Deconstructing Greenspan
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”
—Alan Greenspan, former Federal Reserve chairman, 2004
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The quote above is from a NYT article this morning, that, while not gutting and filleting Easy Al, it certainly questions his judgment and challenges his legacy. The NYT has finally gotten around to what many of us in the finance field have known for a very very long time: That Greenspan was not only a terrible Fed chief, he was a downright dangerous one.
The Times is still only half way there, but there are more than a few juicy quotes in the piece:
"For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added."
And this:
"An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.
As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets. Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”
Why was Greenie so opposed to any oversight of derivative trading? Former SEC chair Arthur Levitt said it was a fundamental disdain for government.
I guess Greenspan never heard the expression, "An ounce of prevention is worth a pound of cure." His disdain for government has led to the largest government bailout in the history of the planet, and essentially caused the nationalization of the finance sector.
Nice legacy you got there pal . . .
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Previously:
5 Myths of the Greenspan Era
Barry Ritholtz
RealMoney.com, 1/31/2006 11:08 AM EST
http://www.thestreet.com/markets/economics/10265345.html
Radio Economics Audio Interview on Greenspan (February 2006)
http://phobos.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?i=40529093&id=75438319
Radio Economics: The Greenspan Era
March 05, 2006
http://bigpicture.typepad.com/comments/2006/03/radio_economics.html
Source:
Taking Hard New Look at a Greenspan Legacy
PETER S. GOODMAN
NYT, October 9, 2008
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html
Thursday, October 09, 2008 | 07:42 AM | Permalink
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Comments
In the Great Depression, people and businesses became inslovent, the government remained solvent. In this crisis, the government is rapidly becoming insolvent,in an attempt to keep businesses and people solvent. When it is realised that the government may not be able to pay this massive debt back.. that is when many "shoes" will drop.
Posted by: catch-22 | Oct 9, 2008 8:34:28 AM
Disdain for government? Then why was he raising and lowering rates? Greenie speaks and acted out of both sides of his mouth. If you don't like government intervention then don't intervene. Instead he intervened all the time.
Posted by: Dave | Oct 9, 2008 8:35:13 AM
So the head of the government's central planning committee had a disdain for government?
Posted by: E | Oct 9, 2008 8:37:40 AM
I'm not the sharpest knife in the drawer but my MBA in Finance plus 25+ years on the Street of Dreams gave me some understandings of the finance markets. But I gotta confess that when The Oracle spoke I ofter said "HUH". I spoke with many of my cohort and we agreed that what he was saying was just plain Bullshit. And when the great pundits remarked on his sayings they were mostly bullshitting their way thru it giving their or others spin to it. But hey, it was great while it lasted.
Posted by: grumpyoldvet | Oct 9, 2008 8:41:38 AM
Catch-22:
That is the way I see it too...I don't think the government is going to try to pay it back...I think twelve months from now life is going to be quite different..
Right now we are outside the carwash looking in...we're mainly just curious as the play unfolds...but I think we're going through the carwash with the top down very soon...
Interesting times.
Posted by: Bruce in Tennessee | Oct 9, 2008 8:41:56 AM
Furthermore, I hate the negative implication tied to the phrase "disdain for the government". There is nothing wrong with wanting a small and less powerful government. In fact, me and a lot of others believe that is ideal.
Posted by: Bill | Oct 9, 2008 8:42:17 AM
And... Ben Bernanke was THE GUY whispering in Greenspan's ear, Greenspan's primary advice giver; "Go lower on rates Al, lower...."
Posted by: robert | Oct 9, 2008 8:44:16 AM
Just now on CNBS there is Bill Issacs, former Fed guy, blaming the current cfredit freeze loack on mark to market. That if we just allow the bankers to value the assets at their, the bankers price, things would be just fine. Implying therefore that the Fed will indeed be paying a higher price than their true current value. Jim Chanos is calling him out on it but as a Fed guy, Issacs has the "creds" but people like Chanos are just vultures looking to pick the pockets of the good banks. No wonder this shit exists.
Posted by: grumpyoldvet | Oct 9, 2008 8:50:31 AM
Furthermore, I hate the negative implication tied to the phrase "disdain for the government". There is nothing wrong with wanting a small and less powerful government. In fact, me and a lot of others believe that is ideal.
Posted by: Bill | Oct 9, 2008 8:42:17 AM
???????????????????????????????????????
The gov sure is getting more involved on a daily basis,,, trying to undo the damage done by Greenspan, Bush, and idiots like Kudlow.
Posted by: rickrude | Oct 9, 2008 8:51:27 AM
we need the governments to take over all the
banks and financial institutions now that they are failing. And then, when
they become profitable again, hand them back to wall street for the good times.
Posted by: rickrude | Oct 9, 2008 8:53:15 AM
Nice long article on derivatives, but as someone who's done a lot of reading about what caused this crisis, the article's linking of derivatives to this crisis was poor. The whole time I was thinking, "a CDS *is* a form of derivative, right? ... the reporter will let me know for certain." But it didn't happen. Has the media made no progress in explaining what a derivative is since Barings in 1995? And I would think that a CDS is a derivative of a very different type.
And speaking of Barings-- uh, NYTimes, history? Why was Congress even discussing derivative regulation? Because it had already caused a spectacular bank failure.
Posted by: stevesliva | Oct 9, 2008 8:53:27 AM
The Oracle meets the Orifice.
Posted by: RK | Oct 9, 2008 8:54:16 AM
Well, the BRIC's that were going to save all our collective bacon are interesting..Shanghai down 2/3 and Russia similarly last 12 months...
And this Libor rate thing...can't we just have Hank tell each individual bank to kiss and make up? Isn't he like the teacher at the fight at recess??? Don't they understand that he is sincere?
Posted by: Bruce in Tennessee | Oct 9, 2008 8:55:48 AM
he always had a crush on Ayn Rand
Posted by: p | Oct 9, 2008 8:58:43 AM
"There is nothing wrong with wanting a small and less powerful government. In fact, me and a lot of others believe that is ideal."
Yeah Bill..... sure....... your mega bowl replacement for your bong arrives today. All the deregulated heads have been buried and consigned to the outer galaxies. Everything you touch turns to shit. You've had your innings - now it's our turn.
Posted by: Every Straff | Oct 9, 2008 8:58:55 AM
I hope that he dies painfully.
Posted by: dc | Oct 9, 2008 9:02:15 AM
If America now turns against free market capitalism, it will be compounding a stupid error with a fatal one. The world has tried every other system ever invented and they have all failed.
The stupid error within the financial markets recently has NOT been too little regulation, it has been (a) too little enforcement of existing regulation (thank you the lobbyists) and (b) massive fraud throughout the entire borrowing and lending system. Derivatives took the result and geared it. Stupid? Yes, but the main problem was the lack of morals and integrity throughout the credit / debt structure - top to bottom - coupled with the idea that short term benefits should always and in every way take precedence over long term benefits.
No individual nor politician anywhere in the world will want to tell the electorate that they got themselves into this mess because of a lack of their own morality and integrity. It is much easier to blame "bankers" and "derivatives". The problem actually started with the person in the mirror.
The solution is for the regulators to send the fraudsters to jail, force them to disgorge their bonuses and salaries and then for the US Government to spend that disgorged money on rebuilding the infrastructure of the USA - roads, railways - and especially implement the results of the research on renewable energy sources.
Posted by: dome | Oct 9, 2008 9:02:51 AM
SCREW AYN RAND - HACK AND NARCISSISTIC THINKER.
Posted by: Florin Streets | Oct 9, 2008 9:05:13 AM
> There is nothing wrong with wanting a small and less powerful government.
I am happy with just having a few referees on the football field. As long as they do their job.
> The solution is for the regulators to send the fraudsters to jail,
But what if the regulators are fraudsters?
Say Chris Cox sending, say, Richard Fuld, to jail should seem, at least, ironic.
Posted by: pmorrisonfl | Oct 9, 2008 9:15:16 AM
I've come to believe that "small" government is a belief in just the amount of government that transfers the greatest amount of wealth from the many to the few.
It's why the Greenspan interventions can be defended by "free market capitalists" but not regulation, with regulations being akin to locks on the public vaults.
Dave, I've always been amazed at that too. Why is "targeting" interest rates not recognized as an obvious price control on money.
Posted by: Jasper | Oct 9, 2008 9:16:03 AM
You know, if you look at almost any chart that covers over 10 years, and you draw a line through the lowest points while using the average slope of the long term line, excluding the bubble parts, it looks like markets have another 10% to 15% to fall before potentially being considered 'cleansed'. If they go up from here while so much known and unknown garbage is still floating around, then that will just be a collective expression of futile hope. Even further down is a possibility. I'm just being optimistic.
Just today, the WSJ reported that Lehman used collateral from it's customers as collateral for it's investments and much of it might be gone. Iceland is going bankrupt. AIG is a money pit, and probably only the first one we know of. If McCain wins then God only knows what kind of insanity he will 'order' the Treasury to embark on. Analysts rave if anyone makes any money. Retail down and probably going down more. The FED is now the commercial bank of last resort and may become the bank of common resort soon. This is not a complete list of complaints. I still think the US carry trade may be a coming innovation in finance.
This is the cleansing fall that so many actually wanted earlier this year. It's not done yet. Why would anyone put new cash out into a market that represents an economy this horrible? Roubini says Dow 7000 is possible. I hope he only means somewhere in the 7000 range, such as 7999 and only for a day or two. The post Y2K market is an excellent model for my expectations of the market in the coming months. Just cut and paste the graphs.
Posted by: dead hobo | Oct 9, 2008 9:19:47 AM
So the Central Planners juice rates down below he bogus inflation rate and the banks then use all this money to make stupid loans and enrich themselves in the process. Meanwhile, Freddie and Fannie, both directly regulated by a different section of the govt, are leveraging to the max to pump the bubble. The FDIC also was watching all the while. Isn't there an insurance regulator for AIG as well?
Cmon, regulation doesn't really work because regulators are human. Subject to the same irrational exuberance everyone else is when the boom is rolling along and and the first to run and hide and point the finger of blame elsewhere when the fit hits the shan. All the while trrying to get their "fair share" and work their way into the very same companies they are "regulating" and make the big bucks themselves. Or else, if they don't really have the smarts, drive, ambition and work ethic to make it in the street, they sit there shuffling paper and working the labyrinthine bureaucracy trying to get ahead that way withour making waves and without showing that they really have no clue what's going on.
But hey, let's add more layers of government bureaucracy to augment the fabulous job they've done so far. After all, it worked wonderfully for the USSR.
Posted by: kennycan | Oct 9, 2008 9:19:52 AM
http://www.federalreserve.gov/boarddocs/testimony/2005/20050406/default.htm
Posted by: Robert | Oct 9, 2008 9:24:13 AM
OT -- where is Mark Haines? I never figured he's Jewish but could be wrong...maybe his wife?
Kudlow of course is ex-Jewish. Whatever. Blow makes you do crazy things.
Please, whatever else happens in this universe, do not let Kudlow be on my TV during the market session.
Posted by: The Original DC | Oct 9, 2008 9:27:50 AM
I just want to join in the pile on of the statement "I hate the negative implication tied to the phrase 'disdain for the government'. There is nothing wrong with wanting a small and less powerful government.
Sorry pal. Get used to it. We've seen where that idealogy leads. You are witnessing its death throws. It might have been possible to sanely implement those ideals, but the Republicans blew it (mostly by duping people with disdain for government).
Posted by: Renting in Mass | Oct 9, 2008 9:32:44 AM
