Greenspan? Rapidly approaching status of “bad joke” in my mind.
According to a New York Times article about Greenspan and his policies today, Greenspan is defending his stance on derivatives (he was pro-derivatives) by saying the whole imploding economy is because of people acting in bad faith in the markets, but the deregulated derivatives approach was somehow still “right.”
Mr. Greenspan is apparently living in a world without people. I’ve been aware of Wall Street and its tendancy to, er, stretch the boundaries of good and bad faith since Greenspan took office. In case he didn’t notice, we had a Savings and Loan Crisis, a Junk Bond collapse, Long-Term Capital Management’s collapse, the Internet bubble popping, then a wave of corporate scandals that even took down Arthur Andersen. Where was he during this 20-year march of greed that he could champion deregulation under the belief that people wouldn’t be greedy and would act in good faith without regulation to impose penalties when they didn’t?
How could he cling to a theory that depended, oh-by-the-way, on the naive belief that people would do the “right” thing even though the instruments let them become unbelievably wealthy by doing the wrong (but legal) thing?
I just don’t get it. And I find myself repeating it over and over in stunned disbelief. He actually believed that Wall Street would police itself, after having presided over several TRILLION dollars worth of corruption and greed with several successive financial instrument “advancements.”
I’m so very, very glad that the man is no longer making policy. Of course, having the head of an investment bank now in the position doesn’t exactly fill me with confidence. Goldman has a good reputation, but at this point, I’m not at all sure that anyone steeped in the financial industry culture for 20+ years has the objectivity to know whether the system is fundamentally broken (they have a vested interest in believing it’s not), or whether it simply requires some trillion-dollar tweaks to put it back in order.
Stever! I can’t ignore an invitation to come argue w/ you… ;o) LOL - at the same time - FINALLY - you are getting to the heart of this…if derivatives - which mortgage-backed securities [MBS] are, correct? - were available as valid trade instruments, of COURSE the market would make full use of them. A return is a return is a return - right?
MBSs are/were derivatives that were “guaranteed by the full faith and credit of the US government” - right? Therefore - why the hell would Lehman and AIG *not* stock up their balance sheet with them? The “mortgages” which “back” these “securities” are/were GUARANTEED by the US Govt. And now…the government is simply…guaranteeing them…in a BIG way.
Am I missing something? Is there nothing to argue with you about here? :o) You are right…Greenspan simply had the grace and blessing of timing to not be sitting in the Fed Reserve chairman seat when the results of his policies are being felt with full force…I would argue the same about Pres. Clinton…check out this NYT article - from 1999 - pretty eye-opening…
http://query.nytimes.com/gst/fullpage.html?res=9c0de7db153ef933a0575ac0a96f958260&sec=&spon=&pagewanted=1
October 10th, 2008 at 8:20 amStever - check this out - from today’s WSJ - thoughts?
http://online.wsj.com/article/SB122360669809922065.html#printMode
October 10th, 2008 at 8:32 amGood points, Stever.
For much of my life I would have casually said that I believed in free markets. However, watching the egregious extremes than have occurred during my adult years, I have refined my view to a belief in competition and transparency in markets and strong regulation where either or both are lacking. I think competition and transparency keep the players honest.
An additional difficulty in the economy is the herding instinct. Wall Street was not the only player caught up in the housing mess. While they created these complex investment instruments, the instruments only grew because people were willing to buy houses, many motivated to cash in on the incredible gains in home prices. This mass psychology is what Greenspan called irrational exuberance, and it could not be sustained.
October 10th, 2008 at 8:34 amNina, I agree with you. Here we see the Tragedy of the Commons in action. The Govt, which is the only player with the power to PREVENT Tragedy of the Commons situations, really scewed it up this time.
They were basically providing insurance. But by providing risk-free insurance, every individual player (the banks) had incentive to stock up way beyond what was financially prudent for the country overall. So when the meltdown came, it was a global meltdown rather than a local meltdown.
I think outsourcing is a similar situation. It’s an utterly rational move for any one company to outsource manufacturing and design. So therefore, pretty much everyone will do it. From the perspective of America as a nation, however, it now means that we move our entire manufacturing base overseas. That leaves us no industrial mechanism for us to train, mentor, and grow up skilled people in anything except service businesses.
Who in the world would WANT the job of President with all this mess…?
October 10th, 2008 at 11:48 amLack of regulation did not cause the problem. Low interest rates + fiat credit money + legislation did.
And to say Alan Greenspan did not know what he was doing is ridiculous.
I hear a lot of people say the Fed Chairmen have been stupid and don’t know what they are doing.
I give the following quotes from the Maestro himself as one example of how untrue this is:
Quote:
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
Quote:
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline – argued economic interventionists – why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely – it was claimed – there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (”paper reserves”) could serve as legal tender to pay depositors.
Quote:
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.
ALAN GREENSPAN (1966)
October 10th, 2008 at 11:43 pm