Monday, April 28, 2008
Jeremy Grantham's latest musing Immoral Hazard(.pdf) has been forwarded to me by a number of you - thanks.
This is certainly deserving of a more careful read, something that will be attended to a little later this morning, but just skimming through it reveals a virtual treasure trove of Greenspan bashing with a fair helping of Bernanke rebukes.
Naturally, Paul Volcker comes out looking better than ever. Here's what caught my eye the first time through:
Yes, this is a real credit crisis, substantially the worst since the Depression, so it now invites unusual responses, and what we have is a series of harried and hasty responses, perhaps even panicky, but we can at least understand the urgency. The real incompetence here goes back over 20 years: the refusal to deal with investment bubbles as they form, combined with willingness, even eagerness, to rush to the rescue as they break. It’s almost as if neither Greenspan nor Bernanke allows himself to see the bubbles. Greenspan was always conflicted and contradictory about whether bubbles could even exist or not. Bernanke, in contrast, has more of the typical academic’s certainty that the established belief in market efficiency is correct and therefore investment bubbles must be merely the product of investors’ overheated imaginations. It would be convenient to have such an important role as Fed Chairman filled by someone who actually deals with the real world, messy or not, that is given to inconvenient bursts of euphoria and riddled by considerations of career and business risk, which modify behavior far away from economic efficiency.It really was both a brilliant and shameful way to deflect blame - get right out there and talk about the whole situation as if you were a casual observer the whole time, rather than the second most powerful man in the Western hemisphere for almost 20 years.
But it is not just that the Fed of recent years has lost the plot. They apparently don’t know it. Greenspan’s book and, even more disgraceful, articles in the Financial Times (and that’s a very high hurdle!), sidestep all blame and admit few errors. His article described housing “as an accident waiting to happen.” Actually it’s brilliant when you think about it: take a distant, almost academic tone and perhaps people will ignore the facts that: first, you allowed the situation to develop; second, did not apparently see it forming (despite 2½ to 3 standard deviation data for housing that suggested a 1 in 80-year event); and third, obliquely or directly blame others. It really is shameful!
Brilliant, but ultimately unsuccessful.