Posted on 09/20/2008 5:43:12 PM PDT by BGHater
Back in 2002, when his reputation as “The Man Who Saved the World” was at its peak, Alan Greenspan, former chairman of the Federal Reserve, came to Britain to pick up his knighthood. His biggest fan, Gordon Brown, now the UK prime minister, had ensured that the citation said it was being awarded for promoting “economic stability”.
During his trip, Mr Greenspan visited the Bank of England’s monetary policy committee. He told them the US financial system had been resilient amid the bursting of the internet bubble. Share prices had halved and there had been massive bond defaults, but no big bank collapses. Mr Greenspan lauded the fact that risk had been spread, using complex derivative instruments. One of the MPC members asked: how could this be? Someone must have lost all that money; who was it? A look of quiet satisfaction came across Mr Greenspan’s face as he answered: “European insurance companies.”
Six years later, AIG, the largest US insurance company, has in effect been nationalised to stop it blowing up the financial world. The US has nationalised the core of its mortgage industry and the government has become the arbiter of which financial companies should survive or die.
Financial markets have an enormous capacity for flexibility, but market participants need to be sure that there are rules, and a referee willing to impose them. Permanent damage has been done to the financial system, despite the extraordinary measures of Messrs Henry Paulson, the US Treasury secretary, and Ben Bernanke, the Fed chairman, to address the problems that stem from the actions of their predecessors. As Mr Paulson has suggested, he is playing a hand dealt by others.
Many blame the Greenspan Fed for this mess. They are right, but not for the reason often cited. It is unfair to say low interest rates are to blame. In the past decade, there is no evidence the US suffered from excessive growth leading to inflation. The economy needed low interest rates and a fiscal stimulus to avoid a severe recession. The Fed was right to do its bit.
Where Mr Greenspan bears responsibility is his role in ensuring that the era of cheap interest rates created a speculative bubble. He cannot claim he was not warned of the risks. Take two incidents from the 1990s. The first came before he made his 1996 speech referring to “irrational exuberance”. In a Federal Open Market Committee meeting, he conceded there was an equity bubble but declined to do anything about it. He admitted that proposals for tightening the margin requirement, which people need to hold against equity positions, would be effective: “I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” It seems odd that since then, in defending the Fed’s inaction, he has claimed in three speeches that tightening margins would not have worked.
The second incident stems from spring 1998 when the head of the Commodity Futures Trading Commission expressed concern about the massive increase in over-the-counter derivatives. These have been at the heart of the counter-party risk in the crisis. Mr Greenspan suggested new regulation risked disrupting the capital markets.
At the turn of the millennium, with no move to tighten margin requirements, a feedback loop sent share prices into orbit. As prices rose, more brokers were willing to lend to buy more shares. As share prices went up the buying continued, until the bubble burst. To create one bubble may be seen as a misfortune; to create two looks like carelessness. Yet that is exactly what the Greenspan Fed did.
Bruised by stock market losses, Americans bought houses. The mortgage industry used securitised bonds to ensure that the people who initiated the mortgage did not worry about getting paid back; risk was packaged and sold to others. This time Mr Greenspan did not just stand aside. He said repeatedly that housing was a safe investment because prices do not fall. Home owners could wait out any downturn. Is it any surprise that so many people thought if the world’s financial genius held this view it must be all right?
Even as things went completely wild, Mr Greenspan dismissed those who warned that a new bubble was emerging. It was just a case of a little “froth” in a few areas. Later, after waiting until 2007, two years after he left office, he conceded that “froth” had been his euphemism for “bubble”. “All the froth bubbles add up to an aggregate bubble,” he told the Financial Times.
This time, as with the equity bubble, the mistake was not to set interest rates too low; it was to stand back as wildly imprudent policies were pursued by mortgage lenders. Indeed, any lender would have been encouraged by his words in April 2005: “Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.” Well, he was right about the rapid growth in subprime lending.
Mr Greenspan was in charge of supervising and regulating much of the banking industry for two decades. The Fed says it is responsible for ensuring “safe and sound banking practices”. It is right that other regulators should have stepped in, too – the US regulatory structure has not kept pace with market changes . But given the Fed’s institutional importance and Mr Greenspan’s personal stature, does anyone doubt that the Fed could have used its limited powers to ensure a closer examination of what was going on?
Mr Greenspan realises that something big has happened and describes it as a “once in a hundred years” event. But then, you do not get Alan Greenspans coming along every day.
The writer is an executive in an asset management company. He writes in a personal capacity
Mega Dittos.
He should be glad he’s not living through the French Revolution.
Would that be the same Gordon Brown who has introduced Sharia law in the UK? /s
The failure to connect the dots, dismissial of warnings as unfounded, declarations of unexpected calamity, calls for urgent action by government to prevent greater disaster, insistence that Congress and the Administration must act immediately, frightening secret briefings by those who claim to know what has led to the emergency and what must be done to handle it, public assurances that while the nation is in jeopardy wise heads have a plan for protection, with continuing risk to be borne by all Americans, those responsible for a solution to be trusted in the future even though they failed in their responsiblities to prevent the crisis, and don’t waste time questioning who was responsible for the failure now is the time to plan for the future.
That the problem is due to the US dropping its guard, being complacent about its superiority, not recognizing threats different from those well-known in political and military terms. And failing to see that a national threat has come from a source that no sensible person could have foreseen, sure a few gloom and doomers raised alarms about incomprehensible financial dealings, but who could believe those obsessed with imaginary hazards to the financial market.
Financial power has shifted from the US to Asia and the Middle East, some say, and who knows maybe that was the plan to outfox the US masters of the financial universe who believed that nobody better knew global economics, and no nation could challenge military protection of the US economy.
Since 9/11 the second 9/11 was predicted to happen in a way that could not be anticipated, that its success would depend on bypassing defenses derived from the first 9/11. Not nuclear, biological or chemical, but financial. Why target a few thousands when millions can be harmed using the institutions and technologies invented for global commerce — hi-jacked airliners a mere test run.
The confused rush to handle the financial crisis with piecemeal reactions developed over a couple of weeks is likely to have been anticipated by attackers to panic their targets while continuing to withdraw funds from US institutions, picking them off one by one, assured that no military countermeasure is possible so long as targets cannot be identified in time to halt the aggression.
Or is there an armageddon military spasm in the offing of wounded warriors unable to pinpoint targets so goes for all in the database with the full panoply of the revolution in military affairs.
I have a sick feeling that this is part of it.
I don’t want to read his name any more. Frankly, I think Bernake is smarter.
Tocqueville's Critique of Socialism (1848)
A solid point to ponder indeed..........Stay safe !!
I am stepping up my reloading efforts right now!
Greenspan. Wasn’t he supposed to be the most brilliant central banker ever?
I’m not buying it. The rest of the world is not going to go its merry way if the US financial world collapses. Our collapse is their collapse.
Beyond that, the simplest explanation is generally the one that is most true. You want me to believe that the collapse of the US banking system was some brilliantly thought out diabolical plot by foreign operatives, or American traitors. Does that make any sense whatsoever? We can’t get 2 economist to agree on anything. How could a saboteur come up with a plan they just knew would destroy the US financial system.
No, the answer is good old fashioned unadulterated greed. Tat is the simple answer. You don’t have to go looking for brilliant evil bogeymen when the simple truth is looking you squarely in the eyes.
Wasn’t my story....check the link........ but it as is all things possible.
No, actually I think that was Paul Volcker (he and Ronald Reagan were a helluva team).
"I absolve you of your sins, now go and sin some more."
Heh, heh, heh. Stupid rubes.
He should be one of the first to be hung when the revolution begins.
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