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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 | Comments (82) | TrackBack (0)
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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