Wikinvest Wire

More hits to the Greenspan legacy

Thursday, October 09, 2008

Former Fed Chairman Alan Greenspan gets both barrels from a big shotgun on the East Coast today with scathing commentaries in the New York Times and at Bloomberg, this photo from the Times piece harkening back to an era when "The Maestro" could do no wrong.
IMAGENow that the bursting housing bubble and imploding derivatives market have settled into a steady-state of extreme panic, it seems that more enlightened individuals are looking beyond "falling home prices" for a root cause of the current mess.

In this NY Times report, Peter S. Goodman reviews two decades of a "hands off" approach to Wall Street derivatives, what Warren Buffet once called "financial weapons of mass destruction".

Taking Hard New Look at a Greenspan Legacy

Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004
For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.

Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.

The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”

But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.

“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.

If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.
This is a lengthy commentary, full of details about who said what over the last twenty some years with some none-too-kind words for former Treasury Secretary Robert Rubin who, without a doubt, retired from his government job at the right time.

Clearly, the highlight has to be more damning comments from erstwhile Greenspan sycophant Alan S. Blinder, a former Federal Reserve Board member, who opined "I think of him as consistently cheerleading on derivatives."

It is well worth reading in its entirety.

The other New York buckshot comes in this commentary at Bloomberg by Caroline Baum who asks the same question that a lot of people have started to ask now that the housing bubble has gone bust, "How can problems caused by easy money be solved with more easy money?"
Easy Money Causes Bubble; Easy Money Cures Bust
Haven't we seen this movie before?

Central bank runs easy monetary policy.

Easy money inflates asset bubble.

Central bank tightens monetary policy.

Asset bubble bursts.

Central bank runs easy monetary policy to offset effects of burst bubble.

Easy money inflates bubble.

This movie played in first-run houses and in rerun during Alan Greenspan's 18-year tenure as Federal Reserve chairman.
Having studied the Great Depression, Fed Chief Ben Bernanke knows the risks associated with doing nothing and doing too much. Having inherited the downside of Greenspan's bubble, he knows the temporary cure of easy money can quickly morph into the next bubble.
At this point, with what markets have done over the last few weeks, most people are proabably desperately hoping for another bubble to somehow get inflated - the alternative would be most unpleasant.

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Jason said...

The 2008 farm bill in the US caused the economic crisis.

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