Friday, September 19, 2008
Lost in the shuffle this week were three stories laying more blame for the current mess at the feet of former Fed chairman Alan Greenspan. They are worthy of a brief note here, late in the day on Friday, as we await more bank failure news or government rescue news over the weekend.
First up is Greenspan's Folly by Michael Hirsch in the current issue of Newsweek, from whence the title of this post was culled.
This mess is mostly a titanic failure of regulation. And the largest share of blame goes back to one man: Alan Greenspan. People mainly fault the former Fed chief, who once enjoyed a near-saintly reputation because of his reputed "feel" for market conditions, for ushering in an era of easy credit that accelerated the mortgage mania. But the much bigger problem was Greenspan's Ayn Randian passion for regulatory minimalism.Obviously, this qualifies as a "Greenspan mess" sighting (the two words within two paragraphs or 100 words of each other), but special consideration would have been given had it not met the technical definition, given the title and tone of the article.
Greenspan has tried to defend himself repeatedly, though as bank after bank has failed he's retreated to the shadows. But in a 2007 interview with CBS he admitted: "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late." This, from a man who once told me, in an interview, that he most enjoyed scanning economic reports for hours in his bathtub. Now, with Tuesday's $85 billion bailout of AIG adding to the hundreds of billions the government has already put up to rescue Bear Stearns, Fannie Mae and Freddie Mac, this apostle of free-market absolutism has realized his worst nightmare. He has given us the largest government intervention into the markets since FDR. Heckuva job, Greenie.
In Bright Side of a Total Financial Market Collapse (hat tip MA), Michael Lewis over at Bloomberg chimed in with the following:
Remember when everyone believed in Alan Greenspan? When John McCain, running for president in 2000, said that if Greenspan died he'd have him stuffed and propped up against the wall at the Federal Reserve, where he'd remain chairman?Hopefully, more people will bring up the Weekend at Bernie's reference that was so funny back when bubbles were inflating rather than bursting.
No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.
He's left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.
And finally, David Blake at the Financial Times gets the award for most damning Greenspan headline of the week in Greenspan’s sins return to haunt us. He notes:
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.Truth be told, I'm not really sure if the photo above is the same David Blake that wrote this article. He is a David Blake residing in the U.K. and that's about as much as I can guarantee.
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.
No matter. Well done, all of you.