Wednesday, February 24, 2010
One of the most disturbing aspects of the recent economic collapse and the ongoing financial market crisis is that there is still widespread disagreement over who or what caused it.
All too often, pundits say, "You can't lay all the blame for our current condition on one institution or one man" and that is true, but these same commentators oftentimes skirt answering the toughest of questions about what nearly brought the whole financial system down by distributing the blame among many players and many failings.
By arguing that the entire system must be reformed, nothing ends up being changed as we see now - almost eighteen months after the worst financial market crisis since the Great Depression and there have been no substantive changes to how the financial system works.
Many argue the system has become more crisis-prone.
An even more disheartening development is that there continues to be debate about whether the most fundamental aspect of credit markets - short-term interest rates - was a major factor in precipitating the late-2008 meltdown.
As evidenced by the musings of current Fed chief Ben Bernanke in early-January, the central bank - the group that controls short-term rates - suggests that people look elsewhere for the root cause of the biggest credit bubble and bust in the history of Mankind as the nation's central bankers did everything right in their conduct of monetary policy.
How could the central bank do everything right and then watch everything go so wrong?
Some of the most important debate over responsibility for the economic and financial market mess we now find ourselves in comes in the treatment of former Fed chief Alan Greenspan who, surprisingly, keeps popping up in the news after offering opinions to captive audiences as part of a quite lucrative post-Fed career as a public speaker.
What is most surprising about these accounts is that they no longer routinely carry the disclaimers that once adorned nearly every story about the former Fed chairman back in 2007 and 2008 - about how Alan Greenspan is thought to be largely responsible for our current predicament.
Typical of the lot is this report in Bloomberg by Joshua Zumbrun that treats yesterday's speech before a gathering of Credit Union representatives in Washington as the observations of an interested bystander rather than someone who was controlling the most important interest rate levers and directing the nation's regulatory bodies during the gestation period of the monstrous bubble.
We learn that the former Fed chairman thinks we've undergone "by far the greatest financial crisis globally ever" and that parts of the U.S. economy are now "dead in the water".
He didn't say who or what was responsible for their demise, but it's a pretty safe bet that his finger would not point inward if asked.
The crisis was caused by a "fundamental misjudgment in the marketplace," Greenspan said, going on to note that he'd like to see the return of a robust subprime mortgage market - once heralded as a great early-21st century financial market "innovation" - however, not with the securitization problems that contributed to the late-2008 meltdown.
As has been the case in other reports of Greenspan's recent speaking engagements, there were no references to short-term rates being held "too low for too long" early in the last decade or of an exceptionally light regulatory touch, omissions that just seem so wrong in so many ways.
It is as if the rewriting of history that sought to shift any blame for the events of the last few years away from the central bank has already been successful.
So, it comes as something of a surprise to learn that in some corners of the financial media there is still a good deal of resistance to what would otherwise seem to be a successful job of "reshaping a legacy" and the latest evidence comes in Alan Greenspan having been awarded the Dynamite Prize in Economics by the Real World Economics Review blog.
Now, to be perfectly honest, this is the first time that I've ever heard of this publication, but, based on their current findings, it's hard to disagree with the consensus that was reached by more than 18,000 votes cast in a recent poll.
I've taken the liberty of organizing the data in pie-chart form below.
By a fairly wide margin, Alan Greenspan was judged "the economist most responsible for causing the Global Financial Crisis" with Milton Friedman and Larry Summers finishing a distant second and third, respectively.
In the summary section for these three, the reasons are clear:
Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.What's most intriguing about the details provided above is that the three men finishing in the top spots cover the three critical factors, without which a financial market crash would not have been possible - flawed theories as espoused by neo-classical economists (Friedman), a powerful spokesman for Wall Street interests (Summers), and, most importantly, someone with his hand at the controls when the maximum amount of dynamite could be deployed (Greenspan).
Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.
Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.
A Dynamite Prize in Economics conducted some five or ten years from now may well put current Fed chief Ben Bernanke in the top spot. In fact, at this point, that seems all but assured since, looking back to early in the last decade, former Fed chief Alan Greenspan was widely believed to be the "greatest central banker of all time" as the dynamite was being laid. Fast forward to 2010 and Ben Bernanke becomes Time Magazine's Person of the Year.
In the meantime, the Real-World Economics Review blog is setting out to acknowledge those who saw the financial crisis coming in the inaugural "Revere Award in Economics", so named for Paul Revere's famous ride through Boston which, fortunately, more than 200 years ago, people listened to.