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Heckuva job, Greenie

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.
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.
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.

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?

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.
Hopefully, more people will bring up the Weekend at Bernie's reference that was so funny back when bubbles were inflating rather than bursting.

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.

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.
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.

No matter. Well done, all of you.

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TBAPPLE said...

Ayn Rand must be turning over in her grave every time her name and Greenspan's are put together.

"We are fast approaching the stage of the ultimate inversion: the stage where the government is free to do anything it pleases, while the citizens may act only by permission; which is the stage of the darkest periods of human history, the stage of rule by brute force. " Ayn Rand

getyourselfconnected said...

So what is the difference between Enron and the banks of today? Timing, sir, timing.

Enron Was Ahead of Its Time
You have to feel bad for those poor souls which ran Enron. They were years ahead of their time, they were just unappreciated as clever geniuses. If Ken Lay and crew had only waited a few more years, history would regard them as savvy players that used the whole "systemic risk" pocket aces to great effect.

Those poor Enron guys. While they were attacked for accounting fraud, Fannie Mae had their purchase caps lifted and was able to operate for 2 years without a single shred of quarterly reports. I mean, falsifying earnings reports is bad, but now that is the new good! Too late for Enron.

Enron used wild and complicated derivatives bets to lever up their small initial working capital into a mammoth, if hollow, money base. At the time this was panned as dangerous but today it is known as the investment bank business model. Again, too late for Enron.

Enron hid losses and wildly exaggerated their asset values using internal parameters that had no basis in the real world. Now this is currently known as "Level Three Asset Accounting" and "Mark to Model" pricing. Again, just missed by a sliver of geological time! Poor fools.

Enron shopped around for a buyer to help them survive, but after looking at their books there were no takers. Once again, we see that the Enron model was not wrong, just early. Today we have the FED and Treasury forcing mergers and buyouts for insolvent institutions, and when that fails they just bail them out themselves.

I think it is clear that the so called scandal that was Enron was something else entirely. I think Enron was punished and attacked so harshly because they exposed the clever plan the banks had for screwing the US taxpayer into paying for their never ending party. Enron was early once again, and paid the price. Their model was then copied and amplified to arrive at the point in time we are now at. I am not writing this to be funny. There is no material difference between Enron's behavior and that of today's players. Sick? Yes. Sad? That too. Basically what we deserve for being the losers that vote in fools? You bet your ass.

VoiceFromTheWilderness said...

yeah... no

First of all, though I have always appreciated your point about Greenspan, at this point, we have to recognize that what is going on is larger than individuals. The urge to find specific scapegoats is really the attempt to divert real blame, and forestall real learning.

The reality is that the Republican Party in particular, most assuredly including the entire administration, is directly responsible for the lax (geez sp?) regulatory structure that is directly responsible for the bad loans, and excess leverage. They are also deeply complicit in the creation of crony capitalism. It's worth noting that people are busy blaming individuals for how we got here, even as the most egregious actions of all -- the direct use of the power of the federal government in service of specific individuals fortunes -- is at it's peak. Their grand dream is only now really coming into being. It's funny how now one is remembering little "drown the government in the bathtub" Grover Norquist. What do you think is going on right now?

Finally the entire culture has been heading toward this moment for more than 30 years. It's been obvious to those who would see, since the days of St. Reagan that the right wing, 'free market', family values 'ideology' was a completely corrupt and duplicitous con game whose purpose was to enrich and empower the few at the expense not just of the many but indeed at the expense of the welfare of the state. The suppression of the investigation into the treasonous actions of Ollie North, George Bush Sr. and Ronald Reagan (sorry, exec is responsible -- I didn't know, doesn't cut it) by itself proved the entire society guilty of the consequences that followed. But the inability to know that 'cutting taxes' doesn't make a government smaller, but rather makes it more indebted, that's has to rank as one of the great sales pitches of all time. Plus the 'get the government off my back' con job. And of course Glass-Steagall repeal was under clinton.

Point is the entirely culture has been believing lies and burying it's head in the sand, and letting the con men and jackals take positions of power for decades now.

Blaming 3 individuals for that is a bad joke. It hides the real problem. It's rather like banning short selling, but ignoring leverage, lying about credit ratings, conflict of interest, and dishonest business practices.

Tim said...

David Blake has written to inform me that the picture provided is not his. I've put a red X over the picture David Blake #2 above, until such time that a picture of David Blake #1 is located.

Anonymous said...

Dear friend,

Realy it is very useful post , Accept my sincere thanks and appreciation

John Bill


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