” in June of 2000, now more than two decades ago. But the proliferation vexing him and monetary policymakers at the dawn of the 21st century had actually begun in the middle of 20th. And when it really started cooking had been the sixties and seventies.

As such, only now are monetary authorities taking a painfully slow interest in Greenspan’s noted products having spent the last thirteen years trying to sort out the rather monstrous consequences of their long-ago proliferation. With one foot still firmly planted in “it was subprime mortgages”, it proceeds at a snail’s pace – where it proceeds anywhere at all.

Fine. But why and where did it fork? On the one hand, there was Greenspan’s accepted view. This was that monetary details had grown so amazingly complex in order to bring these proliferated products back under some new standard definitions the task would require an exhaustive, likely very costly, effort. Chances for success were not a given, either.

Thus, the fork in the road was an especially alluring one to take, primarily because it would be so much easier and simpler: care little to nothing about the monetary system and let the global banks who had been responsible for both the coming up with the products as well as making sure they proliferated sort out the sordid, messy details.

They’d never set some brutish monetary freak free on the world, would they?

Just to make sure, a central bank need only fly above them at 30,000 feet and signal down from on high – even so far as using what, as the years and decades flew by, would become an increasingly unimportant money market rate, federal funds, to send to the banks all the necessary policy gestures policymakers wished to communicate. Alan Greenspan would raise or lower the fed funds target a little here or there, and how the system’s internal organs were fashioned would be left to anyone’s guess.

Random good luck, as some would say.

In doing it this way, though, some policymakers began to shudder at the prospects for what they were really asking. As I chronicled the week before, while most did some could not ignore the mammoth conglomeration of proliferated products accumulated offshore. These eurodollars, at least those which were more of the straightforward variety, had already dramatically outpaced and outdistanced domestic money by the mid-eighties.

That left a whole lot of horror-sized “what-ifs” on the table.

The gross eurodollar size was in 1988 a third greater than the entire M2 stock would be three years afterward, while its net size was closing in on two-thirds of it. And this was three decades ago.

The data collection on eurodollar scale ended in 1988 because only one private firm, Morgan Guaranty, had been astute enough to make the effort. That it wasn’t the central bank tells you a lot about the choices which were made a very long time ago.

But, see, monetary authorities couldn’t just ignore these trillions offshore without first saying something about them. Before he comes at you with a chainsaw, the horror movie villain is rationalized down several times in each flick. To follow down Greenspan’s path to determined monetary ignorance (sorry, money-less expectations management) first required making a determination – and a huge mistake – about the multi-trillion (to tens of trillion by 2007) dollar ogre making unbearably loud noises just in the next room.

As usual, there were legitimate reasons for choosing to believe eurodollars represented a quirky bank investment rather than a true monetary system. For one, the system, the entire system and all its products, just didn’t look like money; Frankenstein meets skinwalker.

To central bankers and Economists whose beliefs were rooted in a 1960’s view of the 1930’s, this offshore world appeared a more appropriate place for investment professionals than monetary stewards.

The argument was thus made in the late seventies, settled in official terms from thereafter:

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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