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Chairman of Financial Politburo

 Enforcer of Bizarre Economic Doctrine which Brought the Country to its Knees

Now only very lazy blog writer does not kick "Chairman Greenspan" and his folly. In a sense, his failure is just a symptom of a set of larger problems and an apt manifestation of the failure of a broader class of neoclassical economists: serving the powerful financial interests, a lack of humility in the face of the complexity of the economic world coupled with an aggressive, quasi-platonic "free market" economic messianism.

Many people plays down Greenspan character issues, saying that he was neither sociopath, nor idiot nor felon. But in a way he was all three:

• He was as close to sociopath as one can get with his compulsive careerism drive. Actually he relentless desire to preserve his position at all costs was played pretty skillfully by Bush administration.
• Hi was as close to idiot as one can get because Greenspan’s claim that the market economy was innately self-stabilizing was an absurdity. The truth is that our last Fed Chairman was not only "a dissembling, blithering idiot, a standing joke in his private practice, who could not find the optimal monetary policy with both hands." (Taylored Tales of the Monetary Bards). He was actually despised by his Wall street colleagues such as Jim Rogers for his incompetence.
• An he was as close to felon as one can get because he was a person with antigovernment instincts who for almost two decades headed an institution that was designed to save financial capitalism from itself. While gifted politician his activity in are of Fed policy was completely criminal and best "white color" criminal tradition. He helped make it easier for banksters to take excessive leverage and derivative risks while pursuing a monetary policy that was designed to protect them from their mistakes.”

But he was a real Maestro of Washington politics, masterful tactician and bureaucrat. He skillfully surrounded himself with sycophants and did everything in order to be re-nominated which at the time meant to serve the banking interests and make himself look credible, at least to outsiders. And too bad the Fed was essentially a forth branch of government with tremendous amount of influence and power, so academic economists were cowed by fear and greed and supported the "Party line" in best Lysenkoism traditions while Sir Alan and his Wall Street handlers blew serial bubbles to increase profits of the new banking economy: worldwide casino where Wall Street was the Croupier to the world.

Obvious criminal negligence of Maestro as a regulator generally should have been land him in the court of law. At the risk of beating a dead horse, the "financial innovations" of the last decade, since the repeal of the Glass Steagall act in 1999 opened the Pandora’s box of predatory abuses, outright financial sector criminality. It actually changed the main function of financial sector from its previous role of channeling money to the most promising investments to the casino gaming  -- an activity that produces no tangible or lasting good to its willing participants, yet yields to its operators an ever increasing share of economic output. While in moderation and limited to rich individuals this is not very harmful for the society as a whole activity, when it became primary activity of financial institutions a huge rent (private tax) was extracted from the society. The fact that no prosecution of "Three cards Maestro" (as Krugman aptly called Greenspan) has happened tells us quit a bit about the level of corruption of the system and the level of influence banksters have on the government ("in Goldman Sachs we trust" as Galbraith called such a behavior).  Despite the fact that Greenspan's criminally negligent behavior was going on for decade or more I’ve never heard  “boo” from the Congress or any hint about possible prosecution for criminal negligence, corruption or whatever such activities would be called.

But in reality Greenspan was a complex figure. Kind of Grey Cardinal of Washington and simultaneously "Grand Inquisitor" of economic profession.  First and foremost he was not a financier, he was an influential republican politician (representing the Reagan's wing of Republican party; he has nothing to do with evangelical crazies and little in common with neo-cons) who masqueraded as economist. And he was weak, uneducated economist and dismal economic forecaster before he became Fed Chairman, actually he was despised by his more successful Wall Street colleagues like Jim Rogers.  Fed was, is and always will be a political institution along with being a financial institution.  He is also a symbol that Washington is totally out of touch and out of control. There is still some people with a political courage there, but an mess it is a club of  political careerists and people dodging real solutions. And entrenched incumbency is a real obstacle to change. Greenspan is this sense is somewhat similar to J. Edgar Hoover: Presidents Harry Truman, John F. Kennedy, and Lyndon B. Johnson each considered dismissing Hoover as FBI Director, but all of them ultimately concluded that the political cost of doing so would be too great.

The current financial crisis is a direct result of a political crisis -- crisis of the Reagan ideology  which dominated Republican discourse for almost 25 years -- one that happened gradually and which was prolonged for more then a decade by the collapse of Soviet Union.

But an important side story to "grand deregulation" scheme, was that it restored the power of financial oligarchy, the power severely undermined by New Deal. Financial industry lobbyists essentially bought legislation and legislators. Money were always the silent fourth branch of government, so in way this was return to normal (albeit suicidal) course of history.  In a way Greeenspan symbolize Politburo-style corruption of regulators better then anybody else. Like most Politburo members he was practically a fossil when he became Fed Chair and he certainly additionally fossilized as he was past age of 70 and eventually became out of touch.  Generally it si very dangerous to let members of Politburo to control economic life ;-). The President of the Independent Community Bankers of America put it succinctly when he said:

“Does anyone think it’s a coincidence that less than 10 years after they repealed Glass-Steagall, the financial markets collapsed?” … He called current rules for banking a recipe for a “Molotov cocktail.”

The man was a shill of the large Wall street banks from the very beginning, He was essentially a Wall street lobbyist who was installed to the position of Fed chairman to promote the industry interests.  and his career can serve as a schoolbook example of an unhealthy relationship between Washington and Wall Street, which helped get us into the current mess. 

Among Greenspan "achievements" we can mention:

• Blindly carrying out destructive Reaganism policies. Being primarily not an economist but an influential Republican politician it was natural for Greenspan to carry the policy of Reaganism to the bitter end as a part of the "Wrecking Crew" (he is a vivid example of  Reagan's attempts to politicize government management positions by favoring ideology over competence.) former association with Ann Rand (even if we consider it as a shrew careeer move by boneless carererest) di not help iether. And sometimes do things that were contrary to even his perverted vision of was is appropriate under Reaganism regime (support of Bush tax cuts is a classic example -- Maestro just wants to be reelected at any cost).  Being a narcissist and obsessive ladder climber create weak point that were exploited by Cheney when he forced Greenspan to traded re-nomination for the disastrous support of Bush tax cuts. The essence of what Greenspan's Fed did was the fueling classic banking crisis (Econbrowser Guest Blog Financial Crisis and Reform Déjà Vu):

  If we set the way-back machine to 2004, a time long before terms like ARM, CDS, and AIG entered common conversation, we can see what people thought a typical bank crisis looked like. That's the year the guys in Basel who worry about such things published "Bank Failures in Mature Economies." They looked at the main banking crises in developed countries from 1980 to 2000 and asked themselves what they saw. To be sure, they saw some differences, but they also saw some patterns. Here's part of their main conclusions (note that "credit risk" is Banker for "bad loans").

  Most of the widespread [banking] failures required some amount of public support, sometimes in very large amounts. All of the episodes that involved large amounts of public support were caused by credit risk problems. ...The widespread banking crises that involved credit risk were remarkably similar. A period of financial deregulation resulted in rapid growth in lending, particularly in real estate related lending. Rapidly rising real estate prices encouraged more lending, abetted by lax regulatory systems in many cases. When economic recessions occurred, inflated real estate prices collapsed, leading directly to the failures. (BIS, 2004, p.66)

  That sounds a lot like what the US (and some other countries) experienced immediately afterwards. There had been some financial deregulation, which was followed by a period of very rapid growth in real-estate-related lending. Rapidly rising real estate values encouraged more lending. The biggest difference seems to be the last point; the recession did not cause real estate prices to collapse; they had peaked by 2006 and fell before the recession started. We could probably also argue about whether it was financial deregulation or "financial innovation that avoided regulations" that helped fuel the increase in real-estate lending. However, in this view the boom and bust cycle in real estate, the subsequent fallout for the banking sector, and the need for a major publicly-funded bailout is not remarkable; we've seen this kind of story before. In fact, Reinhart and Rogoff have gone so far as to tabulate what happens to government debt in the aftermath of a banking crisis. They find that real government debt increases by an average of 86% in the three years after the start of a crisis. So regardless of how you feel about the US government's spending during the crisis, it seems less remarkable when compared to what typically happens in a banking crisis.

• The role of "Grand inquisitor" for the economic profession. Lack of experience and complete absence of abilities in economic forecasting were the main problem is Greenspan configuration hearings ( see transcript and  The Age of Ignorance at the Federal Reserve).

  Fed staff initially laughed at his remarks. Still despite being uneducated and deeply provincial Greenspan at the same time was very authoritarian, like a typical narcissist. And in best BushII traditions he was not shy to stage staff meetings, push for fraudulent research results and punish dissenters.  Complete intellectual degradation of Fed after 14 years of his rule is evident even to untrained observer.

  The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

  This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

  "The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

  One critical way the Fed exerts control on academic economists is through its relationships with the field's gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll -- and the rest have been in the past.

  The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after "flipping" had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan said that "a national severe price distortion [is] most unlikely." A year later, current Chairman Ben Bernanke said that the boom "largely reflect strong economic fundamentals."

  The Fed also failed to sufficiently regulate major financial institutions, with Greenspan -- and the dominant economists -- believing that the banks would regulate themselves in their own self-interest.

  Despite all this, Bernanke has been nominated for a second term by President Obama.

  In the field of economics, the chairman remains a much-heralded figure, lauded for reaction to a crisis generated, in the first place, by the Fed itself. Congress is even considering legislation to greatly expand the powers of the Fed to systemically regulate the financial industry.

  ... Even the late Milton Friedman, whose monetary economic theories heavily influenced Greenspan, was concerned about the stifled nature of the debate. Friedman, in a 1993 letter to Auerbach that the author quotes in his book, argued that the Fed practice was harming objectivity: "I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results," Friedman wrote.

  Greenspan told Congress in October 2008 that he was in a state of "shocked disbelief" and that the "whole intellectual edifice" had "collapsed." House Committee on Oversight and Government Reform Chairman Henry Waxman (D-Calif.) followed up: "In other words, you found that your view of the world, your ideology, was not right, it was not working."

  "Absolutely, precisely," Greenspan replied. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

  ... ... ...

  The Fed's Intolerance For Dissent

  When dissent has arisen, the Fed has dealt with it like any other institution that cherishes homogeneity.

  Take the case of Alan Blinder. Though he's squarely within the mainstream and considered one of the great economic minds of his generation, he lasted a mere year and a half as vice chairman of the Fed, leaving in January 1996.

  Rob Johnson, who watched the Blinder ordeal, says Blinder made the mistake of behaving as if the Fed was a place where competing ideas and assumptions were debated. "Sociologically, what was happening was the Fed staff was really afraid of Blinder. At some level, as an applied empirical economist, Alan Blinder is really brilliant," says Johnson.

  In closed-door meetings, Blinder did what so few do: challenged assumptions. "The Fed staff would come out and their ritual is: Greenspan has kind of told them what to conclude and they produce studies in which they conclude this. And Blinder treated it more like an open academic debate when he first got there and he'd come out and say, 'Well, that's not true. If you change this assumption and change this assumption and use this kind of assumption you get a completely different result.' And it just created a stir inside--it was sort of like the whole pipeline of Greenspan-arriving-at-decisions was
  disrupted."

  It didn't sit well with Greenspan or his staff. "A lot of senior staff...were pissed off about Blinder -- how should we say? -- not playing by the customs that they were accustomed to," Johnson says.

  And celebrity is no shield against Fed excommunication. Paul Krugman, in fact, has gotten rough treatment. "I've been blackballed from the Fed summer conference at Jackson Hole, which I used to be a regular at, ever since I criticized him," Krugman said of Greenspan in a 2007 interview with Pacifica Radio's Democracy Now! "Nobody really wants to cross him."

• Boot licking. As Jeremy Grantham observeed (Just Desserts and Markets Being Silly Again The Big Picture):

  Greenspan, nearly 100 years later in his short-lived “irrational exuberance” phase, did not enjoy being metaphysically slapped by the Senate Subcommittee for threatening the then speedy progress of the economy. What is needed in this typical type of agency problem is for the agent on those rare occasions when it really matters, whether a ship’s captain or a Fed boss, to stop boot licking and say, “No, this is wrong. It is just too risky. I won’t go along.”

• Smoking screen of "jungle libertarianism" (aka free market fundamentalism).  Greenspan style libertarianism  is completely different from Ron Paul libertarianism. Greenspan libertarianism is might-makes-right  philosophy of jungle capitalism, a stalking horse for the brutal, direct dictatorship of big corporations and the rich. His flavour of  "jungle libertarianism" was even worse that  a smoke screen for "might makes right" philosophy with fig leaf of "free market" phraseology. In no way Greenspan was/is a proponent of "free market", he is a proponent of unlimited freedom of action for big financial corporations from which he expects to be benefit personally after his tenure ended. 

  Proponent of unregulated, law of jungles system with the exception of when the rich are involved (socialism for rich, law of jungle for everybody else). It logically leads to TBTF finance, big pharma, big oil, big insurance, big public utilities, big natural resource extraction, and big transportation”. Historically, however, the hypocrisy of "jungle libertarianism" is that somehow it portrays itself as freeing individuals from “government” when in fact (starting with Nixon & Reagan, and including rule of Clinton, the Bush Dynasty and Obama) it created a stratified system based on tiny but extra powerful elite supported by direct political capture of the all branches of government.

  And here in is the main contradiction of the free-market fundamentalists. They want smaller government and deregulation. But they end up with the rule of financial oligarchy, and power concentrated at the top 0.1% of the society. 

  Greenspan jungle libertarianism is incompatible with Democracy for the same reasons the Bolsheviks rule was incompatible with democracy: Democracy is an attempt to equalize societal pressures with regards to concentration of wealth and power by the few over the many.

  In a way Greenspan turned himself into a classic, schoolbook example of capture of regulators by financial industry. As Yves Smith wrote in Will America's Besieged Middle Class Snap-

  A paradox arises to the extent that it is true that the market is dependent on normative underpinning (to provide the pre-contractural foundations such as trust, cooperation, and honesty) which all contractural relations require: The more people accept the neoclasical paradigm as a guide for their behavior, the more the ability to sustain a market economy is undermined. This holds for all those who engage in transactions without ever-present inspectors, auditors, lawyers, and police: if they do not limit themselves to legitimate (i.e. normative) means of competition out of internlized values, the system will collapse, because the transaction costs of a fully or even highly "policed" system are prohibitive. This holds even more so for the regulators that every market requires. If those whose duty it is to set and to enforce the rules of the game are out to maximize their own profits, a-la-Public Choice, there is no hope for the system

• Unilaterally extending Fed mandate to support of equities. The essence of this perversion of Fed functions under Greenspan was that a central bank’s main function in the new millennium was to affect asset prices. See Martin Mayer (p. 314). That in turn led to too frequent and often counterproductive interest rate masturbation. Excessive manipulation of interest rates did  help stabilize stocks market (Greenspan put).  But there was a huge price for that. Great Chairmen wanted stocks and interest rates to move in one direction with stocks serving as a leading indicator of interest rate moves. This partially continued under Bernanke. How long this feat can be accomplished should be interesting to watch. Some evil tongues claim that this was partially was caused by Greenspan's craving for the spotlight as FOMC meeting became like Politburo meetings in the USSR widely covered event by mainstream press.
• Helping to pervert the role of financial sector.  While it’s true that correlation in itself doesn’t prove causation, and therefore the fact that the era of financialization and globalization has coincided almost exactly with the era of real wage stagnation, wholesale job destruction, accelerating wealth inequality, exploding consumer debt, and an economy based on the boom-bust of bubble-and-crash cycle (called the “Great Moderation” in classic Orwellian fashion), does not prove that financialization caused or helped cause these things, it does prove one thing: It did not prevent them.

  Therefore, if the purpose of an economy is to distribute wealth in a way fair to its creators, and to generate good jobs for those who want them, and to lay the groundwork for socioeconomic stability (and all non-Hobbesians or Social Darwinists economists agree that this is the purpose), then financialization and its Orwellianly-named “innovation” has failed miserably even if it was not in fact intended as a direct Hobbesian assault on these things (though I believe it was).
   

• Contribution to the financial sector hypertrophy. Criminal negligence to create counter-cyclical capital buffers and the “economic cycle reserves” in banks’ accounts. the relationship between the size of the financial sector (using the traditional measure of credit to the private sector over GDP) and growth becomes negative when credit to the private sector over GDP reaches 70-80 percent of GDP. If we view Greenspan actually as the agent of Wall Street in Fed, this is what was expected from him. But it looks like his handlers misjudged side effects (aka externalities). As reader fwm noted on September 2, 2009 (in comments to The Nature of Modern Finance « The Baseline Scenario) it might be that correction already started and will continue for a while :

  On a trend basis, financial sector profits as a share of domestic corporate profits, peaked at 39.3% in the second quarter of 2003. That share steadily declined to 23.3% in the first quarter of 2009. The following are some of the trend percentages over the time period 1984Q2 to 2009Q1:
  1984Q2 17.7
  1987Q2 23.4
  1990Q2 28.6
  1993Q2 29.7
  1996Q2 27.6
  1999Q2 32.1
  2002Q2 38.4
  2003Q2 39.3

• Abrogation of his duty as a regulator of the financial system.  Why do we use the word ‘regulation’ when what we are speaking of is law? What good is a lawless society?  In the abesence of laws it is law of jungle that dominated. From this point of view abrogation of duty as the key regulator of financial system in a criminal offence. And it is in most countries. In a way it is the offence very similar to treason. And there are some evidence that we can think about banksters and supporting them Republican party extremists as an occupying force, much in the same line of thinking that lead to the conclusion that Communist Party was an occupying force in the USSR.   Greenspan view was that nobody is able to spot - and prevent a bubble, but for some reason he, by virtue of being a Maestro can deal with the aftermath of the bubble bursting by bailing out his Wall Street handlers. He should probably consult Bernanke about how easy it was despite opening all spigots to control consequences of real estate bubble. This approach to the problem of excessive leverage and abuse of their dominant position by the financial sector was extremely destructive, much more then all Islamic terrorists who his the USA on September 11, 1991. 
  
  He views makes about as much sense as "we can't prevent kids from playing with matches;  all we can do is make sure the fire department is around to put out the fire". Among charges that can be put against Maestro:
  • Criminal negligence to regulate subrpime lenders. This is actually provable charge against Greenspan Fed ( Fed Held Back as Evidence Mounted on Subprime Loan Abuses - washingtonpost.com):

    But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

    The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

    "In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

    Between 2004 and 2007, bank affiliates made more than 1.1 million subprime loans, around 13 percent of the national total, federal data show. Thousands ended in foreclosure, helping to spark the crisis and leaving borrowers and investors to deal with the consequences.

    Congress now is weighing whether the Fed should be fired. The Obama administration has proposed shifting consumer protection duties away from the Fed and other banking regulators and into a new watchdog agency. That proposal, a central plank in the administration's plan to overhaul financial regulation, is opposed by the industry and faces a battle on Capitol Hill.

  • Criminal negligence to see the stealing of shareholder equity by bank executives, turning blind eye on the obvious fact that "cult of bonuses"  encouraged excessive risk taking.
  • Promotion of securitization. Criminal negligence to see that securitization greatly decreases financial stability
  • Criminal negligence in dealing with conflict of interests rating agencies, which became paid agents of large banks. 
• Classic example of regulatory capture. Performing the function of a Trojan horse of Wall Street in government.  The large banks and brokers lobbied for special treatment and got it; they manipulated government legislation for their own ends; They asked for and received special treatment. This were in unique position that almost no other businesses have enjoyed (with the exception Halliburton and couple of simipar companies)  — certainly nowhere near the degree the manufacturing sectors has received. Instead of earning their way via market place competition, these financial giants were uniquely treated in terms of regulation, legislation and tax policy.
• Active, often decisive participation in destruction of New Deal safeguards.
  • Personal role in the destruction of Glass Seagel.
  • Stupid cheerleading of securitization exotic financial products and derivatives. Greenspan also pushed through Gramm-Leach-Bliley and the Commodities Futures Modernization Act, which "modernized" credit default swaps by deregulating them entirely...
    • Misunderstanding securitization risks. Was it when banks which The Fed regulates got into transactions worth hundreds of billions of dollars with AIG when they had no capital - and yet The Fed did nothing
    • Promotion of derivatives. Failure to see counterparty risk in derivatives, as well as 'sleeping at the switch" approach to regulation of SIVs and other offshore entities. Brooksley Born tried to fix things, wanted to do something constructive and was rebuked and muffled by Maestro and friends...
    • Stupid and disingenuous promotion of  variable interest mortgages. Conscious ignorance of mortgage fraud despite the warnings from other Fed officials. 
  • Failure to introduce cap on gross leverage.
    • Failure to recognize and regulate cancerous growth of shadow banking.

      Causes Too Much Debt « The Baseline Scenario

      Menzie Chinn, one of my favorite bloggers, and Jeffry Frieden have a short and highly readable article up on the causes of the financial crisis. Chinn is not given to ideological ranting and is a great believer in actually looking at data, so I place significant weight in what he says.

      Chinn and Frieden place the emphasis on excessive American borrowing, by both the public and private sectors.

      This disaster is, in our view, merely the most recent example of a “capital flow cycle,” in which foreign capital floods a country, stimulates an economic boom, encourages financial leveraging and risk taking, and eventually culminates in a crash.

      They have little patience for the idea that the financial crisis was the fault of Chinese over-saving:

      It is necessary to dispense with the view that all this excess saving from the rest of the world was “forced” upon us. The rest of the world’s capital flowed to us, in part, because we wanted to borrow, and we wanted to borrow because of the Bush administration’s emphasis from 2001 to 2008 on cutting taxes while still spending.

      They do endorse as exacerbating factors the low interest rates set by the Federal Reserve earlier this decade, and the growth of a large and unregulated financial sector:

      Essentially, the development of an unregulated financial sector has circumvented the entire panoply of banking regulation created in the wake of the Great Depression. This made the financial system vulnerable to traditional “bank panics,” or “runs” on the financial system. The abdication of regulatory oversight (particularly in allowing high leverage) in the presence of too many institutions “too large to fail” meant the buildup of implicit financial liability on the part of the government.

      But the overall story is that high borrowing brought in foreign capital; insofar as the borrowing was spent on nontradable goods, such as housing and financial services, necessarily pushing up prices (there is no way for competition from houses in China to keep U.S. housing prices down).

      I think it’s hard to argue against the idea that a huge debt-financed bubble was a bad, bad thing. I still think, as you might predict, that the nature of our particular financial system both made the bubble larger than it might otherwise have been, and made its collapse more spectacular than it had to be.

      The article is drawn from a book they are working on, which I will be sure to buy.

• Manipulation of inflation statistics, targeting only retail price inflation and taking the eye off assets.  It was disastrous decision to target retail price inflation and ignore inflation of assets. In 2002-2004 he might thought that  everything was alright because inflation was low, but assets absorbed the liquidity. Or in more cynical view, he didn't go wrong. He did not care. He was willfully blind and adopted the banking Ponzi scheme in 1996. But even with retail statistics he did a couple of nice tricks that justifies his nickname as "Three card Maestro".  He was instrumental in joint efforts to fudge statistics (especially CPI) to the extent they do not reflect actual inflation and became as detached from reality as the USSR GOSPLAN numbers. As Kevin Phillips noted in The New Politics of Inflation- Asian and Monetary:

  Bill Gross of PIMCO, the world's biggest bond manager and a critic of Pollyanna statistics, pointed out in 2008 that over the decade, global inflation had averaged nearly 7 percent even while Washington proclaimed an official U.S. average of 2.6 percent. "Does it make any sense," said Gross, "that we have a 3 percent to 4 percent lower inflation rate than the rest of the world?"

  Yes and no. No, it doesn't have much statistical logic, but yes it does make tactical sense if you are a Fed chairman running a low-inflation pretense for Wall Street leverage gamesters, G-7 central bankers and Washington budget pseudo-balancers. None of these power centers can afford the various inhibitions attendant on recognizing a Second Price Revolution.

  Moreover, despite the Greenspan-Bernanke pretensions that the decade's inflation was in the 2.6 percent range, in mid-2008 the International Monetary Fund let the cat out of the bag by candidly acknowledging the "broadest and most buoyant commodity price boom since the early 1970s."

• Misplaced believe in self-regulating power of 'free markets" (very similar to excessive reliance on central planning in case of Soviet Politburo members). There is broad agreement that Alan Greenspan ... was wrong to have believed that market forces alone would insulate society from excessive financial risk. .Critics fault Mr. Greenspan for having overestimated the strength of competitive forces, a point he essentially conceded... But the financial crisis was not caused by a shortfall in competition, it was fueled by excessive  competition which was enhanced on banks after Glass-Steagall was killed.  

  Adam Smith’s theory of the invisible hand, which says that market forces harness self-serving behavior for the common good, assumes that markets are competitive... The invisible hand, however, requires not just strong competition but also two other preconditions. The economic models that spawned Mr. Greenspan’s former optimism simply assume those conditions, despite compelling evidence of their absence.

  First, those models assume that rewards depend only on absolute performance, but ... payoffs are often tightly linked to relative performance. When a valuable new piece of information becomes available to the investment community, for example, the lion’s share of the gain goes to whoever trades on it first. For an individual firm..., it is thus completely rational to invest millions of dollars in computer systems that can execute stock trades even a few seconds faster than others. But rivals inevitably respond with similar investments. Taken together, these expenditures are wasteful in the same way that military arms races are.

  A second problematic assumption of standard economic models is that people are properly attentive to all relevant costs and benefits... In fact, most people focus on penalties and rewards that are both immediate and certain. Delayed or uncertain payoffs often get short shrift. ...

  During the recent bubble, unregulated wealth managers created mortgage-backed securities that enabled investors to magnify their returns through financial leverage...

  Many experienced analysts had warned for years that those derivative securities were vastly overpriced, but Mr. Greenspan assumed that prudent concerns about the future would prevent investors from taking foolish risks. ...

• Support of Bush tax cuts in exchange for reappointment.

  President Bush argued in February 2001 that his fiscal policy "returns ... the surplus to the American taxpayers". In his 2001 testimony to Congress, then Fed Chairman Alan Greenspan supported President Bush by offering projections of "an on-budget surplus of almost $500 billion ... in fiscal year 2010". The National Debt would soon be retired and the Boomer's retirements secure.

  Greenspan offered a projection of "an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs."

In the classic game called Jenda, players take turns removing a wooden block from a tower of such blocks and balancing it on top, creating a "higher and increasingly unstable structure as the game progresses." The game ends when the tower falls in any way, with the loser being the one who made it happen. If we talk about dismantling of "Great Deal" safeguards as variant of Janda game, Greenspan was an expert player, he managed to leave the collapse to Bernanke.  As Thomas Frank masterfully depicted this is typical for Wrecking Crew. Here is one Amazon review of the book that summaries key points well:

A Depressingly Compelling Review of Conservatives' Philosophy of Government in Practice , August 15, 2008 by Steve Koss

Following up on his masterly examination of the paradox under which Red Staters consistently vote Republican against their own economic self-interest (WHAT'S THE MATTER WITH KANSAS?), Thomas Frank sets out to trace the present-day conservative Republican approach to government in THE WRECKING CREW. What he demonstrates is deeply disturbing even though it has remained on display virtually every day of the entire Bush II administration.

According to Frank, the conservative worldview is totally committed to "the ideal of laissez faire", meaning minimal government interference in the marketplace, along with hostility to taxation, regulation, organized labor, state ownership, and all the business community's other enemies. "The conservative movement promotes the interests of business exclusively over all else in accordance with the motto, "More business in government, less government in business." So-called "big government," also tagged as the liberal state, is the enemy; in fact, virtually all government is the enemy, other than the national defense.

Mr. Frank follows the conservative movement from the turn of the Twentieth Century through the Depression and New Deal, focusing most heavily on the movement's rebirth under Ronald Reagan and on into the new millennium. Along the way, he discusses the growth of lobbying as a major force in converting the nation's capital into a massive feeding ground for corporate special interests. Frank also highlights the manner in which conservatives have repeatedly run the country into huge spending deficits in order to "defund the left" while simultaneously politicizing government management positions by favoring ideology over competence. The end result under Republican conservative stewardship is government that demonstrates itself as ineffectual and incompetent, offering but further proof that big government is inherently incapable of working and needs to be outsourced to private, professional concerns who can do the job correctly (and then inevitably failing to do so).

THE WRECKING CREW is filled with fascinating side observations, such as its note that the movement has always lionized bullies, from Joe McCarthy to Bill O'Reilly, from Jack Abramoff and Tom DeLay to George Allen and Michelle Malkin (whom Frank describes hilariously as "a pundit with the appearance of a Bratz doll but the soul of Chucky"). The book's most effective and outrage-generating section has to be its chapter on the Marianas Island of Saipan. Frank casts Saipan, with all its corruption, nepotism, income inequity, slave labor sweatshops, and local political control exercised in the name of big business as the perfect and ultimate model of the conservative movement ideal, a truly horrific prospect. He also notes, properly, that the morass that is today's Iraq is equally a product of the attempt to force fit these same free market ideals to a foreign country, implemented (so the Bush Administration hoped) by inexperienced, wet-behind-the-ears young idealogues, home-schooled ultra-Christians with college degrees from the likes of Patrick Henry College, Jerry Falwell's Liberty University, and Pat Robertson's Regent University. Saipan and Iraq constituted "laboratories of liberty," modern-day "capitalists' dreams" whose realizations are (or at least should be) shameful American nightmares.

There is little good news in THE WRECKING CREW. Author Frank shows that our national government has been hollowed out under Republican conservative control, savaged into an ineffectual husk. Furthermore, he illustrates clearly that this was no mistake, that it is part of a deliberate process not just to privatize government and eradicate government regulation but to make these changes permanent by destroying the liberal left (and with it, of course, the Democratic Party). Frank demonstrates well that present day politics has truly become, to invert von Clausiwitz's famous maxim, "a continuation of war by other means." Regrettably, one side of the battle continues to play the game as politics, as elections won or lost and citizens swayed or not, while the other side approaches it as an act of war, a no-holds-barred contest in which the only goal is the complete and utter destruction of the other side.

THE WRECKING CREW is compelling and informative even as it paints a bleak picture of an America being driven rightward and increasingly toward the excesses and inequities of the pre-New Deal era. We all know how that era ended in October, 1929.

Some people thing that collapse is now irrevocable. Here is how the reader  Bayard commented  Simon Johnson post The Nature of Modern Finance « The Baseline Scenario:

I view a healthy economy in much the same terms as I view human health. Enough of most things proportionally as a diet or lifestyle; the secret is balanced living (i.e. enough food in the right proportions and amounts, enough sleep, enough exercise, etc.) to keep a person in peak health and the ability to perform. If one overdoes anything to spite other things (i.e., over or under eating, sleeping, working, etc.) then that imbalance will create problems, usually both physical and psychological. This is standard fare in the prescription for good health.

Economies are much the same. America has at least two major parts of its economy that are far out of balance: finance and health care. There is too much of the GDP represented in each, and the benefits of the overage are not distributed to the broader economy in any rational way, but tend to serve the interests of a very small minority. I would note that the other side is represented by the shrinkage of “real” productivity in that manufacturing has shrunk to an all time low as a percentage of GDP. What this means to me that wealth is not being generated in such an imbalanced economy by creating value, but rather in “churning.” That is by leveraging financial assets against the rest of the economy, and thereby soaking up money without creating productivity in the traditional sense.

The unfortunate fact is that the wealth has become so focused that it has the power to control its own destiny, for now. The greater unfortunate fact is that sooner or later what is in the interest of the moneyed few, if it continues in ever growing concentration, will act to the detriment of all, because such an economy will collapse eventually if not brought back to equilibrium. The final result will be actual revolution and social collapse. It is an inevitability.

I was in hopes that the new President might have a strong enough mandate to coax the powerful to participate in a social and economic rebalancing. I now think that this is not possible. I hope that I am wrong.

His obsessive ladder climbing and narcissism were well served by his service to the doctrine he probably did not believed himself. That makes him not unlike members of Soviet Politburo, who were often called grey cardinals of Kremlin.  Like them he was an card carrying member of party which adheres to some unrealistic ideology. While I doubt that any of the "grey cardinals" believed personally in the ideology they espouse (their wives and daughters were shopping in Paris, their sons went to best London schools), they were instrumental in enforcing it on population at large. 

Greenspan also perfected Politburo-style art of "Looking Serous and Appearing to Say Important Things While Actually Communicating Nothing". This is a crucial skill for anyone in an important unelected position.

Among the personality traits clearly visible in Greenspan that  are common to traits of  a typical member of Soviet Politburo:

• Can be characterized as a compulsive ladder climber (this Greenspan's trait was first noticed by Ann Rand). 
• Fake, insincere adherence to the dominant ideology as the cornerstone of career success.
• Extreme, sociopath-level arrogance, strong autocratic tendencies
• Ability to lie on the spot; calm under pressure.
• Extreme narcissism combined with cultivating his own cult of personality at Fed, Washington and society at large. 

Five centuries ago, Niccolo Machiavelli explained how to undertake a revolution from above without most people even noticing. In his Discourses on Livy, he wrote that one

"must at least retain the semblance of the old forms; so that it may seem to the people that there has been no change in the institutions, even though in fact they are entirely different from the old ones."

That was the essence of Reiganomics which restored Gilded Age with its absolute rule of financial oligarchy at the USA.  An important player in this counter-revolutions was Maestro Greenspan.  Along with "Enron price" he also carry now dubious distinction of being one of the key architects of the current financial crisis.  Although the US like USSR were on unsustainable course for a while, individual blunders by key politicians were important fact in speeding the collapse.

One of the most important lessons from the subprime crisis is that the growth of banks’ capital fell behind the dramatic growth of total credit and overall risks over the last twenty years. Until August 2007, Fed  were not alarmed by this, having been lulled by the comforting hypothesis that the risks were sold outside the banking system and widely spread over many investors. The almost $ 500 billion (and counting) of bank losses incurred prove that this was pure wishful thinking: first, most risks were still on banks’ books; second, other risks had to be taken back to avoid further reputational damages, and worst of all, some risks were simply hidden under the carpet in the form of a “shadow banking system”, according to the Bank for International Settlements.

Fixing the Banks- Hurry Up, Please

In the past few years the main international agencies have repeatedly warned about the risk of a major crisis, but at the same time they kept stressing that the international banking system was robust as never before, thanks to the overall prudential supervision, the capital adequacy rules put in place since the mid-80s, and, most importantly, the imminent significant overhaul of the Basel agreements.

The simple and sad truth is that in the last two decades (and in particular in the last one) we have seen an unprecedented credit boom with the usual component of euphoria and over-optimistic valuations. Bank capital was adequate under in that favorable scenario but not in the face of a consistent shock. As soon as the overall mood changed, the markets priced into interbank rates and credit default swap premium a significant probability of illiquidity and even insolvency for all major banks, notwithstanding the extraordinary interventions of the main central banks as lenders of last resort and the not-less-extraordinary rescue operations put in place for Northern Rock, Bear Stearns, and the like.

As Greenlaw et all put it, the crisis will abate once one or more of three conditions are met:

• Banks (both commercial and investment banks) contract their balance sheets until their capital cushion is once again large enough to support their balance sheets;
• Banks raise sufficient new equity capital to restore the capital cushion to a size large enough to support their balance sheets;
• The perceptions of risk change to a more benign outlook so that the current level of leverage can once again be supported with existing capital.

The third appears highly unlikely. This means that the choice is between great injections of bank capital or greater credit contraction with its attendant macroeconomic pain. Clearly, the priority now should be to rebuild the capital base of the main banks.

Regulators are using all their powers of moral suasion to push banks towards capital rebuilding, but new equity issues have not even kept up with new capital losses (write downs, etc.). In a few cases, the gap is quite significant.

From publicly available information Greenspan emerge as man a person who can do anything to reach career goal and does not have any principles or moral conviction, quintessential ladder climber.  He understanding of economics was so limited that it was raised as a problem during his nomination and he often shock Fed staff with his lack of economic knowledge. At the same time in his position he was a strict authoritarian, crushing any dissent, obsessed with preserving his position  and enlarging and preserving his cult of personality. Narcissistic to the level of sociopathy (which might explain his cool behavior under tough questioning -- this is typical for sociopaths).

Neither Greenspan nor his book matter anymore and at $6 the used copies are still probably 1200% overpriced. So why writing and maintaining this page ? There are two reasons. One we unfortunately cannot reposes the profits form the book in a manner of foreclosed homes of insolvent lender, despite the fact that Greenspan is more intellectually insolvent than most subprime lenders. There might be some minor importance of the book as the last hurrah of Reaganism but this doubtful. Ideas which Greenspan opportunistically endorsed (as a compulsive ladder climber he probably never had his own convictions) are dead.  I think Reaganomics was the variant of Soviet Lysenkoism, an attempt to restore the power of financial oligarchy it enjoyed during Gilded Age. Now the country painfully is getting rid of this scrooge.  Paradoxically the Greenspan is direct beneficiary of the collapse of the USSR.  Often overlooked reason of "the great moderation" (if we abstract it from disingenuous attempts by Greenspan and Co to fudge inflation using CPI modifications and core CPI concept) was the collapse of the USSR which had led to dollarization and Latin-Americanization of the huge territory with approximately half-billion people with the significant industrial base. Excessive dollars were absorbed by those new states (both by population due to instability of local currencies and Weimar or Zimbabwe style inflation and governments) like there was no tomorrow.

They also provided important new markets which previously were almost completely closed for multinationals. Economic collapse due to shock therapy and break-up of established economic links due to new borders and virulent nationalism also resulted to huge flow of highly qualified specialists from this region to major Western countries and Israel, the factor that has major economic consequences (new customers, productivity miracle, etc).

Collapse of the USSR was once in a century event of tremendous economic importance.

Some people call Greenspan "Rasputin of the US Finance". While some strong analogies exists (Ann Rand nonsense  is very similar to bizarre "repudiation of sins with sex" Rasputin professed). But in general this is incorrect. He is more like Lysenko of US finance or as Peter Schiff  put it "a drug dealer" (Maestro won't face the music):

By Peter Schiff

In an interview last week on CNBC, former US Federal Reserve chairman Alan Greenspan cast his eyes on the charred landscape of the national real estate market and offered high-minded criticisms of the obvious excesses and irrationalities that brought on the devastation.

Greenspan's attitude was akin to a retired drug dealer lamenting the urban blight caused by rampant addiction. He noted that housing prices were still too high, that too many homeowners were upside down on their mortgages, and that Fannie Mae and Freddie Mac were accidents waiting to happen. Methinks the serial bubble blower doth protest too much.

The housing bubble was Greenspan's doing pure and simple.

Actually the whole Reagan's market fundamentalism movement has some similarities to the Bolshevik's revolution.  Both were actually counterrevolutions financed by US financial oligarchy. Both attempts to destroy the establish checks and balances, the political system of the society. and both successes putting the host countries in various degrees of misery. consequences of Reagan revolution are actually pretty benign in comparison with Bolsheviks. History repeats first as tragedy and then as farce.

As Kissinger notes representative of a "revolutionary power... " can be defined as " a movement whose leaders do not accept the legitimacy of our current political system.".

Libertarian pretense and Politburo hardcore

Talk is cheap. And Greenspan libertarian pose is just a smokescreen. He is really a Politburo type of apparatchiks. Like most Politburo members it has completely bland record before navigating his way into Chairmanship. Pathological obsession with "ladder climbing" (and he was masterfully taken for a ride by Cheney forced to support Bush tax cut).  The book creates the impression of self-centered authoritarian, narcissistic figure. Strong desire to instill "cult of personality", very limited toleration of dissent:  In 20 FOMC interest-rate decisions as chairman, Bernanke has recorded nine with one dissenting vote and two with a pair of `nays.' His predecessor, Alan Greenspan, had 17 decisions with one or two dissents in his last 10 years as Fed chief.

Fudging statistics

Socialist countries like China are infamous for fudging economic stats, but under Greenspan, lying about inflation became as American as baseball. Academic economists have long grumbled about the unreliability of official inflation data, but the belief that things are worse than governments are willing to admit is trickling down from the ivory tower. Even Charles Bean, the new deputy governor of the Bank of England, has publicly criticized central bankers' use of "core inflation" data, which disregards food and energy prices, in setting policy. When "non-core" items like gas and cereal rise so much that consumers have little cash to spend on anything but those essentials, it's hard to ignore. The temptation to fudge numbers is one that bureaucrats worldwide find hard to resist. In Argentina, where government reassurances about single-digit inflation have long seemed unconnected to consumer reality, revamping the government statistics office became an issue in the last national election. In China, where data based on the prices for state-provided goods and services are increasingly irrelevant in a privatizing economy, the stats are so out of whack that Goldman Sachs has resorted to a movie-review-style system to rank the quality of official data on a scale from one to five. But the habit of playing fast and loose with numbers isn't native to the developing countries where high inflation reigns. Indeed, the popular "core inflation" method for measuring changes in consumer prices is actually as all-American as Enron's accounting practices.

Rasputin-style promotion of dangerous financial instruments which let to slow-motion meltdown:

The gradual way the crisis has unfolded has led to an angels-on-the-head-of-a-pin debate among economists about whether what we’re suffering really deserves to be called a recession.

Yet even a slo-mo crisis can do a lot of damage if it goes on for a year and counting.

It is pretty dialectic fashion hapless forecaster, who was never considered to be above average by his Wall Street colleagues, a person with the clear record of shameless lobbing for banks interests (see Senate hearings) first became Maestro and then after subprime bust again turned in  hapless The Wonderful Wizard of Oz  from The Wizard of Oz (1939)

A must read book about the person who was instrumental in converting the American Economy into Three Card Monty table.  The wealth of nations does not consist of " financial services " resulting from massive speculation and securitization undertaken by Wall Street investment banks and their allies within the Federal Reserve System.

Euro Pacific Capital

Greenspan’s current attitude was akin to a retired drug dealer lamenting the urban blight caused by rampant addiction.

The  Rasputin model (aka "fireman as arsonist") also might be appropriate. The Fed and other regulators took a reckless approach to regulating the financial sector. It was the laissez-faire approach of the Bush administration, and (tantamount to) self-regulation, which really means no regulation and a lack of market discipline. The banks' and brokers' risk-management models didn't make sense because no one listens to the risk managers in good times. As Chuck Prince (the deposed CEO of Citigroup) said, 'when the [casino] music plays you have to dance [make bets] 'They have swapped U.S. Treasury bonds for toxic securities. It is privatizing the gains and profits, and socializing the losses, as usual. This is socialism for Wall Street and the rich.

If you let Bear Stearns fail you can have a run on the entire banking system. But there are ways to manage Bear or Fannie and Freddie in a fairer way. If public money is to be put at stake, first all the shareholders of these companies have to be wiped out. Management has to be wiped out, and the creditors of Bear should have taken a hit. Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase (JPM), which bought Bear Stearns?

Corruption among public officials surprises nobody.  However, Greenspan can comfortably claim the ineptitude as a defense. The fact that the mortgage market spiraled out of control (in a whirlwind of conflicts of interests, greed, fraud, manipulation, weakening lending standards, and cheap money) could be attributed to ignorance or lack of IQ to actually police the mortgage industry/market.  If you need evidence of how widespread the problems were in the industry just read the new stories about Countrywide, Fannie Mac, and Bear Stearns since last spring.  Better yet, take a look at Mortgage News Clips for its carefully selected stories and commentary or read Richard Bitner’s book on the problems in the industry from the Countrywide’s and WAMU’s down to the mortgage broker on main street.

Amazon.com Customer Reviews The Great Unraveling Losing Our Way in the New Century

Krugman starts his book with a bang. He tells us of "Revolutionary Power," the notion of a government that doesn't accept the current system's legitimacy and doesn't follow the usual rules. Although the concept was first written of in regard to 19th century Europe and the author of the idea was a doctoral candidate in 1957 named Henry Kissinger, the description struck Krugman as remarkably similar to what is happening today in America.

It seems that the Revolutionary Power acts so out of line with normal diplomacy and politics that other nations and individuals don't realize how radical the RP is. Even when it is increasingly obvious what is going on, people refuse to believe it. The few critics will be dismissed as shrill or hysterical or as conspiracy theorists.

For example, Yves Smith was the following assessment of Greenspan legacy:

It's one thing for Greenspan to sell books and give speeches to try to salvage his reputation. Nixon did that too, with more success and less profit. It is quite another for him to benefit in a far more direct fashion from the devastation he created, by hooking up with the fund that scored the biggest kill from the worst aspects of the negative real interest rates that Greenspan put into effect.

Overly cheap credit always and inevitably leads to bad investments, And Greenspan of all people should have known that. How he can rationalize his actions then and now is beyond me. But I forgot. Objectivism means never having to say you're sorry.

Actually, it is worse than that. More than 50 years ago, this country could be awakened from its nightmare of Joe McCarthy-led Communist-in-every-closet witch hunting by the exposure of McCarthy's methods in the first nationally televised Congressional hearings. The pivotal moment occurred when a Boston lawyer, Joseph Welch, rebuked McCarthy with the now-famous phrase, "Have you no sense of decency, sir, at long last? Have you left no sense of decency?"

But decency and propriety mean nothing in America these days. What used to be recognized as corruption is now shrugged off as business as usual. When a nation loses its moral compass, it also loses its soul.

Comments

"Cassandra" said...

Emmanuel, To be be fair, one might argue it wasn't H Paulson's job to share with the world his innermost thoughts on the future hazards of (and opportunities betting against) structured sub-prime stuff. One would argue, however, that it was Mr Greenspan's job, and in this respect, he failed miserably. I wonder if J Paulson will listen to AG were he - again - to suggest shooting the moon by taking on some curve risk, as he did to homeowners in 03 & 04, encouraging them to swap their long-dated fixed mtgs for "cheaper" ARMs by telling them it was safe to do so. Too bad he neglected the entire primer on basic associated risk management when waving the bright-red ARM cape at those considering such a leveraged recap of their primary residence following an already stellar move in historical prices.

While business leaders' ethics are pervasively questionable, they merely reflect America's expectations, whereas despite the depths to which the Bush Admin's has brought public service, Greenspan's divergence from his Public Service responsibility is far worse, hands-down.

I think it's safe to say that Alan Greenspan will go down in history, along with George W. Bush, as a reckless and radical proponent of failed laissez-faire policies, as well as one of the worst public officials in American history.

Old News ;-)

[Mar 9, 2010]  Not Regulatory Imprudence, Nonfeasance~! By Barry Ritholtz

March 8, 2010

In his column titled An Irish Mirror, Paul Krugman notes “the most striking similarity between Ireland and America was “regulatory imprudence”: the people charged with keeping banks safe didn’t do their jobs.”  (emphasis mine)

The phrase “regulatory imprudence” is far to imprecise — and wimpy — to describe what took place. Imprudent, as defined by Merriam Webster, is “lacking discretion, wisdom, or good judgment.” (Imprudence is the “state of being imprudent”).

If the Fed was only guilty of bad judgment or lack of wisdom, we could live with that. After all, people are fallible and judgment can go awry.

But that was not what occurred; rather, under Alan Greenspan, the Fed was guilty of Nonfeasance.

According to West’s Encyclopedia of Law, the definition of nonfeasance is far harsher:   It is the intentional failure to perform a required duty or obligation.

When Greenspan made the decision to not regulate or oversee non-bank lenders, his choice was nonfeasance. He chose not to do something that he was bound to do as part of his official duty. (In common law, this was punishable by fines or imprisonment or both).

Mr.E.:

In principle I agree, although it may be misfeasance. I wanted to be sure I had my terms correct, so a quick check with Wikipedia (hardly an authoritative source) provides the following regarding duties of public servants:

“At present the terms misfeasance and nonfeasance are most often used with reference to the conduct of municipal authorities with reference to the discharge of their statutory obligations; and it is an established rule that an action lies in favour of persons injured by misfeasance, i.e. by negligence in discharge of the duty; but that in the case of nonfeasance the remedy is not by action but by indictment or mandamus or by the particular procedure prescribed by the statutes.

This rule is fully established in the case of failure to repair public highways; but in other cases the courts are astute to find evidence of carelessness in the discharge of public duties and on that basis to award damages to individuals who have suffered thereby.”

And what about Mr. Greenspan’s successors ? Yes, they may have been handed a completely misguided effort to lead, but they chose to continue the course rather than make any attempt to correct the errors. Are they not equally culpable?

Pat G:

I agree with your, “intentional failure to perform a required duty or obligation.” Which then makes it malfeasance; wrong or illegal conduct, especially in politics or civil service. Which is an unlawful act.
Also “punishable by fines or imprisonment” but good luck with that…

[Feb 23, 2010] And a round of applause for those who blew up the economy… by Stacy-Marie Ishmael

Feb 22, 2010 | FT Alphaville

We’d never heard of the Dynamite Awards before, but they appear to be — in ethos at least — a distant cousin of the notorious Darwins.

But unlike the Darwin Awards, these gongs aren’t handed out to those who’ve managed to kill themselves in inordinately silly ways. Instead, as the Real World Economics Review blog explained, the winners are:

[those who] have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.

More than 7,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review. With a maximum of three votes per voter, a total of 18,531 votes were cast.  The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting.

The first-place awardee may comes as no surprise — Alan Greenspan, with the lion’s share of the votes –  but the second and third-place winners were interesting selections.

For more, see the post at Real World Economics.

Also nominated: Fischer Black and Myron Scholes, Eugene Fama  and Assar Lindbeck.

TC:

Osama would thank these people for doing what he failed to do.

kim

I don't understand why Black/Scholes get a look in. I assume it is because of their option model ?

Nothing about the recent crisis has invalidated that model. It funtioned throughout. Yes, losses were made when markets were yukky, but these were inconsequential to the amounts of profits it had already realised. Since the model identifies the assumptions upon which it relies, it is not too difficult to understand and manage the remaining risks, and make sensible decisions.

It is a profoundly useful model, and if you lose money on it, you are a fool, or very very unlucky.

Don't blame the model.

What has become invalidated is using "econometric" models (such as credit) where there was no hedge (the model was used as an excuse to bet). The two have been conflated. The price of houses always rises, and house prices are uncorrelated.

That's is not an arbitrage model - in the absence of the ability to hedge those assumptions, it's an opinion. Nothing more.

And while Scholes did lend his name to LTCM, that shouldn't detract from his achievements. Like many academics, he didn't understand the short squeeze.

But BS showed us that we could value contingent claims relative to the underlying asset, provided that we hedged them, and they did so in a mathematically robust framework. Quantifying the work of French mathematicians in the early 20th century.

Stupid people, who didn't understand that the model was an arbitrage (ie relied on hedging), then took open (unhedged risks) thinking that models, which had worked so well in other fields but were in fact so different in character, were all the same, lead to this downfall.

These people don't understand the difference between a model and an analyst's prediction.

ChrisJCook

Yup, I've been saying for years that Greenspan deserved the Nobel for accelerating the inevitable collapse of an unsustainable system by at least 10 years.

Keen's a class act: I also like Dirk Bezemer's approach, plus Richard Werner, who actually came up with the QE phrase fwiw.

taxloss

Rather more infrequent than the Darwins because you need to have the global economy blow up first. Prob why you haven't heard of them. Steve Keen v keen on it. http://www.debtdef...rize-in-economics/

[Feb 08, 2010] Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (Hardcover)

Great book, great insights, deep understanding of "Politburo" mentality of Maestro.

December 9, 2009 THE book on Greenspan by the #1 world expert,  by Fernando del Pino Calvo (Madrid, Spain)

Fred Sheehan is THE expert on Alan Greenspan and, in my view, this is THE book to know about him and his years at the Fed. Sheehan has written extensively about Greenspan and his policies for many years, being first skeptical and then critical when everyone else believed in the Maestro myth, which of course Greenspan himself and the media helped create through the long bull market. Thoroughly researched, the book is mostly factual, based on FOMC transcripts, memories from other Fed officials, conversations with colleagues, and other sources, each of them duly mentioned by the author. Among many eye opening issues, like his mediocre real forecasting track record, the transcript of the Senate confirmation hearing of the soon-to-be Fed Chairman back in 1987 will surely impress you. This is a serious book which shows the man behind the myth, and the politician - not the expert - Greenspan really was. Not only did he help create the bubble: he probably was a bubble himself. Finally, the book is a deep reflection on the flaws of the Federal Reserve as an institution. In the end, we must always focus on systems, not individuals. What has happened is not about a fallible man; it is about the flawed system that allowed him to do damage.

December 5, 2009 Tremendously revealing and unusually sound, by Jeffrey Tucker "Jeffrey Tucker " (Auburn, Alabama)

I figured that this book might be just another in the huge outpouring of post-crash reflections. I was wrong. The prose is impeccable. The research is extensive: I felt nearly a sense of guilt that the author did all the work and I had to do none. The theoretical framework is what surprised me most: he really understands debt, inflation, sound money, and power politics. So far, I would say that this book is the definitive account. It hits Greenspan in the only way that really matters: not whether his policies were as good as they might have been but the extent to which they served the cause of the State. I'm supremely impressed with this work. I should add too that I literally could NOT put this book down once I started it. My congratulations to the author who has produced a work that stands above the rest - head and shoulders above them.

A final note here: I think this might be the only book so far to fully explain the nature of the relationship between Greenspan and Rand.

December 5, 2009 Tremendously revealing and unusually sound, by Michael E. Lewitt

This book is an insightful study of the profound failures of Alan Greenspan's tenure as Federal Reserve Chairman. Fred Sheehan clearly articulates how Greenspan created a system that privatizes profit and socializes risk. In doing so, he performs an extremely important task in speaking truth to power about a man who was unquestionably revered by virtually every powerful sector of the financial sector. Mr. Sheehan shows why this was the case - because Greenspan was serving the interests of Wall Street at the expense of Main Street.

This book provides an indispensable explanation of the Greenspan years, and serves as a bold warning regarding the misguided policies that continue to lead this nation down the wrong path. Mr. Sheehan deserves great praise for this book, which should be read by every person who wants to understand what is happening to our system.

January 20, 2010 The Truth Behind Alan Greenspan,  by Norman Horn (Austin, TX United States) -

Originally published at the LibertarianChristians Blog:

For the bulk of my life so far, I have lived in the age of Alan Greenspan, the chairman of the Federal Reserve Bank from 1987 to 2006. Mentioning a Federal Reserve chair like this in the past would not have been considered normal, yet Mr. Greenspan has a sort of legendary status associated with him. Well, at least some people consider him to be an iconic figure, but more and more the general public is coming to realize the destructive effect he has had on the world economy. Books like Frederick Sheehan's "Panderer to Power" have something to do with the dispelling of the myth.

Sheehan's book is the first critical, post-crash biography of Greenspan. Using Greenspan's own words, Sheehan tracks Greenspan's education as a young man, early professional life, his meteoric rise to stardom as a celebrity figure, and his tenure as Federal Reserve chair. The questions primarily raised are: What kind of man is this who has so much power over the world, and what did he do that has led us to today's economic crisis? The answers are quite surprising. Here are some of the things I learned about Greenspan.

* Greenspan was supposedly a disciple of Ayn Rand, yet he probably did not understand what Rand generally was talking about. Nathaniel Branden wrote later, "I wondered to what extent he was aware of Rand's opinions." Apparently, he would even argue the question of his own existence with the objectivist coterie. Rand herself wondered, "Do you think Alan might basically be a social climber?"
* Even in his pre-Fed years, Greenspan was actually a rather mediocre economist and forecaster. Time after time he would make highly-publicized predictions and yet the exact opposite would occur (see pages 43, 54, and chapter 7).
* Greenspan was a master self-marketer, which is probably the reason for his rise to stardom. He constantly engaged the media and the New York financier social scene, hence he had everyone's ear without the wisdom to back it up. How else can you be both a professional economist and yet date Barbara Walters?
* Even though Greenspan has supposedly had a historically apolitical career, he was a master politician (read: liar). One only need look to his involvement during the Nixon and Carter presidencies to realize that he knew how to play the political game brilliantly.
* Greenspan's policies during his Fed years were incredibly political as well. He frequently timed his actions in accordance with what was politically expedient. Wall Street and the fat cat Congress could count on the legendary "Greenspan Put" to be their savior when things were looking down.
* Post-crash, Greenspan has tried to play his own game of historical revisionism about his policies that led to the economic crisis. Sheehan exposes these and many other lies.
* Greenspan has been hired as a consultant by many of the firms who profited from the economic crisis via government handouts. Go figure, the man who enriches Wall Street and causes the meltdown gets the extra paycheck...

Clearly, there is much yet to learn about the man whom many called "the second-most powerful man in the world" for nearly twenty years.

In summary, Sheehan's retrospective on Greenspan is a fascinating read, and I anticipate it will become a valued resource for those looking to understand the Greenspan years from a perspective that offers more than tacit approval of inflationism and government intervention in the economy. Keep in mind, though, it is not an easy read. Economics is discussed at a fairly high, but understandable level. You will probably end up like me, referring to Wikipedia and other sources to recall certain investment and econ topics. Nevertheless, Panderer to Power is worth your time if you desire more knowledge about the Greenspan legacy.

Indrajith A. Weeraratne "Andrew Weeraratne " (Miami, Flordia, USA)

It is a timely written horror story that you won't be able to put down if you are into money. A loud wakeup call to the citizens as the USA has been descending on a path of corruption decade after decade with each succeeding decade getting deeper into foul play following the historical footsteps of ancient Rome, this book, on a personal level will make you understand the trends affecting the financial markets. Thus anybody who wants to make money in the markets should read this book because unless you know the system insightfully you will not be able to make money through the system. The author, Fred Sheehan, does not give us his opinion but give us facts using the synopses of speeches made by those in power during the decade of greed. However be prepared to be overwhelmed as the book, within its limited pages, attempts to cover a whole lot of material that took the financial markets in an unprecedented roller coaster.

It is the story of Alan Greenspan who rose from a non-illustrious career with no track record to write home about to be probably the most powerful man in the world as the Chairman of the Federal Reserve Board and held that position longer than any other. As you read you will realize that if there is a prize for the best politician ever lived, Greenspan to be a formidable candidate for that position for it was his skill at politics gotten him there. You cannot blame Greenspan. After all he was the product of the environment that facilitated his meteoric rise. There is an instance where the author describes a party that Greenspan attended (where people were being awestruck by the mere appearance of Greenspan the economist rock star) where he mentions also the attendance of Jerzy Kosinski the author of "Being There." "Being There" tells the story of a simpleton come to be admired as a genius by the President of the USA and others around him because they begin to interpret everything he says as words of a sage.

Sheehan points out that Greenspan was elevated into cult status by the system in spite of the fact that enough sophisticated people were alarmed as to the direction the country was heading warning how he could push the whole global economy into a tailspin. It is impossible to figure out why it went to such an extent in a country with more Nobel-prize-winners than any other nation. The conclusion I could reach is that people in power knew the scam being carried on by Greenspan as the Fed Chair but kept quiet because by knowing what was going on they could make unimaginable amount of wealth. No other point in history has insiders have made so much wealth as stocks went over thousands of percent. So all insiders had to do was to own shares of companies and keep quiet watching the money being created by the Federal Reserve snowballing values into stratospheric levels.

Greenspan is an enigma because he seems like a man who would understand that an economy cannot be sustained forever if the system has to depend on creating more and more money and the money being created end up only in the hands of a few. Then the question is why did he continue to carry on with such disastrous policies. The author attributes it to pandering to power. But reading the book I got the impression that Greenspan estimated as long as the Federal Reserve has the power to create unlimited amount of money he could carry on that scheme till he retires and when the crumbling down finally comes, people to place the blame on his successor. His involvement with president Reagan who turned this country from the greatest creditor to the biggest debtor nation paving the way for runaway deficits and still being loved deeply may have given him the impetus for that. However, he may have misjudged the courage of people such as Fred Sheehan to bear it all. In the current atmosphere, the only place people will be able to read such an inside account is in books such as this. Do not expect the corporate-owned media to give you such factual accounts.

The author shows how the current Chairman of the Federal Reserve, Ben Bernanke stood behind Greenspan loyally fanning the fire of speculation. Let's hope the President and the Senate that planning on confirming the current Chair to another term will read Sheehan's book. It is impossible to believe that recession induced by the actions of the reckless Fed is over, especially when the medicine they use to cure is the same old medicine that took us there. So the epilogue for these actions may be written yet in the future. Stay tuned.

MacKenzie (New London CT) Alan Greenspan was widely regarded as an economic genius, as wise statesman who guided the American economy through troubled waters. Events of the past years cast doubt upon Greenspan's credibility. Sheehan has removed all doubt on this matter: Greenspan was most certainly not a wise and responsible steward of the American financial system.
Real history shows that Greenspan was a just a player in a inefficient politicized system. Readers might be tempted to see Greenspan as a villain, but I think there is a broader lesson here. Nobody can make our Fed regulated banking system work. Sheehan makes it clear that Greenspan is a smart man, but there is simply no way anyone can resist the political pressures of this system. Sheehan has done a great service by debunking the Greenspan Myth, and the mythology of the Fed in general. Let's hope that we never see the development of a Bernanke Myth.

 December 8, 2009 An Essential Eye-opener,  By Vincent F. Celli "VFC" (ST Augustine, Fl)

Mr. Sheehan has written an insightful analysis of the Greenspan years, which throws light on the darker side of Greenspan's tenure at the Federal Reserve Bank. Like many who listened to Greenspan speak, I was often puzzled as to what he meant. Mr. Sheehan, with an impeccable understanding of economic forces, reveals why and how Mr. Greenspan left us with our present economic disaster. He consistently provided access to gobs of capital for financial interests, and completely abandoned his duties of oversight. The result: the financial sector grew from 10% to 40% of GDP, while billions of dollars flowed into financial profits, only to be sucked into the inevitable black hole that had been created. Mr. Sheehan illuminates this process brillianty and is to be complimented for his efforts. I was entranced by the book and urge anyone who wants to understand the downside of Greenspan's legacy to pick up this book. Your time will be well spent. The best book I have read to help you understand our current economic woes and why they happened.

December 7, 2009 A penetrating complement to "Age of Turbulence",  Hughes" (Northfield, New Jersey United States)

This is a well written, deeply researched and thoughtfully analyzed account of Alan Greenspan's ascent to power. Author Fred Sheehan provides a critical account of the Fed Chairman's rise to prominence to support the proposition that Greenspan betrayed his principles--early and often-- to further his own personal ambitions. This book is an indictment of the man and the system that allowed him to flourish. It should be read as a complement to "Age of Turbulence", Greenspan's own interesting but overly sympathetic recollection of history.

[Feb 8, 2010] An interview with Fred Sheehan

Frederick Sheehan was interviewed by Jim Puplava on Financial Sense Online over the weekend and the audio has been matched up with some imagery in the YouTube clip below. Recall that Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession.
 
The fact that he studied under Arthur Burns came as a surprise to me but, when you think about it, it makes a lot of sense since, in the fullness of time, history will likely view these two as the worst Fed chairmen of all time.

Also, despite the long-held belief that Greenspan was an ardent follower of Ayn Rand, apparently he wasn't interested in much more than rounding out his Rolodex, all of which helps to explain Sheehan's title selection for the book.

Three Sins, One Gift - Sin #1

January 29, 2010 | The Mess That Greenspan Made

Leading into Sunday's four-year anniversary of the retirement of former Fed Chairman Alan Greenspan, the January 2006 series "Three Sins, One Gift" is being repeated this weekend. This, the first item in the series, originally appeared here on January 13th, 2006.

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A story in The Economist this week has prompted an early kick-off to a series of posts at this blog - a series that had already been planned for later this month, but which begins today instead. The series is intended to shine light on three sins committed by departing Federal Reserve Chairman Alan Greenspan, who is set to step down on January 31st.

On that day, the final installment will detail the gift he has bestowed.

As anonymous economists at The Economist have already done most of the heavy lifting required to make the"margin: 0; padding: 0"> They are masterfully written and available at no cost.

Sin #1 - Ignoring Asset Prices

The legacy of Alan Greenspan is now inextricably intertwined with, and will likely suffer the same fate as, the over-inflated American real estate market.

If housing cools painlessly over the next few years reverting to more normal levels of growth that are sustainable into the next decade, and if over-extended homeowners successfully adjust to a changing world of reduced expectations, then, and only then, will current criticism of the outgoing Fed Chair have been proved both premature and ill-advised.

If, over time, the citizenry maintain much of their currently elevated standard of living, as they have been led to believe is nearly an inalienable right, then the departing chairman will have demonstrated that his detractors were wrong, and will have rightfully earned the praise that accompanies being universally regarded as the greatest central banker in history.

Many believe these rosy scenarios are unlikely and that ignoring asset prices has been sinful.

Today, on the surface, the American economy is the model for the rest of the western world - robust GDP growth, low unemployment, and low inflation.

By most statistical measures emanating from Washington, we are living in a "goldilocks" economy - a sort of dream world where no shocks to the system can derail growth or prosperity - wars, hurricanes, deficits, political intrigue - none of it matters.

But where would we be without rising home prices?

Rising home prices, following historically low interest rates held far too low for over two years, have enabled home equity withdrawal at unheard of rates. This has supported personal consumption which now contributes to GDP growth as never before in history, and has resulted in the creation of millions of housing related jobs.

This has seemingly worked wonders in response to the bursting of the stock market bubble at the turn of the century, but with housing now beginning to cool, the natural question to ask is, "Where do we go from here?"

Like stocks in the late 1990s, why were home prices allowed to rise at many times the rate of inflation, leading all to believe that prosperity would be eternal?

The Economist asks the same questions.
 

The Economist's long-running quarrel with Mr Greenspan is that he chose not to restrain the stockmarket bubble in the late 1990s or to curb today's housing bubble. He has declared himself vindicated in not pricking the equity bubble with higher interest rates, but instead to let it burst and then cut rates sharply to “mop up” the damage. The economy has fared better than we expected since share prices slumped, with only a mild recession in 2001. But a better test of Mr Greenspan's policies is not whether America escaped a deep recession, but whether the economy would today be on firmer foundations if the Fed had acted against that bubble.

How monetary policy should respond to increases in the prices of assets such as houses or shares is the biggest dilemma facing central banks everywhere. The Fed takes account of rising asset prices to the extent that they boost spending and hence future inflation. But the burning question is: should it respond to asset prices even if inflation seems under control? Three main arguments are given by Mr Greenspan and his colleagues for why central banks should ignore asset prices other than their impact on inflation. First, that monetary policy focused on inflation and growth is the best way to achieve economic stability. Second, that one can never be sure that what looks like a bubble really is a bubble. And third, that interest rates affect the economy more like a sledgehammer than a scalpel. A modest rise in rates is unlikely to halt rising share prices, but an increase sufficient to pop the bubble would slow the whole economy and could even cause a recession. Mr Greenspan thus concludes that it is safer to wait for a bubble to burst by itself and then to ease monetary policy to soften a downturn.

Consider each of these arguments in turn. First, the job of a central bank is not just to prevent inflation, but also to ensure financial stability. Yet the three biggest stockmarket bubbles in the past century—America's in the 1920s and 1990s and Japan's in the 1980s—all developed when inflation was low. Arguably, Mr Greenspan has defined the role of monetary policy too narrowly. Inflation is often described as too much money chasing too few goods. But in a world awash with cheap money and with potent new sources of supply, such as China, to hold prices down, inflation will remain low and so fail to signal if an economy is overheating. Increased central-bank credibility also helps to anchor inflation. If central banks hold interest rates low, this will encourage risk-taking in financial markets and excess liquidity will spill over into asset prices rather than traditional inflation.

Asset-price inflation can be as harmful as conventional inflation. A sudden collapse in share or house prices can trigger a deep downturn. And surging asset prices also distort price signals and cause a misallocation of resources—by encouraging too little saving, or too much investment in housing, so reducing future growth. This is why central banks need to pay closer attention to asset prices.

Second, it is not, as Mr Greenspan argues, impossible to identify bubbles. When prices have lost touch with fundamentals and there are other signs of excess, such as rapid credit growth, alarm bells should ring. Mr Greenspan's “irrational exuberance” speech in December 1996 shows he was concerned about a bubble inflating long before the bubble reached its full extent. And transcripts of meetings of the Federal Open Market Committee (FOMC, which meets to set interest rates) now make clear that several Fed officials were fretting about the bubble in 1998 and 1999. At the December 1999 meeting, when discussing the stockmarket, Mr Greenspan said: “It is only a question of how much of a bubble there is.”

Moreover, central banks do not have to be certain they have identified a bubble before they act. Monetary policy has constantly to deal with uncertainty—such as the size of the output gap. Uncertainty is a reason for responding cautiously, but not for doing nothing.

What of Mr Greenspan's third claim that, even if a central banker is pretty sure there is a bubble, there is little he can do about it because interest rates are a blunt tool? In August 2005 Mr Greenspan said: “Given our current state of knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon.” But he was setting up a straw man. Nobody is seriously arguing that central banks should “target” a particular level of asset prices. Most economists accept that aggressive action to “prick” bubbles could also be risky. Instead, the debate today is whether central banks should “lean against the wind” when asset prices appear dangerously out of line with fundamentals, raising interest rates by a bit more than inflation alone would call for.
 

While quarreling with the use of the word "inflation" to casually exclude the cost of housing, there is little else to object to here. These are the same points made on a number of occasions in these pages.
 

1. Asset prices affect long-term stability
2. The formation of asset bubbles can be detected
3. Monetary policy can be used to combat rising asset prices

Regarding the last point, it seems reasonable that regulation of mortgage lending should work alongside monetary policy to do what is in the best long-term interests of an economy, impinging as little as possible on the operation of free markets.

The role of the Federal Reserve and other government agencies in this area has been much too little and far too late to have any meaningful effect on the consequences that are likely to arise as a result of credit that has already been extended.

The horse has long since left the barn, as they say.

Fittingly, Monetary Myopia concludes with a drinking analogy that refers to today's economy as a "mess". We are humbled and gratified that The Economist shares our view, and find it impossible to resist closing with these words as well.
 

In December Mr Greenspan was made a Freeman of the City of London. One of the traditional perks of this honour is that he can be drunk and disorderly without fear of arrest. The snag is that his policies have also encouraged drunk and disorderly asset markets and intoxicated consumers. When the party ends, Mr Greenspan will not be there to clean up the mess. But end it surely will.
 

[Dec 2, 2009] WHAT IS GOOD FOR GOLDMAN SACHS IS GOOD FOR AMERICA THE ORIGINS OF THE CURRENT CRISIS by Robert Brenner

October 2009

STOCK MARKET KEYNESIANISM

From the start of 1995, US equity prices exploded upwards, with the S&P500 index rising 62 per cent by the end of 1996. By the end of 1994, the stock market had already experienced a remarkable twelve year ascent, during which equities had surged by 200 per cent, despite the plunge of 1987 and the mini-crash of 1989. But that spectacular climb in asset values had been more or less justified, and indeed driven, by a corresponding rise in corporate profits, the same revival of the rate of return that had brought the US economy by this juncture to the brink of a new take off. There can be no doubt that the long bull run of the stock market predisposed investors to continue to buy shares. But what actually drove equities to take flight was, almost certainly, a sudden sharp fall in the cost of borrowing, both short and long term. To help insure stability in the wake of the Mexican Peso and Southern American Tequila crises, the Fed abruptly discontinued its campaign to raise short term interest rates of the previous year and reduced the cost of short term borrowing, from 6.05 per cent in April 1995 to 5.2 per cent in January 1996, not to increase it again until 1999 (except for a lone quarter point increase in 1999). Meanwhile, to implement the Reverse Plaza Accord and bring down the yen, Japan cut its discount rate and, along with other governments in East Asia aiming to keep down their own currencies, unleashed a huge wave of purchases of dollar denominated assets, especially treasury bonds. The reduction in the cost of borrowing in Japan had the effect of pumping up the global supply of credit, as international financiers fabricated a very profitable carry trade, borrowing yen at low rates of interest, converting them into dollars, and using the proceeds to invest around the world, not least in the US stock market. The buying up of US government debt by the East Asians appears to have been the main factor in bringing about a stunning twenty-three per cent decline in the long term cost of borrowing over the course of 1995. As is usually the case with asset price run-ups, it was the sudden major easing of credit that catalyzed the new rise of the stock market. But, by now, with the dollar ascending, the material foundations of the long term profitability recovery and associated rise in equity prices were crumbling. The stock market was climbing skyward without a ladder.

This is where Alan Greenspan and the Fed enter the picture.

At the 24 September 1996 meeting of the Federal Open Market Committee, the body that sets short term interest rates for the US economy, Federal Reserve Governor Lawrence Lindsey expressed his worry that runaway increases in share prices were far exceeding the potential growth of corporate profits, and that a distorting bubble, which could not but make for a vast misallocation of capital and eventually a destructive bust, was in the offing. Fed Chair Greenspan did not for a moment deny Lindsay’s observation. “I recognize that there is a stock market bubble problem at this point, and I agree with Governor Lindsey that this is a problem that we should keep an eye on.” Greenspan acknowledged, moreover, that the Fed had ample means at its disposal to deflate the bubble, if it so chose. “We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it. My concern is that I am not sure what else it will do.”7 In fact, as 7 FOMC Minutes, 24 September 1996, pp.23-25, 30-31 Fed Reserve web site; William A. Fleckenstein, Greenspan’s Bubbles. The Age of Ignorance at the Federal Reserve, New York, 2008, p.135. Greenspan made crystal clear at this meeting and subsequently, he had no interest in combating the bubble by any method whatsoever. The economy did seem to be gathering steam, but he was not sure that the expansion had fully taken hold, and he was reluctant to consider raising interest rates, let alone risk directly undermining the equity markets by raising margin requirements, unless and until he was certain it had.8

At the next FOMC meeting, on 13 November 1996, Governor Lindsey, supported by several others, re-stated his concern about over-valued share prices, as well as the threat of inflation, and recommended a significant interest rate increase. But Greenspan preferred standing pat and, as always, he won the day.9 A few weeks later, on December 1996, Greenspan did give his famous warning about “irrational exuberance” in the equity markets. Yet not only did share values continue to rocket into the heavens, but the Fed did absolutely nothing about it. Greenspan not only failed to raise interest rates in the normal way as the economic expansion extended itself, increasing the Federal Funds rate on just one solitary occasion in the years 1995-1999, and that by just onequarter of a percentage point. He also brought down the cost of borrowing at every point at which the stock market experienced the slightest tremor of fear, a fact not lost on equity investors, who soon came to take for granted the infamous “Greenspan put.”

Still, there was a method to Greenspan’s madness. The Fed chair well understood the downward pressure on the economy that was resulting from the rise of the dollar, the disappearance of the Federal deficit, and the declining capacity of the rest of the world to power its own expansion, let alone pull the US economy forward. With traditional Keynesianism off the agenda, he had to find an alternative way to insure that the growth of demand would be sustained. Although Greenspan did not explicitly refer to this, he was well aware that, during the previous decade, the Japanese had implemented a novel form of economic stimulus. In 1985-1986, following the Plaza Accord, Japan had faced a situation rather similar to that of the US in 1995-1996. A fast rising yen had put a sudden end to Japan’s manufacturing-centered, export-led expansion of the previous half decade, was placing harsh downward pressure on prices and profits, and was driving the economy into recession. To counter the incipient cyclical downturn, the Bank of Japan radically reduced interest rates, and saw to it that banks and brokerages channeled the resulting flood of easy credit to stock and land markets. The historic run-ups of equity and land prices that ensued during the second half of the decade provided the increase in paper wealth that was required to enable both corporations and households to step up their borrowing, raise investment and consumption, and keep the economy expanding. The great Japanese boom—and accompanying bubbles--of the second half of the 1980s was the outcome.

Greenspan followed the Japanese example. By nursing instead of limiting the ascent of equity prices, he created the conditions under which firms and households could borrow easily, invest in the stock market, and push up share values. As companies’ stock market valuations rose, their net worth increased and they were enabled to raise money with consummate ease--either by borrowing against the increased collateral represented by their enhanced capital market valuations or by selling their overvalued equities--and, on that basis, to step up investment. As wealthy households’ net worth inflated, they could reduce saving, borrow more, and increase consumption. Instead of supporting growth by increasing its own borrowing and deficit spending--as with traditional Keynesianism--the government would thus stimulate expansion by enabling corporations and rich households to increase their borrowing and deficit spending by making them wealthier (at least on paper) by encouraging speculation in equities—what might be called “asset price Keynesianism”.

The “wealth effect” of rising asset prices would, in this way, underwrite a boom for which the underlying fundamentals were lacking -- notably, the prospect of sufficient rate of return on investment. Greenspan’s stimulus program was a dream come true for corporations and the wealthy, as well as for banks and other financiers, who could hardly fail to profit on lending, by way of the Fed’s unspoken commitment to moderate short term interest rates and to reduce them whenever this was necessary to prevent equity prices from plunging. Its implementation is incomprehensible apart from an accelerating shift to the right in the polity as a whole and ushered in what has been rightly termed the New Gilded Age. Nevertheless, it invited not only the blowing up, but also the bursting, of momentous asset price bubbles.

Much as in Japan, the Fed’s buttressing of the stock market called forth a share price ascent of historic proportions, and one witnessed still another re-enactment of the classic drama of asset price run-ups familiar throughout history. The basic enabling condition was, as usual, low-cost access to credit, both long term—initially bequeathed by the Japanese and East Asians by way of their massive purchases of US treasury bonds in connection with the reverse Plaza Accord -- and short term — provided, and seemingly assured, by the Fed. With credit made so cheap, and profit-making on lending rendered so easy, banks and non-bank financial institutions could not resist opening the floodgates and advancing funds without limit. Stepped up borrowing made possible jumped up investment in stocks, which drove up share values, thus households’ wealth and firms’ market capitalization. The resulting decrease in the ratio of debt to equity for stock market investors, as well as for corporations, made those investors and corporations more credit worthy, at least in appearance. Financiers could therefore justify to themselves, as they have always tended to do in such situations, further increases in lending for further purchases of financial assets, as well as for plant and equipment, paving the way for more speculation, higher asset prices, and of course still more lending -- a self-perpetuating upward spiral.

[Oct 21, 2009] Frontline – The Warning « naked capitalism#comments

DownSouth says:

October 21, 2009 at 1:17 pm

What a superb program!

That said, however, I nevertheless wish that it would have delved a little more into the underlying dogmas and pseudoscience that underpin the philosophies of Rand, Greenspan, Rubin, Summers, Bernanke and Geithner.

“A consistent pessimism in regard to man’s rational capacity for justice invariably leads to absolutistic political theories,” Reinhold Niebuhr cautions us in “The children of light and the children of darkness”; “for they prompt the conviction that only preponderant power can coerce the various vitalities of a community into working harmony.”

And there can be little doubt as to how Niebuhr would have judged Rand, Greenspan, Rubin, Summers, Bernanke and Geithner: “the moral cynics, who know no law beyond their will and interest, with a scriptural designation of ‘children of this world’ or ‘children of darkness’. “

“This is no mere arbitrary device,” Niebuhr goes on to explain; “for evil is always the assertion of some self-interest without regard to the whole, whether the whole be conceived as the immediate community, or the total community of mankind, or the total order of the world.”

Martin Luther King was to pick up on and greatly elaborate upon the “children of darkness,” their pessimism concerning man’s moral and rational resources to achieve fairness and justice:

Plato, centuries ago said that the human personality is like a charioteer with two headstrong horses, each wanting to go in different directions, so that within our own individual lives we see this conflict and certainly when we come to the collective life of man, we see a strange badness. But in spite of this there is something in human nature that can respond to goodness. So that man is neither innately good nor is he innately bad; he has potentialities for both. So in this sense, Carlyle was right when he said that, “there are depths in man which go down to the lowest hell, and heights which reach the highest heaven, for are not both heaven and hell made out of him, ever-lasting miracle and mystery that he is?” Man has the capacity to be good, man has the capacity to be evil.

And so the nonviolent resister never lets this idea go, that there is something within human nature that can respond to goodness. So that a Jesus of Nazareth or a Mohandas Gandhi, can appeal to human beings and appeal to that element of goodness within them, and a Hitler can appeal to the element of evil within him.
–Martin Luther King, “Love, law and civil disobedience”

What we saw beginning about sixty years ago was the rollout of a full court press by the children of darkness. It pervaded every aspect of our thinking lives—art, science, religion, economics and politics. And the New Atheist Ayn Rand was undoubtedly the high priestess of the paladins of selfishness and greed.

But she has many disciples, including the Four Horsemen—the new New Atheists Richard Dawkins, Dan Dennett, Christopher Hitchens and Sam Harris. Probably nowhere are the pseudoscientific half-truths they peddle more amply revealed than in this lecture by Richard Dawkins (beginning at minute 40:00):

http://thesciencenetwork.org/programs/beyond-belief-science-religion-reason-and-survival/session-7-1

For a long time, certainly during all of Rand’s lifetime, the New Atheists, without a doubt due to their deep-pocked patrons and sponsors, ran roughshod over the academic community. Anyone foolish enough to assert “man’s capacity to do good” was exiled into academic oblivion. However, with more recent findings by neuroscientists, the “red in tooth and claw” portrayal of man proselytized by the New Scientists has become empirically indefensible.

So what can be seen in Dawkins’ presentation is his acknowledgment that man does indeed have the capacity to do good, but with the qualification that this is a “mistake” or “misfire.” Man ought to follow his instincts for greed and selfishness, Dawkins advises us, because these benevolent impulses no longer function to enhance survival.

On the religious front, the perversion and corruption is just as egregious. We find the mirror image of Dawkins, Dennett, Harris and Hitchens in such well-known Christian evangelical figures as Pat Robertson, Jerry Falwell, James Dobson, Jim Bakker, Tim LaHaye, James Robinson and a host of other millionaire preachers. Other denominations notable for smiling kindly upon greed and selfishness are the Mormons and the Missouri Synod Lutherans. Kevin Phillips, Andrew J. Bacevich and Greg Grandin, between the three of them do a superb job of researching the current state of right-wing religion in America and its celebration of greed and selfishness.

In the arts, we see the “greed is good” message not only overtly verbalized by the artist, but also conveyed in the iconic sharks and gold-plated bulls of the billionaire-artist Damien Hirst.

And I suppose this audience needs no schooling on how, as Amitai Etzioni so thoroughly documented in The Moral Dimension, “neoclassicists have labored long and hard to show that practically all behavior is driven by pleasure and self-interest.” “The neoclassical paradigm does not merely ignore the moral dimension but actively opposes its inclusion,” he writes.

And politics? What can we say about politics?

Francois Haas in “German science and black racism—roots of the Nazi Holocaust” posits a rather interesting theory. Traditional political theory, Haas explains, holds that “science under dictatorship becomes subordinated to the guiding philosophy of the dictatorship.” Haas, however, says: “I am proposing the inverse, that Politics under Science becomes subordinated to the guiding philosophy of that Science.”
http://www.fasebj.org/cgi/content/abstract/22/2/332

So as the little piece of ground that the New Atheists stand upon is eroded away, as the tyranny they inflicted upon the academe is swept away, does that not give hope that the evil politics they inspired will also be swept away?

[Oct 16, 2009] The Mess That Greenspan Made PBS FRONTLINE The Warning

Friday, October 16, 2009

The new FRONTLINE documentary The Warning, scheduled to debut next Tuesday, is not likely to provide any assistance in the "reputation rebuilding" effort by former Fed Chairman Alan Greenspan whose comments yesterday regarding "too big to fail" might be seen in a whole new light given new revelations from the late-1990s about regulation of derivatives.

Pictured above with former Treasury Secretary and Goldman Sachs alum Robert Rubin, this duo constituted two-thirds of the "Committee to Save the World" (along with top Obama administration economic adviser Larry Summers), a call that, in retrospect, may have been a bit premature.

Brooksley Born:

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission (CFTC) -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"

In The Warning, airing Tuesday, Oct. 20, 2009, at 9 P.M. ET on PBS (check local listings), veteran FRONTLINE producer Michael Kirk (Inside the Meltdown, Breaking the Bank) unearths the hidden history of the nation's worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.

"I didn't know Brooksley Born," says former SEC Chairman Arthur Levitt, a member of President Clinton's powerful Working Group on Financial Markets. "I was told that she was irascible, difficult, stubborn, unreasonable." Levitt explains how the other principals of the Working Group -- former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin -- convinced him that Born's attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was "clearly a mistake."

Born's battle behind closed doors was epic, Kirk finds. The members of the President's Working Group vehemently opposed regulation -- especially when proposed by a Washington outsider like Born.

"I walk into Brooksley's office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She's hanging up the telephone; she says to me: 'That was [former Assistant Treasury Secretary] Larry Summers. He says, "You're going to cause the worst financial crisis since the end of World War II."... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'"

Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. "Born faced a formidable struggle pushing for regulation at a time when the stock market was booming," Kirk says. "Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves."

Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.

"It'll happen again if we don't take the appropriate steps," Born warns. "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience."

This should be good, particularly in light of the fact that there has been virtually no progress on any financial market reforms, despite continuing calls from the likes of Paul Volcker.

[Oct 14, 2009] The Middle Class on the Precipice Harvard Magazine January-February 2006

A book titled Affluenza (by John De Graaf, David Wann, and Thomas H. Naylor) sums it up: “The dogged pursuit for more” accounts for Americans’ “overload, debt, anxiety, and waste.” If Americans are out of money, it must be because they are over-consuming—buying junk they don’t really need.

[Oct 14, 2009] Greenspanism the Root Cause of this Depression

September 13, 2009 | Mish's Global Economic Trend Analysis

We know why the bubble occurred. Call its Greenspanism. Central banks rescued assets each time there was a hiccup, but let booms run unchecked. They pulled "real" rates ever lower, creating addiction to monetary stimulus. Larger doses were required with each cycle, until we hit zero, and it is still not enough. Debt burdens rose to records across the OECD.

TruthNews.us » Blog Archive » Greenspan’s Dark Legacy Unmasked

Greenspan’s Dark Legacy Unmasked

Stephen Lendman
Global Research
October 1, 2007

After retiring as the Federal Reserve’s second longest ever serving chairman, Alan Greenspan is now cashing in big late in life at age 81. He chaired the Fed’s Board of Governors from the time he was appointed in August, 1987 to when he stepped down January 31, 2006 amidst a hail of ill-deserved praise for his stewardship during good and perilous times. USA Today noted “the onetime jazz band musician went out on a high note.” The Wall Street Journal said “his economic legacy (rests on results) and seems secure.” The Washington Post cited his “nearly mythical status.”

Stanford Washington Research Group chief strategist Greg Valliere called him a “giant,” and Bob Woodward called him “Maestro” in his cloying hagiography (now priced $1.99 used on Alibris and $2.19 on Amazon) that was published in 2000 as the Greenspan-built house of cards was collapsing. The book was an adoring tribute to a man he called a symbol of American economic preeminence, who the Financial Times also praised as “An Activist Unafraid to Depart From the Rule” - by taking from the public and giving to the rich.

Others joined the chorus, too, lauding his steady, disciplined hand on the monetary steering wheel, his success keeping inflation and unemployment low, and his having represented the embodiment of prosperity in compiling a record of achievement his successor will be hard-pressed to match.

In 2004, William Greider in The Nation magazine had a different view. He’s the author of “Secrets of the Temple” on “how the Federal Reserve runs the country.” He wrote Greenspan “ranks among the most duplicitous figures to serve in modern American government (who used) his exalted status as economic wizard (to) regularly corrupt the political dialogue by sowing outrageously false impressions among gullible members of Congress and adoring financial reporters.”

They were front and center in the New York Times for the man who “steer(ed) the economy through multiple calamities and ultimately….one of the longest economic booms in history….(He earned his bona fides) weather(ing) the Black Monday stock crash of 1987 (and in 18 and a half years in office) achieved more celebrity than most rock stars” and may now approach them in earnings.

The new book of his memoirs “The Age of Turbulence” is just out for which his reported advance exceeded $8.5 million (second only to Bill Clinton’s $10 for his memoirs) plus additional royalties if sales exceed 1.9 million copies. They may given the amount of high-impact publicity it and he are getting nonstop. And that’s not all. He’s in great demand on the lecture circuit at six figure fees, has his own consulting firm, Greenspan Associates LLC, and his lawyer, Robert Barnett says “virtually every major investment-banking firm” in the world wants to hire him for his rainmaking connections.

They have value, not his market advice, best avoided for the man who engineered the largest ever stock market bubble and bust in history through incompetence, timidity, dereliction of duty, and subservience to the capital interests he represented at the expense of the greater good and a sustained sound economy he didn’t worry about nor did Wall Street.

For firms on the Street and big banks, he could do no wrong and was above reproach for letting them cash in big and then get plenty of advance warning when to exit. Most ordinary investors weren’t so fortunate. They’re not insiders and were caught flat-footed by advice from market pundit fraudsters and the most influential one of all in the Fed Chairman. Just weeks before the market peak in January, 2000, he claimed “the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits and stock prices at a pace not seen in generations, if ever.”

It was hype and nonsense and on a par with famed economist and professor Irving Fisher’s remarks just before the 1929 stock market crash and Great Depression when he claimed economic fundamentals in the country were strong, stocks undervalued, and an unending period of prosperity lay ahead. It took a world war a decade later, not market magic, for them to arrive, but before it did Fisher kept insisting in the early 1930s recovery was just around the corner. It’s the same way Wall Street touts operate today on gullible investors who even after they’ve been had are easy prey again for the next con.

And they’re really in trouble when it comes from the “Maestro,” who at the height of the stock market bubble said: “Lofty equity prices have reduced the cost of capital. The result has been a veritable explosion of spending on high-tech equipment…And I see nothing to suggest that these opportunities will peter out anytime soon….Indeed many argue that the pace of innovation will continue to quicken….to exploit the still largely untapped potential for e-commerce, especially the business-to-business arena.”

One week later, the Nasdaq peaked at 5048 and crashed to a low of 1114 on October 9, 2002. It lost 78% of its value, the S&P 500 stock index dropped 49%, and retail investors lost out while Greenspan was busy engineering another bubble with a tsunami of easy money for Wall Street and big investors. It’s now unwinding as he gets a big payday for his memoirs and a chance to rewrite history. He aims to raise himself to sainthood and at the same time distance himself from the very costly policies he implemented on top of trillions he helped scam in the greatest modern era wealth transfer from the public to the rich. More on that below.

Greenspan’s Background and Tenure as Federal Reserve Chairman

Alan Greenspan grew up in New York, got his B.A. and M.A. in economics from New York University and later was awarded a Ph.D. in economics from Columbia without completing a dissertation the degree usually requires. In a highly unusual move, Columbia made an exception in his case.

Early on, he became enamored with free market ideologue Ayn Rand, wrote for her newsletters and authored three essays for her book “Capitalism: The Unknown Ideal.” It expressed her views on capitalism’s “moral aspects” and her attempt (with Greenspan’s help) to rescue it from its “alleged champions who are responsible for the fact that capitalism is being destroyed without a hearing (or) trial, without any public knowledge of its principles, its nature, its history, or its moral meaning.”

That was in 1966 when Rand, a staunch libertarian as is Greenspan, believed fundamentalist capitalism was being battered by a flood of altruism in the wake of New Deal and Great Society programs she (and Greenspan) abhorred. She defended big business, made excuses for its wars, and denounced the student rebellion at the time and the evils of altruism. Greenspan concurred, maintained a 20 year association with Rand (who died in 1982), and never looked back.

From 1948 until his 1987 Federal Reserve appointment, he served as Richard Nixon’s domestic policy coordinator in his 1968 nomination campaign and later as Gerald Ford’s Council of Economic Advisers Chairman. He also headed the economic consulting firm, Townsend-Greenspan & Company, from 1955 - 1987. Its forecasting record was so poor it was about to be liquidated when he left to join the Fed. A former competitor, Pierre Renfret, noted: “When Greenspan closed down his economic consulting business to (become Fed Chairman) he did so because he had no clients left and the business was going under (and we found) out he had none (of his employees left).” That made him Reagan’s perfect Fed Chairman choice, and Renfret added it was Greenspan’s failure in private business that got him into government service in the first place.

He wouldn’t disappoint as Wall Street’s man from the start. He bailed it out in 1987 after the disastrous October black Monday. It was the same way he did in it later in 1998 following Long Term Capital Management’s collapse and again after the dot-com bubble burst. It was by his favorite monetary medicine guaranteed to work when taken as directed - floods of easy money followed by still more until the patient is healed, unmindful that the cure may be worse than the disease. No matter, it’s a new Chairman’s problem with Greenspan claiming no culpability for his 18 and a half year tenure of misdeeds, subservience to capital, and contempt for the public interest.

His new book claims the opposite. It’s a breathtaking example of historical revisionism that’s become standard practice for the man Sydney Morning News’ Political and International Editor Peter Hartcher calls “Bubble Man” in his new book by that title. In it, he quotes Bob Woodward saying Greenspan “believed he had done all he could” to contain over-exuberance when, in fact, he let it get out of control. He now claims:

– he didn’t support George Bush’s regressive tax cuts for the rich (that helped create huge budget deficits). In fact, he did, and in 2001 wholeheartedly endorsed this centerpiece of the administration’s economic policy in his testimony before the Senate Budget Committee. At the time, he cited the economic slowdown saying: “Should current economic weakness spread….having a tax cut….may….do noticeable good.”

– he’s “saddened (in his book) that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” In his typical obfuscating way to confuse and have things both ways, he tried clarifying his position in a September interview claiming: “I was not saying that that’s the administration’s motive. I’m just saying that if somebody asked me, are we fortunate in taking out Saddam? I would say it was essential.” He failed to say he supported the Bush administration agenda across the board, including the Afghanistan and Iraq wars, with reasons given at the time he’s now distancing himself from.

– no responsibility for the 2000 stock market bubble. He falsely claimed he never saw it coming while providing generous amounts of liquidity to fuel it. After citing the market’s “irrational exuberance” in a December, 1996 speech, he failed to curb it and could have by raising interest rates, margin requirements, and jawboning investors to cool an overheated market to restore stability for long-term economic growth. Instead, he did nothing. He failed to take away the punch bowl, created a bubble, and allowed it to burst causing investors (mostly retail ones) to lose trillions.

– no responsibility for the housing and bond bubbles he created by cutting interest rates aggressively to 1% and flooding the markets with liquidity. As things got out of hand, timely responsible action could have avoided the summer, 2007 credit crisis. Again, he allowed a bad situation to get worse to keep the party going and allow lenders to profit hugely. In the unprecedented run-up in house prices to an $8 trillion wealth bubble, he derided critics claiming anything was wrong. He even encouraged homebuyers to take out adjustable rate mortgages, approved of very risky no down payment purchases, created the subprime mess as a consequence, and isn’t around to address buyers faced with $1.2 trillion in mortgage resets later this year and next that will cause many thousands of painful foreclosures.

Affected homeowners won’t likely be cheered by his speech-making bunkum that bubble level asset prices proved his monetary policies worked by getting investors to demand lower risk premiums. They also won’t be calmed by his arrogant claim that it’s “simply not realistic” to expect the Fed to identify and deflate asset bubbles when it’s real role is to champion flexible and unregulated markets leaving everyone unprotected on our own.

– no responsibility for allowing outstanding US debt to more than triple to around $40 trillion on his watch that one analyst calls his “most conspicuous achievement.” Those having to pay it off won’t thank him.

Greenspan’s Role in the Greatest Modern Era Wealth Transfer from the Public to the Rich

Greenspan was a one-man wrecking crew years before he became Fed Chairman, and his earlier role likely sealed the job for him as a man the power elite could trust. He earned his stripes and then some for his role in charge of the National Commission on Social Security Reform (called the Greenspan Commission). He was appointed by Ronald Reagan to chair it in 1981 to study and recommend actions to deal with “the short-term financing crisis that Social Security faced….(with claims the) Old-Age and Survivors Insurance Trust Fund would run out of money….as early as August, 1983.”

There was just one problem. It was a hoax, but who’d know as the dominant media stayed silent. They let the Commission do its work that would end up transfering trillions of public dollars to the rich. It represents one of the greatest ever heists in plain sight, still ongoing and greater than ever, with no one crying foul to stop it. The Commission issued its report in January, 1983, and Congress used it as the basis for the 1983 Social Security Amendments to “resolve short-term financing problem(s) and (make) many other significant changes in Social Security law” with the public none the wiser it was a scam harming them.

The Commission recommended:

– Social Security remain government funded and not become a voluntary program (that would have killed it);

– $150 - 200 billion in either additional income or decreased outgo be provided the Old Age, Survivors, and Disability Insurance (OASDI) Trust Funds in calendar years 1983 - 89;

– the actuarial imbalance for the 75 year Trust Funds valuation period of an average 1.80% of taxable payroll be resolved;

– a “consensus package” to fix the problem by raising payroll taxes on incomes but exempting the rich beyond a maximum level taxed. Also a gradual increase in the retirement age and various other possible short and longer range options for consideration. The result today is low income earners pay more in payroll than income tax. For bottom level earners, the burden is especially onerous. They pay no income tax but aren’t exempt from 6.2% of their wages going for Social Security and Medicare.

– coverage under OASDI be extended on a mandatory, basis as of January 1, 1984, to all newly hired civilian employees of the federal government and all employees of nonprofit organizations;

– state and local governments that elected coverage for their employees under the OASDI-HI program not be allowed to terminate it in the future;

– the method of computing benefits be revised to exclude benefits that can accrue to individuals from non-covered OASDI employment and only be for the period when they became eligible - to eliminate “windfall” benefits;

– 50% of OASDI benefits should henceforth be taxable as ordinary income for individuals earning $20,000 or more and married couples $25,000 or more;

– in addition, other recommendations concerning cost of living adjustments, the law pertaining to surviving spouses who remarry after age 60, divorced spouses, disabled widows and widowers, and for scheduled payroll tax increases to move up to earlier years up to 1990 after which no further change be made with the wage base rising and is now at a level of $97,500 in 2007 at a tax rate of 6.2% matched by employers;

– self-employed persons beginning in 1984 pay the combined employer-employee rates now at 12.4% with half considered a business expense;

– in addition, a number of other changes recommended that in total would penalize the public to benefit the most well-off that was the whole idea of the scheme in the first place.

The public was told the Commission recommendations of 1983 were supposed to make Social Security fiscally sound for the next 75 years. They weren’t told there was no problem to fix and the changes enacted were to transfer massive wealth from the public to the rich. It was one part of an overall Reagan administration scheme that included huge individual and corporate tax cuts that took place from 1981 to 1986. The rich benefitted most with top rates dropping from 70% in 1981 to 50% over three years and then to 28% in 1986 while the bottom rate actually rose from 11 to 15%.

It was the first time US income tax rates were ever reduced at the top and raised at the bottom simultaneously. But it was far worse than that. In only a few years, Reagan got enacted the largest ever US income tax cut (mostly for the rich) while instituting the greatest ever increase entirely against working Americans earning $30,000 or less.

Alan Greenspan engineered it for him by supporting income tax cuts and doubling the payroll tax to defray the revenue shortfall. He also recommended raiding the Social Security Trust Fund to offset the deficit, and who’d know the difference. His scheme helped make the US tax code hugely regressive as well as for the first time transform a pay-as-you-go retirement and disability benefits program into one where wage earner contributions subsidize the rich as well as support current beneficiaries.

As a consequence, the wealth gap widened, continued under Clinton but became unprecedented under George W. Bush with Greenspan at it again. He supported the administration’s wealth transfer scheme to the rich and outsized corporate subsidies with the public getting stuck with out-of-control deficits, deep social service cuts, and a new Treasury Department report just out promising more of the same.

It claims Social Security faces a $13.6 trillion shortfall “over the indefinite future,” “reforms” are needed, delaying them punishes younger workers, and the program “can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax increases.” Translation: cut benefits deeply, raise payroll taxes, and privatize Social Security so more public wealth goes to Wall Street and big investors.

Already the top 1% owns 40% of global assets; the top 10% 85% of them; the top 1% in the US controls one-third of the nation’s wealth; the bottom 80% just 15.3%; and the top 20% 84.7%. In contrast, the poorest 20% are in debt, owe more than they own, and it’s getting worse.

A generation of financial manipulation devastated working Americans, but it’s even worse than that. Added are the effects of globalization, automation, outsourcing, the shift from manufacturing to services, deregulation, other harmful economic factors plus weak unions just gotten far weaker in the wake of the UAW September membership sellout to General Motors. The tentative agreement reached (for members to vote on) amounted to an unconditional surrender by a corrupted leadership after a two day walkout that was likely orchestrated in advance to cause GM the least pain. If the package is approved as is likely, it will encourage other companies to offer similar deals, take it or leave it. Organized labor suffered another grievous blow, corporate giants gained, and are more empowered than ever to win out at the expense of workers’ futures.

The whole scheme was kick-started under Ronald Reagan. Between his tax cuts for the rich and the Greenspan Commission’s orchestrated Social Security heist, working Americans lost out in a generational wealth transfer shift now exceeding $1 trillion annually from 90 million working class households to for-profit corporations and the richest 1% of the population. It created an unprecedented wealth disparity that continues to grow, shames the nation and is destroying the bedrock middle class without which democracy can’t survive.

Greenspan helped orchestrate it with economist Ravi Batra calling his economics “Greenomics” in his 2005 book “Greenspan’s Fraud.” It “turns out to be Greedomics” advocating anti-trust laws, regulations and social services be ended so “nothing….interfere(s) with business greed and the pursuit of profits.”

It won’t affect the “Maestro.” He’s getting by quite nicely on his six figure retirement income that’s just a drop in the bucket supplementing the millions he’s making as payback for the trillions he helped shift to the rich and super-rich. They take care of their own, and Greenspan is one of them.

Jules on October 5th, 2007

This article is very interesting I always felt he (Greenspan) was a snake, it is obvious - just look at him, but I did not know that he is one of the economic masterminds behind the “rich get richer, poor get poorer” machine. Whats horrible is that they will all get away with it - Americans have been brainwashed so completely. They just can’t seem to wrap their self-centered, cowardly minds around this International Banking Fraud and Secret Govt. Even worse is the fact that they (Americans) are the only ones who can fix this; all they have to do is REFUSE to believe their lies and REFUSE their system of money, credit, etc. Then replace it with one they want.
Obstacles: 1)Ignorance 2) Laziness 3)Cowardice Martin on October 6th, 2007

Jules, you are right, but please understand that what our laziness and cowardliness create is the very ignorance you speak of. Our largest problem is that this article, and the books mentioned will not be ready by the American public, they (we) are too busy watching Britney Spears and the like on TV.

I believe the only way for Americans to change or wake up is to force their TV’s off. TV and the laziness and brainwashing that it encourages is so addictive that Americans can’t be bothered to read or discuss items other than celebrities, we simply want to be told, and entertained; even if it means being lied to and hoodwinked and sold to the lowest bidder.

Anyhow, I can’t blame Greenspan for too much, because honestly, he represents the Federal Reserve, and that (I believe history will show) is the very institution responsible for America’s demise. Just check out this quote from Frank Vanderlip’s biography …

“I was as secretive, indeed I was as furtive as any conspirator. Discovery, we knew, simply must not happen, or else all our time and effort would have been wasted. If it were to be exposed that our particular group had got together and written a banking bill, that bill would have no chance whatever of passage by Congress…I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System.” —

The “Group” he speaks of is not the US Government and not one that is interested in the betterment of general Americans but none other than …

“The executives included Frank Vanderlip, president of the National City Bank of New York, associated with the Rockefellers; Henry Davison, senior partner of J. P Morgan Company; Charles D. Norton, president of the First National Bank of New York; and Col. Edward House, who would later become President Woodrow Wilson’s closest adviser and founder of the Council on Foreign Relations.[3] There, Paul Warburg of Kuhn, Loeb, & Co. directed the proceedings and wrote the primary features of the Federal Reserve Act. Warburg would later write that “The matter of a uniform discount rate (interest rate) was discussed and settled at Jekyll Island.” … who wrote the bill to introduce the Federal Reserve for THEIR INTERESTS, not yours and mine, BUT THEIRS.

There is a reason the above article (the main article on this page) speaks of the great divide between classes now is directly related to the people who guaranteed that outcome for their families in 1913. This meeting was kept secret by this group for 3 years AFTER they had passed the bill via their purchased congressmen.

America was screwed and purchased on the cheap in 1913, we still have yet to recover from this slight of hand. Alan Greenspan …. he is just another pawn in the long list of Federal Reserve pawns hired to do the bidding of their masters … The great depression was orchestrated by this group and our greatest depression (soon to be seen) has been orchestrated by their ancestors and followers … Ask yourself who benefits from it, and then ask yourself when, if ever, you will see a story about it on the major news networks. Don’t ever forget that John F Kennedy was assassinated because he threatened to shut down the Federal Reserve. I believe they simply could not let that happen after 30 years of absolute financial control.

Greenspan was no mastermind, he did what they told him to do, and he did his job well. We must expose “them”.

– Federal Reserve Creative Group Information found on Wikipedia but confirmed in countless other sources.

[Sep 29, 2009] Fed Held Back as Evidence Mounted on Subprime Loan Abuses - washingtonpost.com

If this not criminal negligence, what is ?

But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

"In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

Between 2004 and 2007, bank affiliates made more than 1.1 million subprime loans, around 13 percent of the national total, federal data show. Thousands ended in foreclosure, helping to spark the crisis and leaving borrowers and investors to deal with the consequences.

Congress now is weighing whether the Fed should be fired. The Obama administration has proposed shifting consumer protection duties away from the Fed and other banking regulators and into a new watchdog agency. That proposal, a central plank in the administration's plan to overhaul financial regulation, is opposed by the industry and faces a battle on Capitol Hill.

The Federal Reserve is best known as an economic shepherd, responsible for adjusting interest rates to keep prices steady and unemployment low. But since its creation, the Fed has held a second job as a banking regulator, one of four federal agencies responsible for keeping banks healthy and protecting their customers. Congress also authorized the Fed to write consumer protection rules enforced by all the agencies.

During the boom, however, the Fed left those powers largely unused. It imposed few new constraints on mortgage lending and pulled back from enforcing rules that did exist.

The Fed's performance was undercut by several factors, according to documents and more than two dozen interviews with current and former Fed governors and employees, government officials, industry executives and consumer advocates. It was crippled by the doubts of senior officials about the value of regulation, by a tendency to discount anecdotal evidence of problems and by its affinity for the financial industry.

[Sep 28, 2009] Guest Post: How Well Has The Federal Reserve Performed for America?

By George Washington of Washington’s Blog.

How well has the Federal Reserve performed for America? Mainstream pundits, of course, say that Bernanke has saved the world . . . . but they said the same thing about Greenspan.  So let’s look at the actual historical record to determine how well the Fed has done.

Initially, Milton Friedman and Ben Bernanke have both said that the Federal Reserve caused (or at least failed to cure) the Great Depression through its poor monetary policy.

Many also blame the Fed for blowing an unsustainable bubble between 2001-2007 through artificially low interest rates. If this sounds too much like an Austrian economics perspective, that may be true. But remember that Hayek won the Nobel prize in 1974 partly for arguing that artificially low interest rates lead to the misallocation of capital and to bubbles, which in turn lead to busts.

Moreover, one of the Fed’s main justification has been that it can provide a “counter-cyclical” balance. In other words, during boom times it can put on the brakes (”take the punch bowl away right as the party gets started”), and during busts it can get things moving again. But as economist Jane D’Arista has shown, the Fed has failed miserably at that task:

Jane D’Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit [has a] devastating critique of the central bank. The Federal Reserve, she explains, has failed in its most essential function: to serve as the balance wheel that keeps economic cycles from going too far. It is supposed to be a moderating force in American capitalism on the upside and on the downside, the role popularly described as “leaning against the wind.” By applying its leverage on the available supply of credit, the Fed can slow down a boom that is dangerously overwrought or, likewise, stimulate the economy if it is sinking into recession. The Fed’s job, a former chairman once joked, is “to take away the punch bowl just when the party gets going.” Economists know this function as “counter-cyclical policy.”

The Fed not only lost control, D’Arista asserts, but its policy actions have unintentionally become “pro-cyclical”–encouraging financial excesses instead of countering the extremes. “The pattern that has developed over the last two decades,” she wrote in 2008, “suggests that relying on changes in interest rates as the primary tool of monetary policy can set off pro-cyclical foreign capital flows that tend to reverse the intended result of the action taken. As a result, monetary policy can no longer reliably perform its counter-cyclical function–its raison d’être–and its attempts to do so may exacerbate instability.”…

The Fed is also supposed to act as a regulator for banks and their affiliates, but failed miserably in that role as well.

Indeed, the central bankers’ central banker – BIS – has itself slammed the Fed:

In a pointed attack on the US Federal Reserve, [BIS and its chief economist William White] said central banks would not find it easy to “clean up” once property bubbles have burst…

Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”

“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” [White] said.

The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…

“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.

As PhD economist Steve Keen has pointed out, the Fed (along with Treasury) has also given money to the wrong people to kick-start the economy.

Remember also that Greenspan acted as one of the main supporters of derivatives (including credit default swaps) between the late 1990’s and the present (and see this).

Greenspan was also one of the main cheerleaders for subprime loans (and see this).

The above list is only partial. And it ignores:

(1) allegations that the Fed has manipulated the markets; and

(2) claims that the Federal Reserve System saddles the U.S. government and American people with trillions of dollars in unnecessary debt (that would not be incurred if the government took back the “power to coin money” granted to the government itself in the Constitution).

Even so, it shows that the Federal Reserve has performed very poorly indeed.

[Sep 19, 2009] Greenspan Flunks Test, Bush Falls Into $15 Trillion Pit by James Pressley

May 27, 2009 | Bloomberg.com

Greenspan Muddle

His verdict on former Fed Chairman Alan Greenspan is as astute as it is merciless. A telling moment comes when Ritholtz shows how Greenspan drew the wrong conclusion from the first crisis during his tenure, the crash of ‘87.

“What the astute student learns from the history of speculative frenzies is that the 1987 crash was a unique aberration,” Ritholtz writes. It was a rare combination of a sizzling equity market, a (dangerously) innovative product called portfolio insurance and some antiquated stock-exchange plumbing that together created a short, brutal drop in an otherwise strong economy, he says.

“Greenspan completely missed this point,” he says. “The 1987 crash was the rare exception, not the rule.”

The upshot: Greenspan would respond to crisis after crisis -- from LTCM to the popping dot-com bubble -- with the same mistaken treatment: more liquidity and lower rates. The Greenspan Put was born.

POWER WITHOUT CREDIBILITY, Part 3 Politics of the financial crisis By Henry CK Liu

Asia Times

...But the capital inadequacy did not evolve by itself. It was created by the policy by the Federal Reserve. Geithner seems to have forgotten the stated official views of the Fed under Alan Greenspan who said in a 1998 testimony before Congress:

We should note that were banks required by the market, or their regulator, to hold 40% capital against assets as they did after the Civil War, there would, of course, be far less moral hazard and far fewer instances of fire-sale market disruptions. At the same time, far fewer banks would be profitable, the degree of financial intermediation less, capital would be more costly, and the level of output and standards of living decidedly lower. Our current economy, with its wide financial safety net, fiat money, and highly leveraged financial institutions, has been a conscious choice of the American people since the 1930s. We do not have the choice of accepting the benefits of the current system without its costs.

The risk of systemic market failure was a conscious choice of Fed monetary policy that the American people did not have much say in. Greenspan, notwithstanding his denial of responsibility in helping throughout the 1990s to unleash the equity bubble, had this to say in 2004 in hindsight after the bubble burst in 2000: "Instead of trying to contain a putative bubble by drastic actions with largely unpredictable consequences, we chose, as we noted in our mid-1999 congressional testimony, to focus on policies to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion."

By the "next expansion", Greenspan meant the next bubble, which manifested itself in housing. He did not heed the dire warnings in 2000. The "wide financial safety net" that Greenspan relied on had holes big enough to drive a Mack truck through. By 2008, Greenspan was forced to admit to Congress that he erred in his faith in the self-regulatory regime of banks.

[Sep 10, 2009] Priceless: How The Federal Reserve Bought The Economics Profession by Ryan Grim

The Huffington Post

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

One critical way the Fed exerts control on academic economists is through its relationships with the field's gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll -- and the rest have been in the past.

The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after "flipping" had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan said that "a national severe price distortion [is] most unlikely." A year later, current Chairman Ben Bernanke said that the boom "largely reflect strong economic fundamentals."

The Fed also failed to sufficiently regulate major financial institutions, with Greenspan -- and the dominant economists -- believing that the banks would regulate themselves in their own self-interest.

Despite all this, Bernanke has been nominated for a second term by President Obama.

In the field of economics, the chairman remains a much-heralded figure, lauded for reaction to a crisis generated, in the first place, by the Fed itself. Congress is even considering legislation to greatly expand the powers of the Fed to systemically regulate the financial industry.

Paul Krugman, in Sunday's New York Times magazine, did his own autopsy of economics, asking "How Did Economists Get It So Wrong?" Krugman concludes that "[e]conomics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system."

So who seduced them?

The Fed did it.

Three Decades of Domination

The Fed has been dominating the profession for about three decades. "For the economics profession that came out of the [second world] war, the Federal Reserve was not a very important place as far as they were concerned, and their views on monetary policy were not framed by a working relationship with the Federal Reserve. So I would date it to maybe the mid-1970s," says University of Texas economics professor -- and Fed critic -- James Galbraith. "The generation that I grew up under, which included both Milton Friedman on the right and Jim Tobin on the left, were independent of the Fed. They sent students to the Fed and they influenced the Fed, but there wasn't a culture of consulting, and it wasn't the same vast network of professional economists working there."

But by 1993, when former Fed Chairman Greenspan provided the House banking committee with a breakdown of the number of economists on contract or employed by the Fed, he reported that 189 worked for the board itself and another 171 for the various regional banks. Adding in statisticians, support staff and "officers" -- who are generally also economists -- the total number came to 730. And then there were the contracts. Over a three-year period ending in October 1994, the Fed awarded 305 contracts to 209 professors worth a total of $3 million.

Just how dominant is the Fed today?

The Federal Reserve's Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a "visiting scholarship." A Fed spokeswoman says that exact figures for the number of economists contracted with weren't available. But, she says, the Federal Reserve spent $389.2 million in 2008 on "monetary and economic policy," money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That's a lot of money for a relatively small number of economists. According to the American Economic Association, a total of only 487 economists list "monetary policy, central banking, and the supply of money and credit," as either their primary or secondary specialty; 310 list "money and interest rates"; and 244 list "macroeconomic policy formation [and] aspects of public finance and general policy." The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their "Financial Roundtable," the closest way they can approximate a focus on monetary policy and central banking.

Robert Auerbach, a former investigator with the House banking committee, spent years looking into the workings of the Fed and published much of what he found in the 2008 book, "Deception
and Abuse at the Fed". A chapter in that book, excerpted here, provided the impetus for this investigation.

Auerbach found that in 1992, roughly 968 members of the AEA designated "domestic monetary and financial theory and institutions" as their primary field, and 717 designated it as their secondary field. Combining his numbers with the current ones from the AEA and NABE, it's fair to conclude that there are something like 1,000 to 1,500 monetary economists working across the country. Add up the 220 economist jobs at the Board of Governors along with regional bank hires and contracted economists, and the Fed employs or contracts with easily 500 economists at any given time. Add in those who have previously worked for the Fed -- or who hope to one day soon -- and you've accounted for a very significant majority of the field.

Auerbach concludes that the "problems associated with the Fed's employing or contracting with large numbers of economists" arise "when these economists testify as witnesses at legislative hearings or as experts at judicial proceedings, and when they publish their research and views on Fed policies, including in Fed publications."

Gatekeepers On The Payroll

The Fed keeps many of the influential editors of prominent acade>The pharmaceutical industry has similarly worked to control key medical journals, but that involves several companies. In the field of economics, it's just the Fed.

Being on the Fed payroll isn't just about the money, either. A relationship with the Fed carries prestige; invitations to Fed conferences and offers of visiting scholarships with the bank signal a rising star or an economist who has arrived.

Affiliations with the Fed have become the oxygen of academic life for monetary economists. "It's very important, if you are tenure track and don't have tenure, to show that you are valued by the Federal Reserve," says Jane D'Arista, a Fed critic and an economist with the Political Economy Research Institute at the University of Massachusetts, Amherst.

Robert King, editor in chief of the Journal of Monetary Economics and a visiting scholar at the Richmond Federal Reserve Bank, dismisses the notion that his journal was influenced by its Fed connections. "I think that the suggestion is a silly one, based on my own experience at least," he wrote in an e-mail. (His full response is at the bottom.)

Galbraith, a Fed critic, has seen the Fed's influence on academia first hand. He and co-authors Olivier Giovannoni and Ann Russo found that in the year before a presidential election, there is a significantly tighter monetary policy coming from the Fed if a Democrat is in office and a significantly looser policy if a Republican is in office. The effects are both statistically significant, allowing for controls, and economically important.

They submitted a paper with their findings to the Review of Economics and Statistics in 2008, but the paper was rejected. "The editor assigned to it turned out to be a fellow at the Fed and that was after I requested that it not be assigned to someone affiliated with the Fed," Galbraith says.

Publishing in top journals is, like in any discipline, the key to getting tenure. Indeed, pursuing tenure ironically requires a kind of fealty to the dominant economic ideology that is the precise opposite of the purpose of tenure, which is to protect academics who present oppositional perspectives.

And while most academic disciplines and top-tier journals are controlled by some defining paradigm, in an academic field like poetry, that situation can do no harm other than to, perhaps, a forest of trees. Economics, unfortunately, collides with reality -- as it did with the Fed's incorrect reading of the housing bubble and failure to regulate financial institutions. Neither was a matter of incompetence, but both resulted from the Fed's unchallenged assumptions about the way the market worked.

Even the late Milton Friedman, whose monetary economic theories heavily influenced Greenspan, was concerned about the stifled nature of the debate. Friedman, in a 1993 letter to Auerbach that the author quotes in his book, argued that the Fed practice was harming objectivity: "I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results," Friedman wrote.

Greenspan told Congress in October 2008 that he was in a state of "shocked disbelief" and that the "whole intellectual edifice" had "collapsed." House Committee on Oversight and Government Reform Chairman Henry Waxman (D-Calif.) followed up: "In other words, you found that your view of the world, your ideology, was not right, it was not working."

"Absolutely, precisely," Greenspan replied. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

But, if the intellectual edifice has collapsed, the intellectual infrastructure remains in place. The same economists who provided Greenspan his "very considerable evidence" are still running the journals and still analyzing the world using the same models that were incapable of seeing the credit boom and the coming collapse.

Rosner, the Wall Street analyst who foresaw the crash, says that the Fed's ideological dominance of the journals hampered his attempt to warn his colleagues about what was to come. Rosner wrote a strikingly prescient paper in 2001 arguing that relaxed lending standards and other factors would lead to a boom in housing prices over the next several years, but that the growth would be highly susceptible to an economic disruption because it was fundamentally unsound.

He expanded on those ideas over the next few years, connecting the dots and concluding that the coming housing collapse would wreak havoc on the collateralized debt obligation (CDO) and mortgage backed securities (MBS) markets, which would have a ripple effect on the rest of the economy. That, of course, is exactly what happened and it took the Fed and the economics field completely by surprise.

"What you're doing is, actually, in order to get published, having to whittle down or narrow what might otherwise be oppositional or expansionary views," says Rosner. "The only way you can actually get in a journal is by subscribing to the views of one of the journals."

When Rosner was casting his paper on CDOs and MBSs about, he knew he needed an academic economist to co-author the paper for a journal to consider it. Seven economists turned him down.

"You don't believe that markets are efficient?" he says they asked, telling him the paper was "outside the bounds" of what could be published. "I would say 'Markets are efficient when there's equal access to information, but that doesn't exist,'" he recalls.

The CDO and MBS markets froze because, as the housing market crashed, buyers didn't trust that they had reliable information about them -- precisely the case Rosner had been making.

He eventually found a co-author, Joseph Mason, an associate Professor of Finance at Drexel University LeBow College of Business, a senior fellow at the Wharton School, and a visiting scholar at the Federal Deposit Insurance Corporation. But the pair could only land their papers with the conservative Hudson Institute. In February 2007, they published a paper called "How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?" and in May posted another, "How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions."

Together, the two papers offer a better analysis of what led to the crash than the economic journals have managed to put together - and they were published by a non-PhD before the crisis.

Not As Simple As A Pay-Off

Economist Rob Johnson serves on the UN Commission of Experts on Finance and International Monetary Reform and was a top economist on the Senate banking committee under both a Democratic and Republican chairman. He says that the consulting gigs shouldn't be looked at "like it's a payoff, like money. I think it's more being one of, part of, a club -- being respected, invited to the conferences, have a hearing with the chairman, having all the prestige dimensions, as much as a paycheck."

The Fed's hiring of so many economists can be looked at in several ways, Johnson says, because the institution does, of course, need talented analysts. "You can look at it from a telescope, either direction. One, you can say well they're reaching out, they've got a big budget and what they're doing, I'd say, is canvassing as broad a range of talent," he says. "You might call that the 'healthy hypothesis.'"

The other hypothesis, he says, "is that they're essentially using taxpayer money to wrap their arms around everybody that's a critic and therefore muffle or silence the debate. And I would say that probably both dimensions are operative, in reality."

To get a mainstream take, HuffPost called monetary economists at random from the list as members of the AEA. "I think there is a pretty good number of professors of economics who want a very limited use of monetary policy and I don't think that that necessarily has a negative impact on their careers," said Ahmed Ehsan, reached at the economics department at James Madison University. "It's quite possible that if they have some new ideas, that might be attractive to the Federal Reserve."

Ehsan, reflecting on his own career and those of his students, allowed that there is, in fact, something to what the Fed critics are saying. "I don't think [the Fed has too much influence], but then my area is monetary economics and I know my own professors, who were really well known when I was at Michigan State, my adviser, he ended up at the St. Louis Fed," he recalls. "He did lots of work. He was a product of the time...so there is some evidence, but it's not an overwhelming thing."

There's definitely prestige in spending a few years at the Fed that can give a boost to an academic career, he added. "It's one of the better career moves for lots of undergraduate students. It's very competitive."

Press officers for the Federal Reserve's board of governors provided some background information for this article, but declined to make anyone available to comment on its substance.

The Fed's Intolerance For Dissent

When dissent has arisen, the Fed has dealt with it like any other institution that cherishes homogeneity.

Take the case of Alan Blinder. Though he's squarely within the mainstream and considered one of the great economic minds of his generation, he lasted a mere year and a half as vice chairman of the Fed, leaving in January 1996.

Rob Johnson, who watched the Blinder ordeal, says Blinder made the mistake of behaving as if the Fed was a place where competing ideas and assumptions were debated. "Sociologically, what was happening was the Fed staff was really afraid of Blinder. At some level, as an applied empirical economist, Alan Blinder is really brilliant," says Johnson.

In closed-door meetings, Blinder did what so few do: challenged assumptions. "The Fed staff would come out and their ritual is: Greenspan has kind of told them what to conclude and they produce studies in which they conclude this. And Blinder treated it more like an open academic debate when he first got there and he'd come out and say, 'Well, that's not true. If you change this assumption and change this assumption and use this kind of assumption you get a completely different result.' And it just created a stir inside--it was sort of like the whole pipeline of Greenspan-arriving-at-decisions was
disrupted."

It didn't sit well with Greenspan or his staff. "A lot of senior staff...were pissed off about Blinder -- how should we say? -- not playing by the customs that they were accustomed to," Johnson says.

And celebrity is no shield against Fed excommunication. Paul Krugman, in fact, has gotten rough treatment. "I've been blackballed from the Fed summer conference at Jackson Hole, which I used to be a regular at, ever since I criticized him," Krugman said of Greenspan in a 2007 interview with Pacifica Radio's Democracy Now! "Nobody really wants to cross him."

An invitation to the annual conference, or some other blessing from the Fed, is a signal to the economic profession that you're a certified member of the club. Even Krugman seems a bit burned by the slight. "And two years ago," he said in 2007, "the conference was devoted to a field, new economic geography, that I invented, and I wasn't invited."

Three years after the conference, Krugman won a Nobel Prize in 2008 for his work in economic geography.

One Journal, In Detail

The Huffington Post reviewed the mastheads of the American Journal of Economics, the Journal of Economic Perspectives, Journal of Economic Literature, the American Economic Journal: Applied Economics, American Economic Journal: Economic Policy, the Journal of Political Economy and the Journal of Monetary Economics.

HuffPost interns Googled around looking for resumes and otherwise searched for Fed connections for the 190 people on those mastheads. Of the 84 that were affiliated with the Federal Reserve at one point in their careers, 21 were on the Fed payroll even as they served as gatekeepers at prominent journals.

At the Journal of Monetary Economics, every single member of the editorial board is or has been affiliated with the Fed and 14 of the 26 board members are presently on the Fed payroll.

After the top editor, King, comes senior associate editor Marianne Baxter, who has written papers for the Chicago and Minneapolis banks and was a visiting scholar at the Minneapolis bank in '84, '85, at the Richmond bank in '97, and at the board itself in '87. She was an advisor to the president of the New York bank from '02-'05. Tim Geithner, now the Treasury Secretary, became president of the New York bank in '03.

The senior associate editors: Janice C Eberly was a Fed visiting-scholar at Philadelphia ('94), Minneapolis ('97) and the board ('97). Martin Eichenbaum has written several papers for the Fed and is a consultant to the Chicago and Atlanta banks. Sergio Rebelo has written for and was previously a consultant to the board. Stephen Williamson has written for the Cleveland, Minneapolis and Richmond banks, he worked in the Minneapolis bank's research department from '85-'87, he's on the editorial board of the Federal Reserve Bank of St. Louis Review, is the co-organizer of the '09 St. Louis Federal Reserve Bank annual economic policy conference and the co-organizer of the same bank's '08 conference on Money, Credit, and Policy, and has been a visiting scholar at the Richmond bank ever since '98.

And then there are the associate editors. Klaus Adam is a visiting scholar at the San Francisco bank. Yongsung Chang is a research associate at the Cleveland bank and has been working with the Fed in one position or another since '01. Mario Crucini was a visiting scholar at the Federal Reserve Bank of New York in '08 and has been a senior fellow at the Dallas bank since that year. Huberto Ennis is a senior economist at the Federal Reserve Bank of Richmond, a position he's held since '00. Jonathan Heathcote is a senior economist at the Minneapolis bank and has been a visiting scholar three times dating back to '01.

Ricardo Lagos is a visiting scholar at the New York bank, a former senior economist for the Minneapolis bank and a visiting scholar at that bank and Cleveland's. In fact, he was a visiting scholar at both the Cleveland and New York banks in '07 and '08. Edward Nelson was the assistant vice president of the St Louis bank from '03-'09.

Esteban Rossi-Hansberg was a visiting scholar at the Philadelphia bank from '05-'09 and similarly served at the Richmond, Minneapolis and New York banks.

Pierre-Daniel Sarte is a senior economist at the Richmond bank, a position he's held since '96. Frank Schorfheide has been a visiting scholar at the Philadelphia bank since '03 and at the New York bank since '07. He's done four such stints at the Atlanta bank and scholared for the board in '03. Alexander Wolman has been a senior economist at the Richmond bank since 1989.

Here is the complete response from King, the journal's editor in chief: "I think that the suggestion is a silly one, based on my own experience at least. In a 1988 article for AEI later republished in the Federal Reserve Bank of Richmond Review, Marvin Goodfriend (then at FRB Richmond and now at Carnegie Mellon) and I argued that it was very important for the Fed to separate monetary policy decisions (setting of interest rates) and banking policy decisions (loans to banks, via the discount window and otherwise). We argued further that there was little positive case for the Fed to be involved in the latter: broadbased liquidity could always be provided by the former. We also argued that moral hazard was a cost of banking intervention.

"Ben Bernanke understands this distinction well: he and other members of the FOMC have read my perspective and sometimes use exactly this distinction between monetary and banking policies. In difficult times, Bernanke and his fellow FOMC members have chosen to involve the Fed in major financial market interventions, well beyond the traditional banking area, a position that attracts plenty of criticism and support. JME and other economics major journals would certainly publish exciting articles that fell between these two distinct perspectives: no intervention and extensive intervention. An upcoming Carnegie-Rochester conference, with its proceeding published in JME, will host a debate on 'The Future of Central Banking'.

"You may use only the entire quotation above or no quotation at all."

Auerbach, shown King's e-mail, says it's just this simple: "If you're on the Fed payroll there's a conflict of interest."

Elyse Siegel, Julian Hattem, Jeff Muskus and Jenna Staul contributed to this report

The Fed's king of bubbles Greenspan's Bubbles - The Age of Ignorance at the Federal Reserve by William Fleckenstein Reviewed by Julian Delasantellis

Asia Times

One such petition occurred in 1875, in the Ukraine’s Chigrin District. An outside agitator had tried to organize resistance, to stir up trouble, with the local peasantry. After being found out and expelled, a petition asking for Czar Alexander II’s forgiveness was drafted by the locals.

"How could we, simple, backward people, not believe in the kindness of our beloved monarch, when the whole world attests to it, when we know of his love and his trust for his people, his concern for them."

If you think that such bootlicking fawning obsequiousness could never happen in the United States, freedom’s home, the land where the people rule and the rulers serve, you haven’t watched a Congressional hearing with a US Federal Reserve Board chairman recently.

It happens two or three times a year, and it’s always the same. After an exchange of pleasantries, the Fed chairman delivers his opening statement. During the Alan Greenspan era, this invariably meant about a half hour of indecipherable economic gobbledygook flowing thick like molasses; the financial markets could understand what was being said, and frequently reacted violently in response, but few average citizens could. (Hillary Clinton recently announced that, if elected, she wanted Greenspan to head a commission studying the foreclosure crisis, although, in her continuing effort to prove herself just one of the guys downing shots and beer nuts around the bar in working class Pennsylvania, she admitted that "I never understand what he's saying.")

Then the committe members are permitted to question the great oracle. Sometimes, you can tell that the solon is just reading something written by somebody on his staff who once passed an economics course. Sometimes, since the great augur was obviously in possession of wisdom in all matters of the physical domain, the questions might be related to areas totally beyond the chairman’s purview, like, "Tell me, Mr Chairman, what’s your opinion, chains or studded snow tires?" Frequently, like a local asking for the blessing of a Mafia Don for the success of a new enterprise, the questions would be totally parochial, like, "Tell me, Mr Chairman, isn’t the real problem with our economy the lack of funding for post offices in southwestern Wyoming?", asked by, of course, the representative from southwestern Wyoming.

But the main phenomenon of this process was that the questions were almost always asked with the maximum amount of awe, deference and respect, and, invariably, the questioner would not get a straight answer to his question.

[Sep 7, 2009] Amazon.com Customer Reviews The Wrecking Crew How Conservatives Rule

An evangel for corruption, August 19, 2009 By Luc REYNAERT (Beernem, Belgium) - See all my reviews

Based principally on the DeLay-Abramoff affair with its muddy torrent of graft, Thomas Frank denounces highly emotionally but limpidly the agenda of the conservative right concerning the State and its government, as well as their ideology of selfishness and greed.

The core of US conservatism is the interests of business. These interests are mightily more important than their `free market' evangel. Mechanisms like tariff walls, public subsidies, monopolies, no-bid contracts or patent protections, will be adopted without any resistance if they enhance profits.

The conservative right sees the liberal State as a perversion, as a corruption of private interests (taxes), not as an instrument to service the population as a whole.

When they took power, they sabotaged the working of the government by appointing ferocious opponents of State agencies (EPA, FDA, SEC) at their head. They even created anti-agencies (OIRA, Council on Competitiveness).

For them, all public services should be subjected to the market system, because that is the most efficient way of ruling. In other words, those services have to be managed by private interests.

For Thomas Frank, the result of these policies was a rip-off. The institutions created for the protection of the population became institutions for the exploitation of the population (arms industry, anti-terrorism, administration of Iraq, recovery of hurricane Katrina ...).

One of the main targets of the conservatives is the Welfare State. The money flows of the welfare programs should be privately managed, thereby generating colossal commissions for a bunch of Wall Street managers, while in the meantime `defunding the left'.

For Thomas Frank, this is a sure way for turning US politics into a plutocracy and concomitantly a `bought' government.

Through lobbyism and pure propaganda for the agenda of the Right, conservatism itself became a business with monster fees for the preachers.

A US senator asked a few years ago: `Have you missed the government?'

If the government had not intervened heavily in the huge banking crisis of the last years, the whole capitalist system would have been turned into a desert, an enormous Great Depression for many years to come. The other side of the coin would have been an astonishing handover of all political, economic and financial world powers to the East (China).

This book is a must read for all those who want to understand the world we live in.

N.B. James K. Galbraith treated the same all important issues in a more theoretical way in his formidable book `The Predator State'.

Exposing the Deliberate Mismanagement of a Flawed Political Philosophy, May 4, 2009

By	Larry R. Bradley "Author, Neither Liberal Nor... (Omaha, NE) - See all my reviews

Reading Thomas Frank's The Wrecking Crew has been like finding a key piece to a jigsaw puzzle. My other research led me to believe the things Frank writes about were going on. Frank provides the proof without having to do the first hand research.

In a nutshell, Frank proves the Republican/Conservative approach to governing is not to govern at all. If you are someone who believes there is essentially no difference between the two major US political parties, then this book will change your mind.

My personal preference is I want to vote for a political party whose approach is to govern by balancing the interests of all parties concerned. This approach, to me, is more likely to produce effective and efficient government. In other words, the party might have a preference for one group over another, but the party operates on the premise it will be more likely to be re-elected if it shows itself to be even handed.

Republicans/Conservatives take an entirely different approach. According to Frank's book, Republicans govern only to benefit business and their supporters, not the public as a whole. More on this thought in a moment.

Having recommended in my own book independent voters make contributions to both parties in order to see what each party says about the other, I was especially interested in Frank's description of conservative direct mail fund raising and its enabling of the physical (not intellectual) growth of what passes for conservatism. Frank describes the origins of that phenomenon and how the money is used not just for political purposes but also to feather the nests of those who conduct the operations.

Frank also does a marvelous job of describing the origins and driving philosophies of people such as Jack Abramoff, Grover Norquist and Tom Delay and the creation of the intensive lobbying efforts enabled by those flawed philosophies.

Some prime elements of that flawed philosophy include the following. Govern on behalf of business and your campaign contributors at the expense of the public at large, rather than balancing the interests of all. Hollow out and suppress the activities of regulatory agencies by putting political appointees in place who will to keep the agencies from doing their jobs. Reward your campaign contributors by outsourcing more and more government functions and awarding the contracts to your contributors. Incur excessive amounts of debt so the government will be forced to shrink and push off its welfare and education programs to churches (or at least that is the whispered plan with a wink. Whether such a plan was actually intended to be supported is debatable.)

Show me some examples, you say? How about failure to regulate financial markets to prevent either the speculation in oil prices or the sub-prime meltdown? How about passing drug legislation without negotiation requirements or credit card bills written by credit card companies? How about FEMA and "Heckuva job, Brownie"? How about Monica Goodling (a graduate of Pat Robertson's Regent University) using political litmus tests for attorneys to work for the Justice Department? How about no-bid contracts to Halliburton and using Blackwater mercenaries?

I also liked Frank's cataloging of something I've heard before. If a conservative politician fails to govern well, conservatives will blame not the flawed philosophy. Instead, conservatives will say of the politician that he/she was not a "true conservative".

Overall, I shake my head at the lack of perspective of the people expressing these philosophies. They are like people who complain about the mess the mud between the logs of the log cabin makes inside the cabin, never realizing the purpose of the mud and the damage removing the mud will create.

Thanks to The Wrecking Crew, the flaws of this philosophy have never been more evident.

[Sep 7, 2009] Jesse's Café Américain

The Will to Power and Its Followers in the Socially Immature 

"I am afraid we may have, in the near future, friendly fascism. And I do not use the term lightly. I grew up under fascism, in Franco’s Spain, and if nothing else, I recognize fascism when I see it. And we are seeing a growing fascism with a working-class base in the U.S. This is why we cannot afford to see Obama fail. But his staff and advisors are doing a remarkable job to achieve this. Ideologues such as chief-of-staff Rahm Emanuel (who, when a congressman, was the most highly funded by Wall Street) and his brother, Ezekiel Emanuel (who did indeed write that old people should have a lower priority for health care spending) are leading the country along a wrong path."

Vincente Navarro, Obama's Mistakes in Health Care Reform

Vincent Navarro writes an amazingly insightful political analysis of health care reform and the Obama Adminstration. This is as we would expect, since Navarro, is an M.D., Ph.D., and professor of Health Policy at The Johns Hopkins University and editor-in-chief of the International Journal of Health Services.

But then he goes on to end his essay with this remarkably bad prescription.

"Given this reality, it seems to me that the role of the left is to initiate a program of social political agitation and rebellion (I applaud the health professionals who disrupted the meetings of the Senate Finance Committee), following the tactics of the Civil Rights and anti-Vietnam War movements of the 1960s and 1970s. It is wrong to expect and hope that the Obama administration will change. Without pressure and agitation, not much will be done."

The Will to Power has a bewitching siren call. It offers simple solutions to complex problems. It provokes the cycle of problem - reaction - solution, and the eye for an eye approach that 'makes the whole world blind.'

"Communism and fascism or nazism, although poles apart in their intellectual content, are similar in this, that both have emotional appeal to the type of personality that takes pleasure in being submerged in a mass movement and submitting to superior authority." James A. C. Brown

And yet, like most dark powers, it decimates and destroys who pick up the sword, and lays waste to them, their country, and their children.

This is the lesson of history, the abyss of madness into which a great leader can bring a nation once it loses its sense of proportion, that people in their passionate desire for power often forget.

[Jun 19, 2009] Guest Post- Richard Alford on Target Fixation and the Fed as Systemic Regulator

Like a typical member of Politburo Greenspan surrounded himself by cronies who adhere to his personal "party line".

naked capitalism

Target fixation is a process by which the brain is focused so intently on an observed object that awareness of other obstacles or hazards can diminish...The term "target fixation" may have been borrowed from World War II fighter pilots, who spoke of a tendency to want to fly into targets during a strafing run…. Target fixation may also refer to a phenomenon where a skydiver may forget to pull the ripcord because he or she is so focused on the landing area.(From Wikipedia, the free encyclopedia)

... ... ...

Evidence of Fed Target Fixation

A speech by Rajan “Has Financial Development Made the World Riskier?” aufficient liqu the past 18 years. I believe that the Greenspan doctrine, if I may call it that, has reflected the Chairman's analysis and deeply held belief that private interest and technological change, interacting in a stable macroeconomic environment, will advance the general welfare.

[Jul 20, 2009] So Many Miscreants . . . By Barry Ritholtz

July 19, 2009 | www.ritholtz.com

This week’s Barron’s has Randall Forsyth going a bit postal on the Usual Suspects:

“With so many miscreants participating in arguably the biggest financial catastrophe in history, it’s all but impossible to point to the chief perpetrator.

In truth, there was a suspension of disbelief all down the line: by mortgage brokers who arranged loans for delusional borrowers who bought houses they both knew they couldn’t afford; bankers who collected, pooled and sliced and diced the junk mortgages into triple-A securities; ratings agencies who provided that Good Housekeeping Seal of Approval to those defective products; investors who credulously bought these mortgage-backed securities with gilt-edged ratings and junk-bond yields; sellers of credit-default swaps who never thought they’d have to pay off on the insurance they’d written. And don’t forget Fannie and Freddie, which leveraged the implicit (and later explicit) backing of Uncle Sam to use cheap credit to balloon their balance sheets. And it was all fine, of course, because house prices never went down.

No less an authority than Alan Greenspan, the former Federal Reserve chairman, saw no problem with this because, firstly, scattering all these loans to the wind meant the risk was dispersed and therefore nobody needed to worry about the all these dubious loans threatening the financial health of any one institution. Moreover, there was no need to worry about bubbles; though they inevitably burst, the damage can be contained by reinflating a new one.

In that, Greenspan had empirical evidence on his side, after having reflated successive burst bubbles over his tenure. The Fed had done just that after the 1987 stock-market crash, which led to the commercial real-estate and junk-bond booms and busts of the late ’80s. And after the dot-com bust of 2001 (which was helped importantly by Fed pumping to stave off the supposed Y2K threat), Greenspan countered by slashing rates to 1% by 2003 and leaving them at preternaturely low levels for a couple of years, which inflated the housing bubble.”

Note what Forsyth writes: Not that there are no villains, but that its hard to pick the worst of the bunch out of all the miscreants involved. Still, it seems he is nominating Greenie as the front runner.

And yet some other people continue to think there were no villains in all of this. Some folks have suggested its simply a case of defining deviancy down, but I believe the more likely explanation is that its yet another Atlas-addled brain unable to process evidence that conflicts with now hard-wired ideolology.

Call it yet another case of cognitive dissonance . . .

Source:
It’s Good to Be Goldman
Randall Forsyth
Barron’s, JULY 20, 2009
http://online.barrons.com/article/SB124786956635760403.html

Why Big Capital Markets Players Are Unmanageable

naked capitalism

The way I see this distorted situation is that when someone does come along (in banking or government) who can whip it (whip it good) they are slandered or screwed over like Brooksley E. Born (who could whip it): "As the financial crisis of 2008 gained momentum, newspapers began reporting on what might be some of its causes, including the adversarial relationship Greenspan, Rubin and Levitt had with Brooksley Born, [11] with Greenspan leading the opposition, and how Born's recommendations were suppressed.[9] She is retired from Arnold & Porter and until recently had declined to comment on the unfolding crisis and her efforts to rein in the growing market for derivatives. "The market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been." The disagreement has been described as a classic Washington turf war. She now laments the influence of Wall Street lobbyists on the process and the refusal of regulators to discuss even modest reforms"

Praise be Wiki: http://en.wikipedia.org/wiki/Brooksley_Born

[Jun 5, 2009] Debt Deflation in America

We are living in the wreckage of the Greenspan bubble           

As recently as two years ago consumers were buying so many goods on credit that the domestic savings rate was zero. (Financing the U.S. Government’s budget deficit with foreign central bank recycling of the dollar’s balance-of-payments deficit actually produced a negative 2% savings rate.) During these Bubble Years savings by the wealthiest 10% of the population found their counterpart in the debt that the bottom 90% were running up. In effect, the wealthy were lending their surplus revenue to an increasingly indebted economy at large.

Today, homeowners no longer can re-finance their mortgages and compensate for their wage squeeze by borrowing against rising prices for their homes. Payback time has arrived – paying back bank loans, whose volume has been augmented to include accrued interest charges and penalties. New bank lending has hit a wall as banks are limiting their activity to raking in amortization and interest on existing mortgages, credit cards and personal loans. 

Many families are able to remain financially afloat by running down their savings and cutting back their spending to try and avoid bankruptcy. This diversion of income to pay creditors explains why retail sales figures, auto sales and other commercial statistics are plunging vertically downward in almost a straight line, while unemployment rates soar toward the 10% level. The ability of most people to spend at past rates has hit a wall. The same income cannot be used for two purposes. It cannot be used to pay down debt and also for spending on goods and services. Something must give. So more stores and shopping malls are becoming vacant each month. And unlike homeowners, absentee property investors have little compunction about walking away from negative equity situations – owing creditors more than the property is worth.        

Over two-thirds of the U.S. population are homeowners, and real estate economists estimate that about a quarter of U.S. homes are now in a state of negative equity as market prices plunges below the mortgages attached to them. This is the condition in which Citigroup and AIG found themselves last year, along with many other Wall Street institutions. But whereas the government absorbed their losses “to get the economy moving again” (or at least to help Congress’s major campaign contributors to recover), personal debtors are in no such favored position. Their designated role is to help make the banks whole by paying off the debts they have been running up in an attempt to maintain living standards that their take-home pay no longer is supporting. 

[Jun 30, 2009] Robert Kuttner Pecora Whirling

. For this attempt to spoil the party, she was excoriated and isolated by an old-boys' mob that included Alan Greenspan, Robert Rubin, Lawrence Summers and Gary Gensler. Incredibly enough, Gensler, an Obama appointee, now holds Born's old job as chair of the CFTC.

More than a decade and several meltdowns later, the Obama administration's 88-page white paper is ambiguous on the subject of whether and how

[Jun 27, 2009] The Danger of Discretion

The Baseline Scenario

As Ezra Klein puts it: “When evaluating a particular financial regulation proposal, ask yourself this question: Would these regulations have worked if Alan Greenspan hadn’t wanted to implement them?” That’s a good question, although it’s a bit unfair: if you posit a regulator who doesn’t believe in regulation, then virtually any regulatory scheme is bound to fail. This is why Fox and Klein argue for ironclad rules that don’t leave room for discretion. In addition, though, I think we also need to think about how to make sure we get regulators who are not cheerleaders for or captives of the financial services industry.

[Jun 26, 2009] Made The arsonist inspects the fire damage

The Mess That Greenspan

Former Fed chairman Alan Greenspan writes in the Financial Times that, if only stock prices would keep going higher, we might have a chance at a sustained economic recovery.

The rise in global stock prices from early March to mid-June is arguably the primary cause of the surprising positive turn in the economic environment. The $12,000bn of newly created corporate equity value has added significantly to the capital buffer that supports the debt issued by financial and non-financial companies. Corporate debt, as a consequence, has been upgraded and yields have fallen.
...
Global stock markets have rallied so far and so fast this year that it is difficult to imagine they can proceed further at anywhere near their recent pace. But what if, after a correction, they proceeded inexorably higher? That would bolster global balance sheets with large amounts of new equity value and supply banks with the new capital that would allow them to step up lending. Higher share prices would also lead to increased household wealth and spending, and the rising market value of existing corporate assets (proxied by stock prices) relative to their replacement cost would spur new capital investment...

PLEASE!! JUST STOP!!

You can't blow more bubbles just by writing an occasional op-ed piece in the Financial Times, an organization that, for their own perhaps perverse reasons, still allows you to air your thoughts to a wide audience on a regular basis.

Maybe the Financial Times still hasn't gotten over the whole "transfer of global superpower status" from six or seven decades ago and sees this as an opportunity to highlight some of the reasons why, in the decades ahead, this power will be shifting again.

Maybe not...

Back to the Maestro, as he explains his thinking on perpetually rising asset prices.
 

I recognise that I accord a much larger economic role to equity prices than is the conventional wisdom. From my perspective, they are not merely an important leading indicator of global business activity, but a major contributor to that activity, operating primarily through balance sheets. My hypothesis will be tested in the year ahead. If shares fall back to their early spring lows or worse, I would expect the “green shoots” spotted in recent weeks to wither.

Stock prices, to be sure, are affected by the usual economic gyrations. But, as I noted in March, a significant driver of stock prices is the innate human propensity to swing between euphoria and fear, which, while heavily influenced by economic events, has a life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but major causes of it.

It's too bad that not too many people listen to what 'ol Greenie has to say anymore because, in his later years, he's offering more insight into why he did what he did.

As evidenced by that last paragraph above, he really believed that a bubble-based economy was the right way to go.

He goes on to talk about inflation, deflation, and political pressure on the Fed.

For the benevolent scenario above to play out, the short-term dangers of deflation and longer-term dangers of inflation have to be confronted and removed. Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge. If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012; earlier if markets anticipate a prolonged period of elevated money supply. Annual price inflation in the US is significantly correlated (with a 3½-year lag) with annual changes in money supply per unit of capacity.

While the statistical analysis referred to might be woefully underestimating the timeframe for inflation (look at what oil prices have done lately, just based on "green shoots"), the comments on political pressure are probably on the mark.

That will be Ben Bernanke's big test over the next year - to do what's in the best interest of the economy in the long-term despite there being a mid-term election approaching.

As for the demands of Congress and the White House during Greenspan's tenure, he learned his lesson well from the early-retirement of his unpopular (but now highly regarded) predecessor at the central bank, Paul Volcker:

Political pressure is a constant - if you want to be reappointed, keep the easy money coming.

[Jun 20, 2009] Calculated Risk Book Review The Greenspan Problem

6/20/2009 | CalculatedRisk

CR Note: This is a guest post by Mathew Padilla of the Mortgage Insider blog. All opinions expressed are Matt's.

A book review by Mathew Padilla for Calculated Risk.

Count the following among the most accurate titles ever written: Nasdaq’s Peak was Greenspan’s. The title introduced a 2001 essay by James Grant, author of newsletter Grant’s Interest Rate Observer, in which the author addresses former Fed Chief Alan Greenspan’s approach to the ‘90s stock bubble: “He seeded it, accommodated it, celebrated it and defended it from those who believed they saw it turn into a bubble.”

The essay is an opening salvo against Greenspan to be followed by three other works that eviscerate the Maestro, the Federal Reserve and U.S. monetary policy in Grant’s late 2008 book Mr. Market Miscalculates: The Bubble Years and Beyond, which is a compilation of his essays celebrating the 25th anniversary of his newsletter. (I confess I submitted the review to Calculated Risk this month because I just finished reading the book.)

In the Nasdaq’s Peak essay Grant deconstructs Greenspan’s March 6, 2000 speech before the Boston College Conference on the New Economy. Greenspan praised the “revolution in information technology” including how managers formulated decisions with “real-time” information and that reduced uncertainty, allowing them to better control inventories. Grant delivers one of his many wry lines:

Thanks to clarity afforded by instantaneous communications, Cisco Systems had to write off only $2.25 billion in excess inventories during its third fiscal quarter, in addition to just $1.17 billion in restructuring and other special charges. … Lucent, Corning, Nortel and JDS Uniphase have been devastated by one of the greatest misallocations of investment capital outside the chronicles of the Soviet Gosplan. Who can conceive of the size of this waste had there been no e-mail?

It’s the misallocation of capital that gets at the heart of Grant’s criticism of both Greenspan and the Fed. Grant saw Greenspan as the Chairman of Perpetual Intervention, juicing the money supply

1. When a big hedge fund had a serious hiccup
2. When computers might go bonkers over two-digit dates.
3. After Nasdaq tanked. But the former chief saw no need to raise rates to stem speculative excesses. (Recall the 2001 essay is before the most pernicious bubble of all.) Greenspan practiced a lopsided monetary policy.

Compounding his folly, Greenspan was slow to react to the Nasdaq crash and start lowering rates when boom turned to bust in the second half of 2000, Grant writes, adding: “(B)ecause information technology was an absolute and unqualified good thing, it followed that it could not be held responsible for a bad thing – for instance, the bottom falling out of capital investment and, therefore, out of the GDP growth rate.”

That was Grant annoyed. Grant disgusted comes across in a September 13, 2002 essay, Monetary Regime Change, in which Grant’s prose oozes with repugnance as he picks apart Greenspan’s speech that year at the “monetary jamboree” of the Kansas City Federal Reserve Bank in Jackson Hole, Wyo. “Alan Greenspan washed his hands of responsibility for the bubble he said he could not have pricked even if he had noticed it floating above his desk on a string.” Again we are talking about the tech bubble – a warning that Greenspan was a deeply flawed policymaker. Grant goes on:

Following is a speculation on the outlines of a post-Greenspan monetary system. It is supported by some of the historical works that the chairman can read in the well-deserved retirement he should have taken starting in about 1996. We say “post-Greenspan” because, we believe, the Jackson Hole Speech will raise the odds against his reappointment (his current term expires in 2004), speed the day of his departure and reduce his policy-making influence for a long as he remains in office.

Grant was right about Greenspan not being reappointed, but wrong about his waning influence. In his final years, Greenspan fueled a pernicious explosion in credit, and he provided intellectual cover to politicians either ideologically opposed to regulation or too preoccupied with other matters to get to it. The essayist also was prescient but a little early with this in 2002: “Only one of the troubles with bubbles is that, after they pop, ultra-low interest rates and extraordinary rates of credit expansion lose their stimulative potency. The rate of creation of new yen by the Bank of Japan stands at 26.1% year-over-year, but this outpouring has yielded no appreciable reflationary results.” Grant was exactly right, but after a property bubble, not a stock-market bubble.

Greenspan is the lighting rod, but monetary policy is the storm. Grant writes since the late 19th century to their creators, each monetary system suited the ages. “But none lasted much longer than a generation. The system in place since 1971 is the worldwide paper-dollar system.” Grant takes this idea and runs with it in Mission Creeps, a November 7, 2003 essay that takes stock of the Federal Reserve on the eve of its 90th anniversary. “The Federal Reserve would be unrecognizable to the men who conceived it.” The law creating the Fed defined its purposes as follows, “to provide for the establishment of the Federal Reserve banks, to furnish and elastic currency, to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes.”

The founders, including Sen. Carter Glass (D.Va.), feared bank runs and their potential to disrupt commerce. They envisioned a central bank that could keep the banking system liquid. But they lived in the era of the gold standard, and never, ever dreamed of an expanding money supply designed to boost employment. Balancing full employment and appropriate inflation came later – the Fed and Congress found uses for the original act’s “and for other purposes.” Grant’s strongest ammunition is fired at the very idea of a central bank’s power to steer an economy, and all the myriad actors in it, by comparing economics to the hard science of physics in 2003:

Both use quantitative methods to build predictive models, but physics deals with matter; economics confronts human beings. And because matter doesn’t talk back or change its mind in the middle of a controlled experiment or buy high with the hope of selling even higher, economists can never match the predictive success of the scientists who wear lab coats. … Gov. Ben S. Bernanke is one of those true believers, as he reiterated last month in a lecture at the London School of Economic. “If all goes as planned,” said Bernanke, getting off on the wrong foot, “the changes in financial asset prices and returns induced by the actions of monetary policymakers lead to changes in economic behavior that the policy was trying to achieve.” If all went according to plan, the LSE would be teaching case studies in the triumphs of the Soviet economy.

In yet another essay, There ought to be Deflation, in January 14, 2005, Grant builds on the idea of a monetary policy as a source of economic distortion. He quotes Friedrich von Hayek, who, while accepting the Nobel price for economics more than 20 years ago, said:

The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of money stops or slows down, together with the expectation of a continuing rise in prices, draws labor and other resources into employment which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate.

And that is exactly what happened when Greenspan cut rates in the 2000s. Workers flooded into subprime lenders, construction companies, Home Depots, and on and on.

Grant bemoans, in more than one essay, the death of the gold standard. In his view a fixed currency would constrain both the Fed and the federal government. It might even have prevented a war of choice in Iraq, since what cannot be funded cannot be done. But fixed currencies have their disadvantages, writes another Nobel laureate, Paul Krugman, in another book tackling our current woes, his updated The Return of Depression Economics and the Crisis of 2008. A currency that is allowed to fall benefits an economy in recession since its exports become cheaper, Krugman argues. He’s also a proponent of a flexible currency giving a central bank freedom to expand money and combat unemployment.

Curiously, Krugman has a chapter in his book dubbed Greenspan’s Bubbles, but he does not address the Greenspan conundrum: what to do about the risk a Fed chairman will over stimulate asset prices while doing nothing to stop credit abuses. Until that problem is addressed I side with Grant and Hayek – expansionary monetary policy is dangerous.

In all of Mr. Market Miscalculates, I have but one quibble with Grant’s views. He cites the “socialization of risk” as encouraging reckless corporate behavior. The problem began with FDIC insurance and culminated in Greenspan’s interventions, including the orderly dissolution of hedge fund Long Term Capital Management. Grant’s case is that banks are more willing to lend to corporate cowboys if they think government will bail them out, or the market overall.

An alternative view is that FDIC insurance has been a key element among government initiatives that maintained safety and soundness in banking for some 50 years. It wasn’t until President Reagan initiated the anti-regulation era that insured institutions went bonkers – S&Ls binged on junk bonds and commercial real estate. Even now, with all that has happened, consumers are not lining up at insured banks in an all out panic – before FDIC insurance some good banks failed on mere rumors of trouble.

And moral hazard did not fuel the excesses of the era just ended. As an example, noninsured, nonbank New Century Financial secured more than $15 billion in credit lines from bigger banks in housing’s heyday. No one thought the subprime generator was too big to fail. And as soon as it wobbled, New Century found its credit cut off, and it fell into the abyss. This is the real issue with the modern era -- capital flows quickly, at times too quickly, into and out of any venture anywhere in the world.

On the whole, there is much genius in Grant’s observations. And his book covers more than what I touched on here. He gives a modern take on value investing, illuminates Wall Street’s mortgage fantasies, and more. As for a solution to the Greenspan problem, it is not Grant’s style to offer one. He never explicitly says the country should return to the gold standard or hack some appendages off the Federal Reserve. Grant is subtler, and more general. He simply warns us: change is coming.

Mathew Padilla is co-author of Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis, a USA Today Business Book of the Year, and hosts the Mortgage Insider blog.

An Interview With Paul Samuelson, Part One - Conor Clarke

And this brings us to Alan Greenspan, whom I've known for over 50 years and who I regarded as one of the best young business economists. Townsend-Greenspan was his company. But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy. He actually had instruction, probably pinned on the wall: 'Nothing from this office should go forth which discredits the capitalist system. Greed is good.'

However, unlike someone like Milton, Greenspan was quite streetwise. But he was overconfident that he could handle anything that arose. I can remember when some of us -- and I remember there were a lot of us in the late 90s -- said you should do something about the stock bubble. And he kind of said, 'look, reasonable men are putting their money into these things -- who are we to second guess them?' Well, reasonable men are not reasonable when you're in the bubbles which have characterized capitalism since the beginning of time.

But now Greenspan admits he was wrong.

Because we had, instead of three standard deviations storm, a six standard deviation storm. Well, we did have something unprecedented. I think looking for scapegoats and blame can be left to the economic historian. But, at the bottom, with eight years of no regulation from the second Bush administration, from the day that the new SEC chairman -- Harvey Pitt -- said 'I'm going to run a kinder and gentler SEC,' every financial officer knew they weren't going to be penalized.

Self regulation never worked as far as macroeconomic events -- whether we're talking about post-Napoleonic War business cycles or the big south sea bubble back in Isaac Newton's time, up to today's time. The pendulum just swings back in the other direction.

Joseph A. Palermo Alan Greenspan Has Written His Own Epitaph

October 9, 2008 | www.huffingtonpost.com

In a superb front-page article in today's New York Times, "Taking a Hard Look at a Greenspan Legacy," Peter S. Goodman treats his readers to a banquet of former Federal Reserve Chairman Alan Greenspan's oracular pronouncements in favor of deregulating derivative markets -- Yes, those unregulated, absurdly inflated "swaps" and other exotic debt instruments that are largely responsible for crippling the financial system of our civilization.

According to the article, Mr. Greenspan told a Congressional committee in the mid-1990s: "Risks in financial markets, including derivative markets, are being regulated by private parties. There is nothing involved in federal regulation per se which makes it superior to market regulation." Oh, Really? I don't know what history books Mr. Greenspan reads -- maybe he should put down Atlas Shrugged for a moment and read about the causes of the Great Depression, or even the causes of the more recent dot-com bust or the failure of WorldCom, Tyco, Adelphia, etc. Or, better yet, maybe Greenspan should return the "Enron Prize" that "Kenny Boy" Lay gave him in 2000 and read up on the causes of the Enron collapse. I guess it is too much to ask a multimillionaire economist to lower himself and pick up a book about how American society has actually worked in the past, instead of relying on his ideological wet dreams.

Greenspan knows that banking regulations, like the 1933 Glass-Steagall Act, did not come forth because the financial system was humming along, but rather, they emerged out of a financial crisis similar to the one we are experiencing right now.

Goodman's piece shows that Mr. Greenspan is an ideologue. His devotion to the free-market Ayn Rand-Milton Friedman creed is as fanatical as a Conquistador or a Maoist. Although Greenspan refused to grant an interview for the article, he is still gallivanting around the country telling his acolytes at high-paid speaking engagements: "Risk management can never achieve perfection." His assessment of the current financial meltdown is exactly like George Bush's assessment of the damage caused by Hurricane Katrina: "Oops, sorry -- I'll try to get it right next time." Well, that attitude is simply not good enough anymore -- if it ever was. We expect more from our public officials now.

Ironically, the economic crisis Greenspan helped create offers us an opportunity. It comes at the perfect time for an electoral referendum on the disastrous eight-year reign of Bush the Younger and his Republican cheerleaders, as well as a repudiation of neo-liberal, laissez-faire, right-wing ideology that has been rammed down the nation's throat for three decades. I think most Americans now realize that Greenspan's libertarian worldview is nothing more than greed posing as public policy.

And yet with all of the evidence that Wall Street could not be trusted -- the "golden parachutes" for executives who crash their companies, the insider trading and fraudulent over-valuation of stocks, the labyrinthine network of off-shore accounts and "special purpose entities" that look a lot like money laundering, and so on -- Mr. Greenspan, at a time when derivatives were infecting the international banking system like a financial AIDS virus, had this to say in 2004 : "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."

Those words should be Alan Greenspan's epitaph -- they should be inscribed on his tombstone when he joins Ayn Rand and Milton Friedman in the great free-market utopia in the sky.

The sociologist/economist, James O'Connor, argued long ago that an "accumulation crisis" of the magnitude we're now seeing historically always ushers in a "legitimation crisis" as millions of people slowly begin to realize that the smart white men in pin-striped suit (like Greenspan) who they trusted to run the nation's most important financial institutions have been lying to them all along, and are, in reality, nothing but a bunch of white-collar criminals free of any ethical constraints. That's what happened after the Great Depression: two crises, one economic, the other political. And just look at the behavior of the AIG executives who took a weeklong vacation partying and golfing and getting pedicures and manicures (and who knows what else) at a beachside resort lavishing on themselves $500,000 AFTER receiving the $85 billion bail out from the American taxpayers. What are we to make of people like that? And Alan Greenspan still says we can trust these guys?

No wonder the Republicans do not want us to look back on the recent history that brought us to this point. Given that Ronald Reagan, the free-market avatar who started the ball rolling, appointed Alan Greenspan to be Fed Chair, he, more than any other individual, embodies the market fundamentalist philosophy that has brought the nation to its knees.

Hank Paulson and Ben Bernanke are trying to pretend that they have the situation under control, but this thing is so huge and complex and international in scope they do not have a clue about how to begin addressing the crisis. They're not riding a "tiger," they're chasing a thousand tigers in the middle of a hurricane. They are play acting as if they are running things so the stock market is reassured. Well, today's 678 point drop in the Dow indicates that these men have no credibility, hence, proof that the "legitimacy crisis" continues.

I think it's safe to say that Alan Greenspan will go down in history, along with George W. Bush, as a reckless and radical proponent of failed laissez-faire policies, as well as one of the worst public officials in American history.

[Jun 14, 2009] Lawyers, Guns and Money Laundering Greenspan

October 20, 2005

The editor of The Economist is currently on NPR. Responding to a question from a listener about Alan Greenspan's role in the Bush deficits, he deflected it by saying that Greenspan is just in charge of monetary policy, so it's really on Bush, but perhaps could have used his "bully pulpit" more. The dishonesty here, of course, is implying that Greenspan has consistently opposed Bush's fiscal policy but not loudly enough. Er, no. As the country's Randian-in-chief is let out to pasture, let his profoundly embarrassing argument in 2001 that the possibility that the national debt would be paid off too quickly was a good reason for Bush's unpaid-for upper-class tax cuts be mentioned as much as possible.

[Apr 18, 2009] Fed first to blame for financial crisis Kaufman Reuters.com By John Parry

Apr 17, 2009 | NYT (Reuters)

The Federal Reserve allowed the global credit crisis to happen and must be redrawn as a tough regulator to stop big financial institutions from taking excessive risks, prominent Wall Street economist Henry Kaufman said on Friday.

The world is "now in the midst of the worst financial crisis since the Second World War," Kaufman said in a speech titled "Who is Primarily Responsible for the Credit Crisis?" he gave to a conference in New York.

"I am convinced that the misbehavior of some would have been much rarer -- and far less damaging to our economy -- if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities," Kaufman said.

Kaufman became known for correctly forecasting higher inflation and interest rates when he was chief economist with Salomon Brothers in the 1970s and 1980s. During that time, he acquired the moniker "Doctor Doom" among financial market watchers and is well known as an expert on monetary policy and how financial markets work.

"At a minimum, the Fed's sensitivity to financial excesses must be improved," Kaufman said.

SAYS GREENSPAN FAILED TO WARN ABOUT RISKS

Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.

"Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior," Kaufman said. "It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective."

Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were "too big to fail" have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.

"Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities," he said. "The Fed failed to rein in the problem."

Banks' exposure via hedge funds and structured investment vehicles, known as SIVs, to assets that turned bad have burdened them with trillions of dollars of write-downs and losses since the credit crisis erupted in mid-2007.

The U.S. central bank is largely to blame for the banking system's ballooning exposure to such risks, Kaufman said.

"Much of the recent extreme financial behavior is rooted in faulty monetary policies," he said. "Poor policies encourage excessive risk taking."

Now the Fed should act as a regulator to strictly oversee big financial institutions and impose "constraints on their assets and profit growth," he said.

However, Kaufman praised the central bank's many emergency measures to combat the global financial crisis by supporting securities markets to get credit flowing again.

For the central bank's "resourcefulness and innovativeness in working to revive the credit market ... the Fed deserves to be commended," Kaufman said. "Even so, these actions came after the crisis had gained considerable momentum."

(Reporting by John Parry; Editing by Jan Paschal) 

[Apr 10, 2009] Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party  By JUSTIN LAHART

 WSJ.com

To outline his fears about the U.S. economy, Raghuram Rajan picked a tough crowd.

It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. -- and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth.

Mr. Rajan, a professor at the University of Chicago's Booth Graduate School of Business, chose that moment to deliver a paper called "Has Financial Development Made the World Riskier?"

His answer: Yes.

Mr. Rajan quickly came under attack as an antimarket Luddite, wistful for old days of regulation. Today, however, few are dismissing his ideas. The financial crisis has savaged the reputation of Mr. Greenspan and others now seen as having turned a blind eye toward excessive risk-taking.

More

• The Doomsayers Who Got It Right

He says he had planned to write about how financial developments during Mr. Greenspan's 18-year tenure made the world safer. But the more he looked, the less he believed that. In the end, with Mr. Greenspan watching from the audience, he argued that disaster might loom.

Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly.

He pointed to "credit-default swaps," which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred.

Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said: "The interbank market could freeze up, and one could well have a full-blown financial crisis."

Two years later, that's essentially what happened.

Many of the big names in Jackson Hole weren't ready to hear the warning. Former Treasury Secretary Lawrence Summers, famous among economists for his blistering attacks, told the audience he found "the basic, slightly lead-eyed premise of [Mr. Rajan's] paper to be misguided."

The 45-year-old Mr. Rajan is an unlikely dissident. Born in Bhopal, India, he had a childhood marked by stints in Indonesia, Sri Lanka and Belgium, as his civil-servant father rose through the ranks. In high school, he came across the work of British economist John Maynard Keynes, who became his intellectual hero.

He was "helping the world out of recession," Mr. Rajan says of Lord Keynes. "For a person growing up in a developing country, you sort of believe that there has to be a better way."

Joining the University of Chicago's business school in 1991, Mr. Rajan established himself as a rising star. He won the first Fischer Black Prize in 2003 for the person under 40 who has contributed most to the theory and practice of finance. Later that year he became the IMF's chief economist, the youngest person and first non-Westerner in that position.

The Jackson Hole contretemps followed by a few months another set of attacks on Mr. Rajan for a study he co-wrote at the IMF that concluded foreign aid didn't help developing countries grow. Mr. Rajan says the twin controversies didn't deter him. At the IMF, he pushed the research department to focus on financial-sector issues, and continued to sound alarm bells about financial-market risks.

By summer 2007, as the crisis began unfolding in earnest, Fed bank presidents Janet Yellen and Gary Stern were citing Mr. Rajan's critiques in their speeches.

With the economy heading toward the deepest recession since World War II, Mr. Rajan believes, the government needs to be more forceful in its efforts to right the still-teetering banking sector, deciding bank by bank which ones deserve capital injections and which need to die. Otherwise, banking problems will deepen, as they did in Japan in the 1990s, he says, and delay an economic recovery.

Mr. Rajan is now focused on coming up with ways to avoid a regulatory backlash akin to what happened during the Great Depression, when governments around the world threw up protectionist barriers and clamped down on financial markets.

Instead of heavy regulation, he says, the incentives of Wall Streeters need to change so that punishments for losing money are in line with rewards for earning it.

At the start of 2008, he suggested that bonuses that financial workers make during boom times should be kept in escrow accounts for a period of time. If the firm experienced big losses later, those accounts would be drained.

Facing withering criticism over the bonuses paid out in the boom, financial giant UBS and Wall Street firm Morgan Stanley have recently announced they're adopting policies along the lines of what Mr. Rajan proposed.

Mr. Rajan also urges other safeguards. Along with Chicago colleagues Anil Kashyap and Harvard economist Jeremy Stein, he's come up with a plan to create a form of financial-catastrophe insurance that firms would buy into.

When he presented the insurance idea at last year's Jackson Hole confab, the reaction was different than back in 2005. Finnish central-bank governor Erkki Liikanen, recalling the weaknesses Mr. Rajan had spotted in the system back then, said: "I don't dare criticize you. That is all."

The man from Kenora who battled Greenspan

William White’s tussle with Alan Greenspan is spilling into their retirements as world leaders meet in London to try to prevent the next financial meltdown.

White challenged the former Federal Reserve chairman’s mantra that central bankers can’t effectively slow the causes of asset bubbles when he was chief economist at the Bank for International Settlements.

As heads of state gather for tomorrow’s Group of 20 summit, several former central bankers and regulators are advising them to advance the same arguments White has made for more than a decade: raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times to use in lean years.

"We started worrying about this at the same time that Alan Greenspan started worrying about irrational exuberance" in 1996, said White, a Canadian who has remained in Basel, Switzerland, since retiring from the BIS in June. "The difference was he stopped worrying about it, or at least he stopped worrying about it publicly, and we didn’t."

Chiefs of the world’s 20 biggest economies, including U.S. President Barack Obama and Chinese President Hu Jintao, will debate how the first contraction in the global economy since the Great Depression could have been avoided, and how to change systems for managing growth and regulating financial industries.

White, now 65, suddenly has company. His approach is reflected in position papers for the G-20 written by Jacques de Larosiere, former head of the International Monetary Fund and the Bank of France, and former Fed Chairman Paul Volcker.

Financial Stability

"Concerns for financial stability are relevant not just in times of financial crisis, but also in times of rapid credit expansion and increased use of leverage that may lead to crises," a panel led by Volcker said in a January report for the coalition of former central bankers, finance ministers and academics known as the Group of Thirty.

Stability matters because today’s economic stress could quickly lead to social unrest, which is what happened in the 1930s, White said in an interview across from his old office in Basel. He described how his father was killed in 1944 fighting Adolf Hitler’s forces in France near the town of Caen in Normandy. White was born on May 17, 1943, in Kenora, Ontario, about 400 miles north of Minneapolis.

In this crisis, the U.S. government and the Fed alone have spent, lent or guaranteed US$12.8 trillion to try to prop up the banking industry and overall economy to stem the longest recession since the 1930s. The World Bank said last month that the global economy will probably shrink this year for the first time since World War II.

15 Years

White’s warnings that credit risks were building up started while he was at the Bank of Canada, where he was deputy governor from 1988 to 1994. They were his constant refrain for more than 15 years, said Michael Mussa, senior fellow at the Peterson Institute in Washington and former IMF chief economist.

"I met Bill in 1991 or 1992, and we were already talking about this back then," Mussa said.

In 1994, White joined the BIS, a counterparty for the world’s central banks and a forum for top policy makers and finance officials. He became head of the monetary and economic department in 1995. The BIS also houses the Basel Committee on Banking Supervision, which sets international bank capital requirements.

Jackson Hole

White took his argument directly to Greenspan on Aug. 28, 2003, at the Kansas City Fed’s annual meeting in Jackson Hole, Wyoming. Claudio Borio, head of research for White’s department, prepared for questions as White wrote his notes out in longhand at the Jackson Lake Lodge in Grand Teton National Park.

"Claudio said to me quite rightly, ‘We cannot miss this chance, everybody is going to be there,’" White said. Borio, still at the BIS, declined to comment.

Greenspan was unmoved by the presentation and said he pointed out that the Fed had tried and failed to stem a surge in stock prices by raising its target for the Federal Funds rate by 300 basis points in 1994. A basis point is 0.01 percentage point. He still isn’t convinced White’s monetary policy plan would work, he said.

"There has never been an instance, of which I’m aware, that leaning against the wind was successfully done," Greenspan, 83, said in a Feb. 27 telephone interview. He added that spotting a bubble is easy. What’s hard is predicting when it will pop.

‘Out of Whack’

Greenspan, who retired as Fed chairman in 2006, did broadly agree with White’s position on safety margins for banks, he said.

"It has always bothered me that our capital requirements are so low," he said. "We do not have an adequate cushion."

Mark Gertler, a New York University economics professor who has collaborated on research with Fed Chairman Ben Bernanke, Greenspan’s successor, said that the U.S. housing boom and bust weren’t caused by low interest rates in 2003 and 2004. The problem stemmed from the decline in subprime mortgage lending standards and from leaving investment banks essentially unregulated even as they held mortgages and issued short-term liabilities like commercial banks, he said.

"The first-order cause of this crisis was the regulatory system was way out of whack," Gertler said. "It’s not the case that you can get at this alone with interest-rate policy; it really requires smart regulatory policy."

White’s policy plans recently have been endorsed through words and actions. Axel Weber, president of Germany’s central bank and a European Central Bank board member, said in a Feb. 10 speech in Malaysia that monetary authorities should consider raising rates if risk increases in financial markets, even if there is no short-term inflation-fighting reason to do so.

UBS, Credit Suisse

Bank capital regulation changes like the ones White promotes were adopted in December by Switzerland. The country set up new rules for UBS AG and Credit Suisse Group AG requiring them, by 2013, to hold between 50% and 100% more capital than the minimum 8% of risk-weighted assets under Basel rules. They could dip into the shock absorber in hard times. The regulator also instituted a leverage ratio, or a maximum amount of debt each bank could hold relative to its capital.

White will have influenced the discussion at the G-20 meeting, which he’s not attending, as part of a committee headed by the ECB’s former chief economist, Otmar Issing, which made recommendations to the German government. White also presented his views at a Feb. 18 conference in Toronto aimed at forming the Canadian government’s proposals.

Japan’s Example

White watched from the Bank of Canada as shares and real- estate prices soared in Japan in the 1980s. Asset prices then crashed, growth ground almost to a halt and unemployment climbed.

"It’s not rocket science in the sense that the fundamental insight is to watch the developments, what I would call the what, the why and the when of these crises," White said. "When you’ve seen one of them and it’s made an impression on you, it’s easier for you to see the problems building up elsewhere."

That led White to pen admonitions for a series of BIS annual reports.

"Some developments over the past year revealed disturbing laxities in internal governance, of both corporations and financial institutions, as well as in oversight and market discipline," White wrote for the report published in June 2004.

No ‘New Era’

Two years later, he wrote, "The recent historical experiences of Japan, Germany and Southeast Asia all indicate that costly economic downturns are possible, even after long periods of exceptional performance."

His darkest warning came on the eve of today’s financial turmoil.

"Virtually no one foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s," he wrote for the June 2007 report. "Each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived."

ECB President Jean-Claude Trichet praised the BIS as "obviously the most lucid institution in terms of its own research and publications" when asked about White after a Feb. 20 speech to the European American Press Club in Paris.

Social Costs

Beyond the current economic pain, White said the social costs of a severe economic crisis, in particular potential spikes in extremism, also propel him in his quest to find a way to limit boom-and-bust cycles.

"When you think about the big economic disruptions, what I always worry about is that you get into the fault lines on the political and social side of things pretty fast," White said, citing the confluence of the Great Depression and Hitler’s rise to power in Germany.

White’s critics often mistake the symptom of asset bubbles for the cause, which is a rapid increase in credit, he said. While his policy wouldn’t stop asset appreciation, it might squeeze out some of the gains that didn’t stem from improved productivity or technology, he said.

Still, he is modest about whether his financial stability elixir is made up of exactly the right ingredients.

"I’d like to believe that having been right about one thing implies a greater probability of being right about the other," White said, smiling. "But, of course, logically it’s not true. It doesn’t necessarily follow."

Bloomberg News

It Really Is All Greenspan's Fault  Ask John Taylor ... by Susan Lee,

Too simplistic...

04.03.09 | Forbes.com

It's been quite a spectacle for those who have followed Alan Greenspan's career for decades. Gone is the financial rock star or even the statesman testifying before Congress in a measured baritone. Instead, over the past several months, Alan Greenspan has morphed into a totally new person.

The first incarnation was the shaken Greenspan who was stunned that greedy and reckless short-term behavior could overwhelm long-term, rational self-interest. That was rather amazing all by itself. But now, there's a newer Greenspan--a decidedly prickly and whiny one.

I'm talking about Greenspan's recent op-ed in The Wall Street Journal. A 1,500-word attempt to move blame for the financial crisis away from himself and onto ... China.

It was, writes Greenspan, Chinese growth that led to "an excess" of global savings. That growth kept long-term interest rates low, which fueled the housing bubble. As for himself, the lowly chairperson of the Fed, he says he was helpless. He only had control over short-term rates.

Why this recent incarnation as a self-pitying victim of historical forces? Most likely, it's because of John Taylor, a mild-mannered professor at Stanford and former colleague of Greenspan's at the Fed.

In his Getting Off Track, a nifty little book, Taylor exposes, as plain as day, the culprit behind the financial boom-bust: Greenspan. His weapon of choice is the "Taylor rule" (discovered by Taylor--but not named by him, as he modestly points out.) (The Taylor rule is a recommendation about how the Fed should set the short interest rate--suggesting the amount it should be changed given economic conditions.)

Here's Taylor's take. Short interest rates fell in 2001 in response to the dot-com bust. But--and here's the important moment--beginning in 2002, the Taylor rule indicated that Greenspan ought to have tightened. Indeed, from 2002 to 2005, rates ought to have climbed to a touch over 5% and then stayed there through 2006.

But the Fed kept to a loose monetary stance, and rates kept falling during the period 2002 through 2004. Rates didn't start back up until middle of 2004 and didn't reach 5% until 2006. You can check this out in Figure 1, below.

 

The result? The Greenspan Loose policy went on to fuel a boom, while the Taylor Tight would have avoided one. As Taylor says, all the Fed needed to do was follow "... the kind of policy that had worked well during the period of economic stability called the Great Moderation, which began in the early 1980s."

The connection between Greenspan Loose and the housing boom is also clear. Housing starts took a sharp spike up in 2003 and then continued to climb through 2006. If the Fed had followed Taylor Tight, however, housing starts would have peaked at a much lower level at the end of 2003, and drifted down through 2006.

 

What about Greenspan's argument that he only controlled short-term rates? And that short rates became decoupled from long-term rates in 2002?

Nonsense, says Taylor. Surely the existence of adjustable-rate mortgages (accounting for about one-third of mortgages starting in 2003) linked the mortgage market and short-term rates. Moreover, says Taylor, whatever minor decoupling occurred, happened because bond investors were flummoxed by the Fed's odd behavior.

Taylor also takes on Greenspan's excuse that he was helpless in the face of a global saving glut. Cutting off the feet of Greenspan's excuse, Taylor says there wasn't a glut, there was a shortage. Figures from the International Monetary Fund show global saving rates, as a share of world GDP, were low during 2002 to 2004--way lower than rates in the 1970s and 1980s. In fact, the global saving rate fell at the end of 1990s, hitting bottom about 2003.

 

Greenspan's monetary excess was also crucial in setting off a chain of bad government policies. As Taylor argues, Greenspan Loose was amplified by the popularity of subprime mortgages, especially adjustable-rates, which promoted risk taking. And it made for a lethal brew in a pot of policies to promote homeownership.

Greenspan pulls out many stops in his defense. He even quotes the great Milton Friedman's approving assessment of Fed policy between 1987 and 2005. Well, Friedman died in 2006 and, in 2009, his equally great colleague, Anna Schwartz, has this to say: "There never would have been a subprime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for." As for Greenspan's argument that the whole mess is China's fault, she says tartly: "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events."

As fine a last word as there could be.

Susan Lee has written several books on economics, including a college text. She is an economics commentator for NPR's "Marketplace" and writes a weekly column for Forbes.

Greenspan's Folly/The demise of the cult of self-interest by Darrin W. Snyder Belousek

MARCH 30, 2009

 I was wrong, Alan Greenspan said in so many words. Seated before his congressional inquisitors in October 2008, with the worst financial crisis since the Great Depression cascading down Wall Street, Mr. Greenspan confessed that the philosophical principle upon which he had based his highly influential professional judgment is—flawed.

For some two decades as chairman of the Federal Reserve, Greenspan had counseled presidents and Congresses that government deregulation of financial markets and reliance upon self-regulation by self-interest was the way of both freedom and prosperity. The collapse of one insolvent bank after another has called such counsel into question.

Here are Greenspan’s own words: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.... The whole intellectual edifice [of risk-management in derivative markets]...collapsed last summer.” Asked whether his ideological bias led him to faulty judgments, he answered: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

One pillar in the “intellectual edifice” of Mr. Greenspan’s economic philosophy is the objectivist philosophy of the late Ayn Rand, whose inner circle Greenspan joined in the 1950s. As explained in her book The Virtue of Selfishness (1964), Rand believed that the individual exists solely for her own happiness and thus that rational self-interest is the only objective basis for moral action. There are no moral constraints on the selfish pursuit of personal happiness, except force and fraud. And there is no moral duty to sacrifice individual advantage for any greater good, because there simply is no greater good than personal happiness (“egoism”).

In the view of the objectivist philosophy, the only moral economic system is laissez-faire capitalism, which gives free rein to the selfish pursuit of individual profit. Accordingly, government should be minimal, limited to national defense, property protection and criminal prosecution. In his memoir, The Age of Turbulence, Greenspan acknowledged Rand as a “stabilizing force” in his life and reconfirmed as “compelling” the “philosophy of unfettered market competition.”

Ayn Rand and the Egoist Ethic

As his comments to Congress indicate, Greenspan seemed sincerely surprised (and distressed) that financial institutions managed by self-interested individuals seeking to maximize private gain in unregulated markets would not have more prudently protected shareholder interest from excessive risk. He had assumed, implicitly, that corporate executives would seek what was best for the institution and its investors—and hence, that self-regulated self-interest would align private profit with institutional good. Given a Randian ethic of rational selfishness, however, one should be wary of such assumptions.

The egoist ideal is that, short of force or fraud, I pursue my own advantage regardless of others, because individual happiness is the ultimate good. Consider executive compensation. If I am an executive, then on egoist terms, I have limited rational interest to sacrifice personal gain for shareholder equity on account of risk assessment, as long as my compensation package guarantees me multimillions regardless of stock performance. Even if the company crashes, I escape with my “golden parachute.”

The egoist ethic amplifies this divergence between private interest and common good throughout the financial market. Consider the mortgage market. If I am a mortgage lender, then issuing risky loans that are unlikely to be repaid is a good investment for me, as long as the secondary mortgage market allows me to pass the risk of default to others—say, by selling the loans on the secondary market for bundling into mortgage-backed “securities.” Even if the borrower later goes into default, I have gained in the market as long as I am able to remove the loan from my books and reap my commission.

And if I am an investment banker, then purchasing bonds backed by risky loans is also a good investment, as long as a derivatives market allows me to “swap” the risk with a leveraged investor or an insurance company. Even if the underlying loans go into default, I have still maintained my market position, as long as my credit-default swaps pay out and I cover my losses.

In short, as long as there is an unregulated market for betting on loan defaults and as long as there are investors willing to take the bets, financial risks that promise individual profit with potential cost to the common good make rational sense. Of course, this game of risk is sustainable only as long as the bets continue paying off—which meant in this case, only as long as housing prices continued rising. With the burst of the bubble in the housing market, resuluting in a flood of mortgage defaults, bond sellers and default insurers alike were left unable to make good on their promises, leaving bond holders to absorb the losses they had gambled others would pay. Although the risk-takers have reaped their reward in a whirlwind, it is ultimately stockholders and taxpayers who have borne the real cost through losses to retirement funds and education budgets.

Greenspan’s “intellectual edifice” of self-regulation by self-interest has thus collapsed upon its own presuppositions. Having recognized the “flaw” in his thinking, Greenspan now suggests that financial institutions selling complex products (e.g., securities backed by high-risk mortgages) be required to hold a substantial portion of the bonds they issue in their own portfolio. That is, institutions should be required to expose themselves to the risk they market to others in order to constrain the excesses of self-interest.

Reasonable regulation of capital markets and executive compensation to rein in self-interest, though necessary, does not get to the heart of the matter, however. The deeper philosophical issue is that the egoist ethic underlying Greenspan’s theory is an insufficient foundation for how we envision our economic life. According to the Randian philosophy, rational selfishness is the chief virtue, its constraint the chief vice. What the financial crisis teaches us is that excessive self-interest is economically destructive. Unrestrained selfishness is thus itself a vice, undermining not only the general welfare but also self-interest.

While self-interest is the operative principle of the marketplace, and while Greenspan is correct to argue that markets have made expanding prosperity possible for many, the unrestrained self-interest that egoism values has proved corrupting of the very free market in which it was supposed to flourish. Rational selfishness without moral constraint has corroded the trust between financial institutions that is necessary to sustain the flow of credit upon which a market-capitalist economy depends. Not even the lowering by the Federal Reserve of its lending rate to practically zero has been sufficient to stimulate financial markets in the current climate of mistrust.

Buying into the market, inasmuch as it involves risk, depends on trust; but trust in the market cannot be bought. For trust depends essentially upon the trustworthiness of prospective buyers and sellers, borrowers and lenders. Without mutual trustworthiness, freedom of exchange is undercut, even if the cost of buying into the market (the interest rate, for example) is cut to zero. Virtue thus is prior to freedom; and without virtue, freedom destroys itself. The free market cannot operate by self-interest alone, therefore, but relies on ethical presuppositions.

An Alternate Vision

What is further lacking in the Randian philosophy is a robust concept of the common good. The common good is more than the competing interests of selfish individuals (the view on the right). It is also more than the composite interests of special groups (the view on the left). The common good is “the good we have in common”—the comprehensive communal conditions necessary for the virtuous pursuit of human fulfillment by all in society.

Talk of virtue ethics and the common good is the language of Christian moral philosophy. The financial crisis, then, issues a special call to the faithful. American society needs an alternative vision of economic life to the one that has reigned over the past quarter-century and has now brought so many institutions and investors to ruin.

The first task of this alternate vision—in the face of ingrained individualism and endemic egoism—is to reclaim the very fact of our common life as the basis of our obligations to one another. Times of crisis remind us of our inter-dependence and summon us to our mutual responsibilities. Without sustained focus and reflection, however, such lessons learned can be quickly lost in the public consciousness. (Recall how soon the official message after 9/11 shifted from “let’s pull together” to “everyone go shopping.”)

As a Mennonite philosopher, I have found Catholic social teaching to provide a plentiful resource of reflection on these questions, especially Leo XIII’s encyclical Rerum Novarum (1891), where we can find precisely the principle that we need to re-learn: “Civil society exists for the common good, and, therefore, is concerned with the interests of all in general, and with the individual interests in their due place and proportion” (No. 37).

From the perspective of Catholic social teaching, individual interest is inseparable from the common good. The individual’s claim on the community is bound up with the community’s claim on the individual. Such mutuality implies moral principles for the economic system: individual profit is accountable to the common good; gain for the wealthy is immoral apart from justice for the poor; economic freedom entails social responsibility (see the U.S. Catholic bishops’ pastoral letter, Economic Justice for All, 1986).

Another rich resource for reflection is John Paul II’s centenary reflection on Pope Leo’s encyclical, Centesimus Annus (1991), which includes a comment (No. 17) with a remarkable relevance for the current crisis:

We see how [Rerum Novarum] points essentially to the socioeconomic consequences of an error which has even greater implications.... This error consists in an understanding of human freedom which detaches it from obedience to the truth, and consequently from the duty to respect the rights of others. The essence of freedom then becomes self-love carried to the point of contempt for God and neighbor, a self-love which leads to an unbridled affirmation of self-interest and which refuses to be limited by any demand of justice.

The “unbridled affirmation of self-interest”—among buyers and sellers, borrowers and lenders—was indeed the mantra of the Greenspan era. And the “socioeconomic consequences” of that “error” are now evident to all.

Secular Wisdom

The wisdom of virtue ethics and the common good, as Catholic social teaching itself acknowledges, is not confined to the tradition of the church. It would thus behoove people of faith, when presenting an alternative vision to persons of good will in American society who are not Christian, to seek out sources of such wisdom beyond ecclesial documents.

We could reconsider such classic writers as Aristotle, Aquinas and Tocqueville. They understood civil society as the natural setting for human fulfillment, the common good as the moral horizon of individual pursuit and wise governance to be as important as individual liberty for the sustainable pursuit of living well.

We would also do well to consider contemporary writers like Robert Bellah, Stephen Carter and Amitai Etzioni. They not only remind us of the republican ideal of a common good above private interest, but also call us away from the egoist ethic of selfish individualism toward a civic ethic of shared sacrifice and social virtue.

The need now, for both people of faith and all people of good will, is a return to the ethics of virtue and the philosophy of the common good, within which human freedom and individual interest find their “due place and proportion.” The welfare of the nation depends on it.

From the archives, America's review of Ayn Rand's Atlas Shrugged.

 

Darrin W. Snyder Belousek is instructor of philosophy at Louisburg College in North Carolina and a member of Bridgefolk, a Catholic-Mennonite ecumenical organization.

Economic Disaster McCain and Greenspan PEEK AlterNet

Newsweek's Michael Hirsh says that although there are many people responsible for out current economic meltdown, we should thank one very special guy in particular:

 

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. Under the Home Ownership and Equity Protection Act enacted by Congress in 1994, the Fed was given the authority to oversee mortgage loans. But Greenspan kept putting off writing any rules. As late as April 2005, when things were seriously beginning to go wrong, he was saying that subprime lending would work out for the common good—without government interference. "Lenders are now able to quite efficiently judge the risk posed by individual applicants," he declared at the time. So much for his feel. New regs didn't get put into place until this past July—long after the crash had come, under Greenspan's successor, Ben Bernanke. The new Fed chief's "Regulation Z" finally created some common-sense rules, such as forbidding loans without sufficient documentation to show if a person has the ability to repay.

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.

Reimagined as a pitchfork wielding populist reformer (while he tries to figure out how many houses he owns) John McCain is out on the stump this week railing about greed and avarice. But it was only yesterday he was saying this: 

"Get ol' Alan Greenspan -- whether he's alive or dead. And um if he's dead, we'll put dark glasses on him and prop him up like they did at Weekend at Bernie's."(Town Hall Meeting in Concord, NH 12/17/07)

And then we have Guru number 2, Phil "you're all a bunch 'o whiners" Gramm, the man McCain extols as an economic genius:

 

When Senator Phil Gramm and his wife Wendy danced, it was most often to Enron's tune.

Mr. Gramm, a Texas Republican, is one of the top recipients of Enron largess in the Senate. And he is a demon for deregulation. In December 2000 Mr. Gramm was one of the ringleaders who engineered the stealthlike approval of a bill that exempted energy commodity trading from government regulation and public disclosure. It was a gift tied with a bright ribbon for Enron.

Wendy Gramm has been influential in her own right. She, too, is a demon for deregulation. She headed the presidential Task Force on Regulatory Relief in the Reagan administration. And she was chairwoman of the U.S. Commodity Futures Trading Commission from 1988 until 1993.

In her final days with the commission she helped push through a ruling that exempted many energy futures contracts from regulation, a move that had been sought by Enron. Five weeks later, after resigning from the commission, Wendy Gramm was appointed to Enron's board of directors.

According to a report by Public Citizen, a watchdog group in Washington, ''Enron paid her between $915,000 and $1.85 million in salary, attendance fees, stock options and dividends from 1993 to 2001.''

As a board member, Ms. Gramm has served on Enron's audit committee, but her eyesight wasn't any better than that of the folks at Arthur Andersen. The one thing Enron did not pay big bucks for was vigilance.

There's a lot more you can say about the Gramms and Enron, and not much of it good. But Phil and Wendy Gramm are just convenient symptoms of the problem that has contributed so mightily to the Enron debacle and other major scandals of our time, from the savings and loan disaster to the Firestone tires fiasco. That problem is the obsession with deregulation that has had such a hold on the Republican Party and corporate America.

Enron is so 2001, right? Something out of the past. Except it really isn't. It's yet another example of the GOP's deregulation fetish of the past quarter century, which seems to result every, single time in a bunch of people losing their savings and the taxpayers being on the hook for billions. Sure, the big boys have to take some heat --- why some of them are down to their last 100 million or so. But seeing as they've been swallowing a fire hose of money for the past seven years, I think they'll pull pull through. The rest of us have to stay up nights wondering what the hell the next few years are going to bring us.

And John McCain has been out there selling this crap the whole time, vacationing with Keating, being best buds with Gramm and drooling over Alan Greenspan like a Hannah Montana fanboy. If anyone expects change from this guy they are living in a total dreamworld. He's one of them.

If you like useless expensive wars, financial scandals, stock market crashes, foreclosures and economic instability as far as the eye can see, vote Republican. They've got everything you need.
 

The Maestro Has No Clothes The Big Picture

By Guest Author - March 17th, 2009, 9:15AM

Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.”

March 2009

Alan Greenspan’s March 11 opinion piece in the Wall Street Journal (“The Fed Didn’t Cause the Housing Bubble”) sought to cast doubt on growing suspicions that the Fed shares substantial blame for the current global crisis. We find Mr. Greenspan’s denials and assertions unreasonable. Let there be no doubt; the Fed is largely responsible for the current economic crisis and, as the Chairman of the Fed leading up to the crisis, Mr. Greenspan was one of its principal architects.

Mr. Greenspan cited two generally accepted “broad and competing explanations for the origins of the crisis” that he then cast as spurious: 1) easy monetary policies, which he summarily dismissed as in-credible and 2) the “far more credible” (and later denied) notion that interest rates stayed low despite Fed rate hikes, which “spawned speculative euphoria”. Mr. Greenspan seemed to try to separate the Fed from blame by asserting the Fed “lost control” of mortgage and longer term rates because of an organically-created “excess savings pool.”

We find the construct for Mr. Greenspan’s plea lacking. As the body responsible for targeting overnight funding rates in a largely finance-based economy, the Fed is (or should be) concerned only with the interest rate or quantity level of overnight funds relative to available returns that investors may capture from borrowing those funds. The absolute levels of the Fed’s target rate or market-based interest rates do not matter.

Consider that the shadow banking system comprised of global leveraged arbitrage investors (on Wall Street and independent of Wall Street) care only about yield spreads, not about yields. A Fed funds target that rises from 1% to 5.25% over two years may not induce a diminution of credit issuance because as long as arbitrageurs may buy credit paper with higher yields than their funding costs, they will continue do so.

Against this more relevant backdrop, Mr. Greenspan’s Fed maintained an extraordinarily easy monetary policy throughout his tenure, even at times when overnight funding rates rose. This easy money policy engendered credit expansion; at first among mostly creditworthy borrowers, then among more marginal borrowers and ultimately among dubious borrowers with virtually no hope of repaying their home mortgage and consumer loans.

Nevertheless, we will respectfully address Mr. Greenspan’s arguments and then seek to substantiate our claim that the Fed is indeed largely responsible for the current crisis.

* * * * *

Regarding low interest rates, Mr. Greenspan argued that from 2002 to 2005 mortgage rates decoupled from their long history of being tightly correlated to short-term benchmark interest rates that the Fed controlled and/or heavily influenced. He noted that the leading indicator of home prices was the mortgage rate and not the fed-funds rate, which the Fed explicitly targets. Any fact-checker can see this is true, but it is an irrelevant data point taken out of context. As we have already implied, the driver of home prices from 2002 to 2005 was easy credit that ultimately influenced mortgage rates lower than pure economic fundamentals would have dictated.

Indeed, the record is clear that the Fed chose an easy money path that created supplemental demand in US
Treasury and mortgage markets. This artificially-induced demand in turn caused mortgage rates to drop to
artificially low levels (i.e., levels not explicitly tied to true home values or borrower credit risk), and to then be relatively insensitive to rising funding rates later on.

A little background is appropriate. The mechanism the Fed deploys to create credit is time-worn and well known among Wall Street bankers. Simply, the Fed provides daily amounts of credit to Wall Street primary dealers through repurchase agreements. (Fed repurchase agreements or “repos” are overnight or short-term credit facilities between the Fed and the largest Wall Street banks in which eligible collateral is swapped in return for Fed credit in the form of US dollars. The borrowers pay an implicit interest rate — or repo rate — for this credit that finances their balance sheets.)

There was (and remains) no limit to the repo lines the Fed and Wall Street may create (other than the amount of eligible assets that may be offered as collateral), meaning the Fed largely controls the amount of US dollar-based credit provided to the markets. In short, through the repo market the Fed controls/supplies funding for the largest Wall Street banks and, secondarily, the shadow banking system (the securitization process and levered buyers of those securities that borrow from Wall Street).

Through Fed repos, Wall Street was able to grow its collective balance sheet dramatically and then use it to
distribute — through the shadow banking system — credit to homeowners and consumers. Wall Street provided vendor financing to leveraged debt investors through their profitable prime brokerage units. Yet, ultimately, the credit came from the Fed. (The Fed and commercial banks “create, distribute and sometimes even extinguish” credit while Wall Street “intermediates and demands” it. Wall Street does not create it but does “market” and “redistributes” it.)

Ironically, Mr. Greenspan seems to be pointing his finger at banks and borrowers for taking the Fed’s credit. (Even more ironic is that, as the Fed Chairman, he was the chief bank regulator and could have stepped in to prevent bank, and ergo, leveraged-investor balance sheet growth by demanding and enforcing more traditionally- stringent lending standards.)

We assert that Mr. Greenspan knew perfectly well what he was doing and, as the graph below indicates, he was quite proficient in meeting his goals. Beginning in 1996, the Fed seemed to have increased the magnitude of its repo program dramatically as indicated by the expanding differential of M3 growth (green line), which includes repurchase agreements, and M2 growth (blue line), a narrower money stock measure, which does not.

M2, M3

Source: St. Louis Fed

We can see from the graph the degree to which the Fed financed Wall Street directly and thus, the shadow banking system, indirectly. Notable is that from 1981 to 1996, the growth rates of M2 and M3 tracked one another quite closely, implying the Fed’s manufacturing of credit would be sustainable (a dollar loaned could be paid back with an existing dollar). However, from 1996 to 2006 — during Mr. Greenspan’s chairmanship — M3 growth consistently pulled away from M2, implying increasing future hardship for debtors with obligations to repay the credit leant to them. The red line at the bottom of the graph represents the difference in growth rates of M2 and M3.

(Curiously, the Fed ceased publishing M3 in March 2006 to save on “administrative costs.” Hmm. Who could blame it? The growth of M3 relative to M2 seems to provide clear evidence of risk-enticing Fed monetary policy.)

From 1996 to 2006, M3 grew from about $4.7 trillion to about $9.6 trillion, an astounding average annual increase of 10.2%. M2, the narrower monetary aggregate that does not include repurchase agreements, rose a more modest 8.2%. This difference was a big deal. In these ten years, M3 growth compounded to a 94% increase over M2 growth. This difference reflects the aggressiveness of Fed-lending to Wall Street, ergo the capital markets, ergo the housing and derivative markets.

We assert that without this Fed-induced financing, the credit, housing and derivative bubbles would not have developed to anywhere near the magnitude they ultimately did. The nexus of these bubbles was a currency bubble initiated and exacerbated by the Greenspan Fed. It appears the Maestro sacrificed the future for the present, which is a sure way to make people on Wall Street, Main Street and in Washington happy…temporarily.

We must ask ourselves why banks and investors would keep buying homeowner and consumer debt even as
interest rates began rising in 2004. The answer is simple: as long as banks could maintain a profitable spread between the rate at which they borrowed overnight from the Fed (the repo rate) and either the rate at which they could lend directly or the rate of return implicit in the fees they generated by effectively re-structuring and distributing their repurchase agreements (and, as long as debt buyers could maintain a positive arbitrage), then the actual level of interest rates – benchmark, mortgage or consumer rates – didn’t matter. It was, as all things financial usually are, the “spread” that mattered.

Wall Street and the shadow banking system were fundamentally engaged in a grand carry trade for which the Fed provided funding. This is the business of finance, which is precisely the business that Wall Street and investors practice. After fourteen years at the helm of the Fed (in 2002) Mr. Greenspan should have known this (or, might we dare say, should not have forgotten this).

* * * * *

By 2007 the entire interest rate pricing structure had been corrupted by: a) the difference in the amounts of credit previously sold and the available funds necessary to retire that credit and, b) generally-accepted benchmarks that erroneously signaled all was well when all was anything-but-well. There seems to have been a bit of deception that made the markets seem healthy when in reality they were not.

To start, we think low inflation expectations subsequent to a time of very high monetary inflation (1996 to 2006) may have made it an inevitability that the bubble would burst. Treasury Inflation-Protected Securities (TIPS) are viewed upon by the fixed-income markets to be a practical, market-based indicator of inflation expectations. While their yields may have accurately reflected — and still reflect — the public’s general perception of low future inflation rates (at least as expressed by CPI-U), they did not in 2007 — and still do not – compensate investors for anything close to recent historical or anticipated monetary inflation rates in our view.

Without getting into too much detail, it is broadly agreed that in pure economic terms inflation is a monetary phenomenon in which changes in the stock of money (and by extension, credit) determine changes in nominal prices for goods, services and assets. Simply, the more dollars outstanding, the less purchasing power each has and the more dollars it takes to purchase an item. In other words, money creation produces nominal price increases and money destruction (a dynamic that has not occurred for any length of time since the Fed was established in 1913) would produce price declines.
This has real-world investment applications. As is evident in the graph, the substantial and consistent creation of asset-supporting credit by the Fed from 1996 to 2006 also created the future need for more dollars to service and pay down that credit. So inflation was (and is) built into the system yet few investors seemed positioned for it. Either the value of credit had to drop or the amount of money in the system had to rise to repay that credit. (This is literally the same dynamic that perpetuates a Ponzi scheme – the need to find or manufacture more money to satisfy existing claims.)

But there is a far more granular reason for the bursting of the currency/credit bubble. Too much credit in the system drove down fixed-income yields across the board (thanks to a wide arbitrage spread separating funding rates from nominal debt yields). When the Fed began allowing the fed funds rate to rise in 2004, it triggered a narrowing arbitrage spread and nominal price losses on the bond side of the arbitrage. This, in turn, triggered redemptions for bond funds like the Bear Stearns mortgage funds.

There was an air pocket underneath. Bonds and their derivatives were being priced at the margin by leveraged arbitrageurs. Smart real money buyers were waiting for positive real yields which, given the aggressive monetary inflation at that time, could only be found at nominal yield levels well in excess of those then available (hey, today’s “safe haven” Treasury buyers, are you listening?). Can Greenspan’s Fed be held accountable for this?

We think so. In 2004 the Fed began to allow a progressively higher fed funds rate to “be targeted” which created the perception of tightening monetary policy. Yet the Fed was NOT TIGHTENING AT ALL. Despite a steadily rising fed funds rate we believe the Fed stood by as market-based funding demand continued to increase substantially. In fact, short-term credit provisions from the Fed continued to grow during this time. Indeed the Fed pursued an easy money policy despite the optics of it “targeting” a higher funds rate. To us, “easy money” means more money and credit, not less.

Orthodox economic supply/demand curve analysis has no difficulty reconciling a progressively higher fed funds rate with simultaneous growth in the quantity of credit clearing in the marketplace. (Don’t demand curves shifting to the right create both higher clearing prices and clearing quantities? And, don’t supply curves shifting to the left create higher clearing prices but lower clearing quantities? We intuit a lot of the former and little to none of the latter during the period in question.)

We argue that Mr. Greenspan would have had to restrict Fed credit far more than he did if he wanted to close the arbitrage spread giving bond investors incentive to keep adding credit to their balance sheets. He should have shifted the funds rate higher and more forcefully. The move in the fed funds rate from 1% to 5.25% from 2004 to 2006 was woefully inadequate and should have been MUCH more aggressive if spurious credit demand were to be discouraged. Put slightly differently, we assert that the ENTIRE fed funds move from 1% to 5.25% was driven by increased credit DEMAND (levered credit buyers had incentive to put as much on their balance sheets at a positive spread between funding costs and bond yields). Mr. Greenspan didn’t seem to get this.

Had the Fed wanted to restrict the clearing quantity of credit, it would have had to target a fed funds rate well in excess of 5.25% and/or acted much quicker than it did. The Fed would have needed to restrict SUPPLY and thus target less growth in overall credit. This, no doubt, would have endeared him to no one (but former Chairman Volcker perhaps?).

More forceful credit restriction would have clearly retarded any growth in demand from the shadow banking
system and the credit bubble would have been stopped in its tracks well before it burst. We don’t believe that Econ-101 supply/demand curve analysis is beyond Mr. Greenspan’s reach as he seems to protest, nor was it so when he was Chairman of the Fed.

* * * * *

In a broader sense, real (inflation-adjusted) losses had already been locked-in by fixed-income investors because prevailing absolute nominal yields were lower than the higher rate of monetary inflation. And as we discussed, the Fed’s monetary inflation between 1996 and 2006 actually produced lower absolute bond yields than would have otherwise prevailed (too much money chasing bonds). Why did this “irrational investment behavior” occur?

It was not irrational-investor behavior though it was irrational investing. We think there were two inter-related issues at hand: 1) investors didn’t mind running a mismatched asset/liability book because they were compensated at shorter intervals and, 2) conventional economic wisdom, that seems to have been fostered and encouraged by policymakers, produces terribly inaccurate economic data that these mismatched investors used to justify their actions. (The two dynamics remain in place today.)

For example, the Consumer Price Index (CPI) and other price baskets generally used as “inflation” indicators had not risen to reflect gross monetary inflation produced by the Fed from 1996 to 2006. This is not proof that money growth does not equal inflation; rather it is proof that the CPI does not accurately reflect the diminution of a dollar’s purchasing power. (If an indicator like the M3 growth rate had been a generally-accepted inflation metric — not perfect but closer than highly subjective price baskets — then there would not have been buyers of credit at negative real yields.)

In this light, it would also not appear to be acceptable Fed regulatory policy to assume that Wall Street banks — competitive publicly traded institutions with quarterly incentives to produce ever-increasing revenues — would somehow not re-distribute that credit to its credit-purchasing clients (that they were vendor-financing). It is also not reasonable to assume that credit buyers — competitive institutional asset managers with daily incentives to produce competitive returns relative to benchmark indexes and their peers, not relative to the creditworthiness of the instruments they were buying or even the real returns they were producing — would somehow not buy that credit priced at yield spreads above diminutive benchmark Treasury yields and funding rates (particularly when many of those asset buyers accessed leverage through Wall Street banks.).

There is more to Mr. Greenspan’s assertions that we find troubling. As he brought up for the second time in as many years:

“As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.”

Mr. Greenspan surely knows that there cannot be “an excess pool of savings” because, by definition, the pool of savings equals the pool of investment. (Mr. Bernanke seems guilty of this lapse too, we’re afraid.) However, there is an excess pool of “currency” in today’s world. Again, as the simple laws of supply and demand suggest, an increase in the supply of currency which is not coincident with an increased supply of assets will drive asset prices higher. A prudent central banker acting in the interests of economic stability would have absorbed that excess pool of currency (and would not now dub it as “savings”).

In an honest or “hard” money system, the “tectonic shift” Mr. Greenspan discusses would have led to CPI
deflation as the newly accessible pool of cheap Asian labor would have been deployed in the productive process. This would have implied lower consumer prices and higher interest rates. There would have been better margins helping asset prices on the one hand, and higher interest rates hurting them on the other. The net effect on productive asset prices would thus be ambiguous.

But the economy would have been sustainable and the US dollar would have remained sound. Clearly, Mr.
Greenspan allowed the various measures of the monetary aggregates to inflate and his reputation did not suffer for it during his tenure. The organic forces of price deflation provided him a shield.  Why did he do this? To keep asset prices up? To keep US tax receipts up? The effect of his actions hurt dollar-based savers, fixed-wage workers and people living on a fixed-income. All would have been better off if the purchasing power of the dollar were to have been maintained or even, via the “tectonic shift”, enhanced.

And finally, Mr. Greenspan’s reminder that “prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance” is almost too much to bear. If this were true, where then were the fruits of this productivity advance? Doesn’t an increase in productivity, ceteris paribus, imply lower output prices and thus lower consumer prices? (Is this the “shabby secret” of modern central banks — they are inflation machines that counterbalance natural deflationary pricing forces brought about by private sector competition?) Mr. Greenspan’s record is crystal clear and his knack for obfuscation is not as charming now — or helpful to society — as it appeared it once was.

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4 Responses to “The Maestro Has No Clothes”

1.  AJS Says:
   March 17th, 2009 at 11:50 am

   If, coming out of a tech bubble and mild recession, an increase from 1% to 5.25% was woefully inadequate, what size increase will be necessary to take away the punch bowl this time? I just don’t see the Fed having the cojones to do it (maybe that’s why Obama has Volcker waiting in the wings).

2. tom brakke Says:
   March 17th, 2009 at 2:24 pm

   In him we trusted.

   Two parts to the equation. Him and us.

3. GB Says:
   March 17th, 2009 at 3:35 pm

   Maybe the economy was okay to soak up all this money.
   1) Population increase Immigration and job creation
   2) If people understood inflation and excepted price increases
   3) Job and wages followed inflation / population increase.
   4) Investment class sold real estate near peak. denial of inflation.
   5) Investment clases compensation and wages were controlled rationally and re-invested into sound business activity instead of more paper investments.

   Just playing devil’s advocate here. Yes it would be easier to regulate the money than all things here.

4.  d4winds Says:
   March 18th, 2009 at 5:21 am

   The Bush tax cuts in ‘03 came at a time of relatively full employment, so they had no or little real output effect but almost exclusively an inflationary one. Greenspan accomodated the fiscal stimulus by expanding M2/M3 as you have noted, keeping interest rates low and adding fuel to the inflationary fire. Rather than seeing a widespread increase in prices, however, the inflationary effects were directed to a broad-based market in which the speculative profit from price increases was largest and the opportunities least regulated (by Greenspan among others), the mortgage origination/securitization market and thus to housing. Ergo, the bubble.

   Since Greespan’s low interest rates meant that private real investment was not being crowded-out, the real resources for the financing for the huge deficit spending from those tax cuts, Medicare expansion, 2 wars, and an unprecedented expansion in other defense-spending had to come from somewhere. China obliged.

   Thus Greenspan and now Bernanke have it backward: There was no saving glut from China but a huge desire for dissaving in the US from the tax cuts. Effectively, Bush spawned a housing bubble, Greesnspan ratified it, and the real resources needed for this excess came from China, Japan, Germany, etc. , who became double winners at our expense: the increasing capital surplus account for the US spawned an increasing current account deficit to drive their export-oriented economies. We threw a party–guns are good, houses are better, and paying for them with taxes (Bush) or interest rates (Greenspan) or reduced private investment (both) is bad–and paid for it by posting a big sign saying “For sale America.”

Amazon.com The Trillion Dollar Meltdown Easy Money, High Rollers, and the Great Credit Crash Charles R. Morris Books

In this excellent, highly readable book, Charles R. Morris combines legal and financial experience with literary craft. No ideologue, no partisan and certainly no salesman, Morris traces the roots of the 2007-2008 mortgage securities crisis to its distant origins in the 1970s.

He argues that policy missteps under the Nixon, Ford and Carter administrations, when Arthur Burns chaired the Federal Reserve, led to dollar debasement. He contends that the decline of America's currency and its business sector at that time led in turn to the Reagan administration's zeal for deregulation and Chicago-school economics. He details his belief that Alan Greenspan's policies took America from a relatively healthy financial status to a position perhaps as dire as in the late 1970s.

Morris also reveals the privileges enjoyed by an out-of-control financial services system. getAbstract found this to be a trenchant and provocative read.

Disappointed, June 6, 2008 By Richard M. Rollo Jr. I was very much impressed by Charles R. Morris's "The Coming Global Boom" in the early 1990's, so this book was quite a disappointment. "The Trillion Dollar Meltdown" is an example of the phase Charles Kindleberger describes in his "Panics, Manias, and Crashes" as "looking for the scapegoats." Here the principal scapegoats are Milton Friedman and Alan Greenspan. Morris both decries and predicts the demise of Friedman's free market "ideology" and Reagan's idea that government is part of the problem and not the solution. Morris sets up his argument by describing how liberalism and fiscal Keynesianism lost credibility by the end of the 1970's with what has been described as stagflation. Fiscal stimulus no longer stimulated an economy mired in so much debt. Morris then describes how Paul Volker implemented Friedman's Monetarism policy , but according to Morris, it worked because Volker didn't believe in the ideology. Volker just wanted to demonstrate to the world he was serious about inflation. While I think Morris brilliantly critiqued the Liberalism of the 1970's, I disagree with his argument that it went away. Reagan promised to abolish the Energy and Education Departments and that went nowhere. Republicans talked about "government as the problem" but then expanded most government programs. The liberal interest groups that proliferated in the 1970's turned their attention to the Federal Courts and achieved many of their goals there. Interest group Liberalism didn't go away in the 1980's. It's agenda was still advanced merely by changing venues. My point is that big government never died, Morris's claims notwithstanding. Nor did financial regulation end with the repeal of Glass-Steagall Act. In the aftermath of the Dot.com boom-bust, the Sarbanes Oxley Act---which Morris doesn't mention---put heavy restrictions on new stock issuances. So, the money went where the regulations aren't. As it usually does. I would also say that in dealing with the current crisis, Fed Chairman Bernanke is not using the Milton Friedman approach of letting the "fire burn itself out." Instead, Bernanke is using the Walter Bagehot strategy of finding the lender of last resort to bail out the ailing institutions. Now, I agree with Morris that many of these `investments" he describes are scams. I think variable rate mortgages are a bad idea because most people who agree to one have no idea that they are placing a bet on what the Fed will do over the life of the loan. They are signing up for what could be a rather bumpy ride. I also agree with Morris's criticisms of Sallie Mae and the student loan mess, but I would point out that the colleges themselves are considerably to blame for these problems. Many colleges have accumulated vast trust funds while doing little to help their students. It sometimes seems to me that a college education has become like home ownership: having one is better than not having one but too many bucks have been chasing too little bang for some time now. I think the institution that is most profoundly in need of reform in America is the United States Congress. When the Republicans forgot what they had been elected to do, they were turned out of office. But, when the Democrats returned to power, I saw that many faces of the Committee Chairs were the same as those who were turned out of power in 1994. Do you think they learned anything in the interim? I don't.

Greenspan Shocked Disbelief

October 24,  2008 | t r u t h o u t

by: Robert Borosage, The Campaign for America's Future

On October 23, former Federal Reserve Chairman Alan Greenspan testified before a House Oversight and Government Reform Committee hearing on the role of federal regulators in the current financial crisis. (Photo: Mark Wilson / Getty Images North America)

It marks the end of an era. Alan Greenspan, the maestro, defender of the market fundamentalist faith, champion of deregulation, celebrator of exotic banking inventions, admitted Thursday in a hearing before Rep. Henry Waxman's House Committee and Oversight and Government Reform that he got it wrong.

 "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he said.

 As to the fantasy that banks could regulate themselves, that markets self-correct, that modern risk management enforced prudence: "The whole intellectual edifice, however, collapsed in the summer of last year."

    Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless banks to do reckless things. Greenspan dismissed that goofiness in response to a question from one of its right-wing purveyors, Rep. Todd Platts, R-Pa., noting that subprime loans grew to a crisis only as the unregulated shadow financial system securitized mortgages, marketed them across the world, and pressured brokers to lower standards to generate a larger supply to meet the demand. Private greed, not public good, caused this catastrophe:

"The evidence now suggests, but only in retrospect, that this market evolved in a manner which if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely to have taken on the dimensions that it did. It wasn't until the securitization became a significant factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime loans, because remember that without securitization, there would not have been a single subprime mortgage held outside of the United States, that it's the opening up of this market which created a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities.

    But having admitted the failure of his faith, Greenspan could not abandon it. Credit default swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations were needed, because the markets "for the indefinite future will be far more restrained than would any currently contemplated new regulatory regime."

    Now hung over from their bender, the banks could be depended upon to remain sober "for the indefinite future." Or until taxpayers' money relieves their headaches, and they are free to party once more.

---

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The only Guantanamo that the

Sun, 10/26/2008 - 23:37 — Captain America (not verified)

The only Guantanamo that the United States has any business running is a concentration camp for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud the American people from their hard earned dollar.

What they did dwarfs the damage caused to this country by 911, (no disrespect for the many innocents who died). However, here, every single citizen is a victim of fraud and corruption on a scale that was heretofore inconceivable. Greenspan, Bush and now Paulson have done more than Bin Laden and his hordes could do in a 100 years.

By the way, if you protest YOU wind up locked up for being un-American. What happened America ?

There are no free markets in

Sun, 10/26/2008 - 19:27 — pink elephant (not verified)

There are no free markets in America, any more than there is free lunch. The game was always fixed and Greenspan was the ultimate shill for the fixers. The past thirty years have been an orgy of greed with common sense shoved aside for the sake of uncommon expediency. Americans became infatuated by arcane formulas and dense incomprehensible mathematics to the point that they forget simple arithmetic. America wake up it was only a dream, and a bad one at that.

So it wasn't the

Sun, 10/26/2008 - 19:07 — Anonymous (not verified)

So it wasn't the military-industrial complex that did us in after all . . .

It's clear from comments on

Sun, 10/26/2008 - 15:40 — afrothethics (not verified)

It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's sorry testimony before Congress. What has faith in something to do with enforcing the policies of fiduciary responsibility already on the books? All these so-called "experts" on capitalism are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily and criminally responsible for their actions, inept or not. The truth is as plain as the nose on your face: Greenspan, the Federal Reserve, the investment banks, the Bush administration and several members of Congress unobtrusively acted to consciously and knowingly to rob the national treasury for the sake of capitalism's sacred cow: capital accumulation on behalf of the nation's political and economic elite. If it looks like class warfare, as David Harvey, author of Neoliberalism, has stated, call it class warfare and act accordingly.

We have heard statements

Sun, 10/26/2008 - 10:11 — DJK (not verified)

We have heard statements like "the mathematical models used for knowing the behavior of derivatives based on subprime mortgages were too difficult to understand", etc. But it doesn't take a genius to understand that when financial instruments are created based on crap (subprime mortgages), that eventually problems will occur with those instruments. In fact, Greenspan and his cronies knew that, which is why they resisted these instruments being regulated by the SEC or even the CFTC. And this is why they turned a blind eye to many of the rating agencies giving many of these instruments AAA ratings. I am sure that a real investigation will reveal numerous instances of fraudulent activity in conjunction with this debacle. Those perpetrators must be identified and brought to justice. While this will not fix our current problem, it hopefully should serve as a deterrent to those who would in the future attempt to again engage in such activities.

Well here you have it a

Sun, 10/26/2008 - 08:13 — Robert Iserbyt (not verified)

Well here you have it a confessional lie from the biggest fraud perpetrator in the history of American finance Why the markets ever listened to this criminal in the first place is evidence that our entire nation should be required to take a full year of real unfettered economics just in case they don't understand what is going on now. All the pundits on MSNBC and all the talking heads should be removed from the airwaves. The Bailout what will that do? the answer lies before you.

Sounds like the "maestro"

Sun, 10/26/2008 - 02:02 — Anonymous (not verified)

Sounds like the "maestro" hit a flat note in his orchestra of greed and deregulation. Come on, do you really think we are all so stupid to buy into the story that you couldn't predict a melt down knowing that those writing the subprimes held no responsibility for their actions? That's like giving a "get out of jail card" to someone who just created a felony! Did anybody even bother to consult the Math PhDs who created these instruments to run possible scenarios -- just in case? why bother when you know you can scare congress, the president and the treasury and ultimately the people into bailing your ass out of worldwide collapse?

I'm a former real estate

Sun, 10/26/2008 - 00:24 — two7five7one (not verified)

I'm a former real estate broker and my son is a mortgage broker. From about 2004 through the beginning of this "greatest financial crisis since '29", we frequently talked on the phone about the disaster which would ensue when the real estate value appreciation stopped, and people were no longer fueling the economy with money borrowed against their equity, and the sub-prime loan fiasco would end. We knew it would be disastrous, and both of us were astonished that neither the FED nor congress was willing to say or do anything about it. Anyone who has witnessed over the years the cycle of boom/bust/boom/bust in the real estate market knew that after eleven years of unprecedented "boom" -- '96 through '2007 -- the "bust" would be like an earthquake. Paulson and Greenspan and their ilk now denying that they suspected this is just is just their lying to protect the GOP which was benefitting from the booming economy. They should both end up in prison, with all of the GOP members of congress who have had their hands in the cash register.

Dance clown, dance. First

Sat, 10/25/2008 - 23:48 — mysterioso (not verified)

Dance clown, dance. First you were against the FED until you became head of the FED. Then you were for trickle down economics and letting the "system" regulate itself until you saw the inevitable destruction it caused. Dance clown, dance. You should be the first one sent to prison under the "Un-American activities act". The arrogance of your testimony before the committee was appalling. You honestly couldn't believe you were wrong !!!

Shocked disbelief, my foot.

Sat, 10/25/2008 - 23:35 — slw (not verified)

Shocked disbelief, my foot. Many of us predicted EXACTLY this outcome.

This is like telling the Fox

Sat, 10/25/2008 - 22:43 — topview (not verified)

This is like telling the Fox to watch the Hens and then walking away and trusting him to do the right thing. Government has to return to regulation and see that there is no hanky, Banky going on anymore. Monopolies have to be busted up, like the Communication industry's, the Drug industries and any other Corporations that control to much of the way the Country operates. No more Outsourcing any Government duties.

Shocked Disbelief is a ploy.

Sat, 10/25/2008 - 22:00 — radline9 (not verified)

Shocked Disbelief is a ploy. When they were all riding high, they didn't give a crap. They were going to come out richer than hell anyway.

Where's Ayn Rand when you

Sat, 10/25/2008 - 20:53 — anglohistorian (not verified)

Where's Ayn Rand when you need her? Give me a break Mr Greenspan. Never let history and reality get in the way of the big unregulated celebration of greed like we have had since "Saint Ronald Wilson Reagan", and the other "Free Market" "government is the problem" ideologues. We can spend trillions on war and corporate bailouts, but we can't have a single payer health system? We can't rebuild our infrastructure? Say it again- give me a break!

What about the 1994 Act of

Sat, 10/25/2008 - 20:41 — Jtmonrow (not verified)

What about the 1994 Act of Congress that required the Fed to moniter and regulate derivatives? The Act Greenspan ignored?

"...I am shocked - shocked,

Sat, 10/25/2008 - 20:29 — Anonymous (not verified)

"...I am shocked - shocked, there is gambling going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca

This would be the same

Sat, 10/25/2008 - 19:50 — dtroutma (not verified)

This would be the same "shocked disbelief" expressed by Willie Sutton's mother?

shouldn't Greenspan give his

Sat, 10/25/2008 - 18:06 — Anonymous (not verified)

shouldn't Greenspan give his salary and bonus back to taxpayers?

On Greenspan

Calculated Risk

I've received numerous emails concerning Greenspan's testimony today. Greenspan has been criticized for keeping rates too low (see CNN: Culprits of the Collapse), however his far larger mistake was opposing oversight when many people were pointing out the extremely lax lending standards.

So I was happy today that the Q&A focused on this issue ... from the WSJ: Greenspan Admits Some Mistakes Amid Grilling by House Lawmakers

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief," according to Mr. Greenspan.

The panel chairman, Henry Waxman (D., Calif.) criticized Mr. Greenspan's approach to mortgage regulation while he was Fed chairman. The Fed "had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market," Waxman said, but Mr. Greenspan "rejected pleas that he intervene."
...
[W]hen Mr. Waxman pressed "were you wrong" about the benefits of deregulation, Mr. Greenspan responded, "partially." The "flaw" in the assumptions he had over four decades, Mr. Greenspan said, was that lending institutions themselves were best able to protect the interest of their shareholders.

Greenspan's comments on the economy are also interesting:

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Mr. Greenspan said in the text of prepared testimony to the U.S. House Government Oversight and Reform Committee.

That, in turn, "implies a marked retrenchment of consumer spending as households try to divert an increasing part of their incomes to replenish depleted assets, not only in their 401Ks but in the value of their homes as well," Mr. Greenspan said.

While Mr. Greenspan assured lawmakers that "this crisis will pass" and that the U.S. will end up with a "far sounder financial system," he warned that it won't come quickly.

Mr. Greenspan said a "necessary condition for this crisis to end is a stabilization of home prices in the U.S."

"At a minimum, stabilization of home prices is still many months in the future," he said.

Greenspan is now saying what many of us were warning about several years ago.

Greenspan Shrugged, Now Says Regulation is Necessary

Now that Greenspan has thrown in the towel, the free market ideologues have lost one of their most loyal advocates. From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan called for tighter regulation of financial companies, distancing himself from the free-market culture that he helped to create.

Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony to the House Committee on Oversight and Government Reform. Other rules should address fraud and settlement of trades, he said. Greenspan's office released the text ahead of the hearing scheduled for 10 a.m. in Washington....

Today, the former chairman asked: ``What went wrong with global economic policies that had worked so effectively for nearly four decades?'' During his term at the Fed's helm, Greenspan repeatedly warned lawmakers against inhibiting markets, such as by tightening oversight of certain types of derivatives.

Greenspan, reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading counterparties to prevent surging losses. The ``breakdown'' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.

Shocked, shocked? Greenspan really has no sense of irony.

The Big Picture My Experience at Indy Mac Fraud, Corruption, Criminality

Greenspan's touting of ARMs in 2004, with Fed Funds pegged at 1%, was either evil or stupid. I strongly suspect the latter, as Greenspan was and is a mediocre economist. But that don't mean he shouldn't hang for ruining the lives of millions.

... ... ...

Way to weasel out, for some of those on the political right.

Cronyism and incompetence is bipartisan, but the hostility to proper regulation and competent regulators is partisan. In between gutting the regulations and regulators and then "tort reform"... Seriously, which party's administrations and judicial appointees undermine whistle-blower protections?

Why did Greenspan and friends allow this to go on so blatantly? Could it be because they were so set against wage inflation that they had to invent a way for wage earners to afford housing? Until we see the motivation, we won't find the cure.

People want to try to pin blame on one major cause of this fiasco...usually, I would shy away from that. But when someone goes by the name "Maestro" they need to be held to a higher authority. You can absolutely pin most of this on Greenspan...he provided the motive through moral hazard (the Greenspan put)...he provided the gun (money growth since 1990s) and looked the other way by not using his powers to regulate lenders given in 1994. he egged it on by saying more borrowers should take ARMs. And he was the boss. Who else needs to be blamed? Mozilo was a low level hack compared to the Maestro.

===

Whammer -

People who are furious with Bush see this debacle as, primarily, an abject failure of regulation.

The day to day, nitty gritty work of regulation is conducted by career professionals, many of whom are extremely competent and dedicated to what they do. These professionals work in bureaus that report up to the department and department secretaries who are appointed by the President and often serve on the Cabinet.

For 8 years we've had an administration that has been ideologically hostile to governing, has refused to regulate in favor of the unfettered free market, has appointed department heads based on cronyism rather than ability, has under-funded regulatory agencies and has politicized appointments, promotions and retention to a degree unseen before.

For examples see Brownie of FEMA, layoffs of OTS regulators, the politicization of the Justice Department (see commentary by Jeffrey Toobin), and Paul Krugman: http://krugman.blogs.nytimes.com/2008/07/13/look-whos-talking/

For results of this approach to governing see the financial crisis, the environmental record, increased food poisoning incidents, increased near misses at airports, etc.

My question is: at what point is an ideologically driven, tragically wrong bet on governance so destructive that it goes beyond "OOPS, guess we got it wrong."

To me, the people who deliberately looked the other way while the economy of the richest country in history was being systematically looted have committed treason.

In Russia it was called kleptocracy: rule by thieves.

After 9/11 Bin Laden said that one of his goals was to bring down the U.S. economy. Now that this unholy alliance between Washington and Wall Street has caused so much more economic damage than he was able to, shouldn't the people involved be identified and punished for what they are: enemies of the state?

Seems fair to me.

===

There's been so much fraud the past few years that we can spend our way out of recession just by hiring enough prosecutors and building enough prisons to put all these MF-ers away for years.

A pleasant fantasy, but few of these folks will ever see the inside of a jail.

If an American is robbed by a man in the street of $100, he will want the thief put away for decades. If he is robbed of $20,000 of his tax dollars by a community of wealthy, respectable men, it is simply not a problem.

Most Americans would never put a real thief in jail because they hope to be thieves themselves someday. Actually, Americans admire the thieves, even when they themselves are the thieves’ victims.

So much for “pitchforks” and “torches.

Monetary Stalinism in Washington By Hossein Askari and Noureddine Krichene

People lost half of thier 401K if they kept it in stock funds as Naive Siegelism recommends.

Asia Times

Amongst the worst tragedies of Soviet collectivization was the Ukraine famine of 1932-33, which took six million lives as Joseph Stalin practiced forced appropriation of crops and imposed very low prices for agricultural products in favor of industrialization. Interference with the pricing mechanism and Stalinism in the form of very low prices for agricultural products also caused famines in India in 1965 and in China in 1969, with a human death toll well into the millions.

Monetary policy as practiced by the US Federal Reserve for the past decade is but a form of financial Stalinism, forcing ridiculously low or negative real interest rates, with catastrophic results that are now plaguing the world. Fed policy has disabled the price mechanism in capital markets and set off uncontrolled credit expansion at the expense of capital productivity and> creditworthiness, pushing housing, food, and energy prices to prohibitive levels, and triggering food and energy riots in vulnerable countries. It has undermined the dollar and made the US highly dependent on foreign financing.

The dramatic consequences of Fed policy are unfolding before our very eyes. The financial crisis that broke out in August 2007 has recently taken a turn for the worse. After claiming international and well-established banks and investment banks, it has now reduced the financial savings of ordinary Americans (in retirement accounts) by over 30%.

The fiscal bill for past, ongoing and future bailouts by Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson will be staggering; the US fiscal deficit will be blown up to unthinkable proportions, public debt will be pushed to unprecedented levels, and most public resources will be destined to absorb financial losses at the expense of social and economic programs.

Last, but not least, the long-term inflationary consequences may turn out to be even more dramatic. All these consequences are real and were in part predictable.

So far Bernanke and Paulson have failed miserably in stemming the financial crisis and have brought the US economy to a standstill, in part because Bernanke does not have a feel for the free-market mechanism and in part because he is not a prudent central banker.

It would appear that Bernanke has read a great deal about the Great Depression of 1929-1933 and perhaps very little, or nothing, about the German hyperinflation of 1920-1923. His view is that the Fed was liquidationist of banking institutions during 1929-33. In his view, if the Fed had injected sufficient liquidity during 1929-1932, it would have precluded thousands of bank failures. Therefore, Bernanke is determined not to let that mistake happen again. Consequently, his response to the financial crisis has been a blind and aggressive monetary policy in form of negative interest rates, massive liquidity injection, and massive bailouts.

Bernanke is like the medical doctor who is familiar with one drug, and who prescribes it to every patient he sees at full dose without diagnosis of what ails the patient or thinking what will happen if he takes the wrong medication.

Thinking that the US economy was in a deep recession in 2007, one similar to the Great Depression, he precipitously unleashed monetary policy. His rushed actions have destabilized the financial system, sent commodity prices skyrocketing, and crippled economic growth. The US economy in 2007 had no resemblance to either the institutional setting of the Great Depression or to the immense role and expansionary stance of fiscal policy. Namely, today, there are institutions that can prevent bank runs, such as the Federal Deposit Insurance Corporation, and the federal and state governments (both relatively far bigger than 1929) are running large deficits that should preclude a deep recession, especially if they adopt appropriate policies.

Hence, his inflationary approach was ill-designed and will be very costly in bank failures, high inflation and rising unemployment.

The Fed chairman is by far the most important personality on the US economic and financial landscape. In fact, both Wall Street and Main Street read his statements more carefully than reading the words of a president or the laws of the land. His words and actions are the most influential in the financial and economic world. Being in large part an independent institution, the Fed, largely under Bernanke's predecessor Alan Greenspan, grasped absolute power over economic policymaking and decided to abandon its regulatory power, enabling the development of financial anarchy under the guise of financial engineering and innovations.

Such myopic faith in the free market has turned the US financial markets into a casino. The US president has negligible influence on economic policymaking and has become merely a symbolic figure. By subscribing fully to Bernanke and Paulson policies, the two presidential contenders have renounced their future economic role. The US Congress has become a rubber stamp of Fed policies. It applauded Greenspan�s policies and it now supports Bernanke-Paulson knee-jerk and costly bailouts. The US public is not so much interested in the presidential debates as in how Bernanke and Paulson policies will affect their jobs, retirement savings, tax liabilities and the very livelihoods of their children.

Wrong course will continue
Once the Fed follows a policy path, it hardly changes course, which means the Fed will perpetuate its cheap monetary policy indefinitely. After institutionalizing negative real interest, the Fed wants to institutionalize high housing prices and rents, and a depreciated dollar. While US banks are in the process of strengthening their balance sheets and opting for safe banking, the Fed is forcing them to extend credit regardless of risk and profitability, and to finance with short time resources long-term loans.

Recent desperate actions by the Fed consist of bypassing the banking system and extending directly low-cost loans to borrowers regardless of risk and nationalizing the banking system. The Fed sees no limit for issuing trillions of dollars by electronically crediting borrowers.

The Fed has arguably created the most uncertain and unstable economic environment in US history. No one would have predicted that the value of shares would tumble by nearly 5,000 points, or approaching a decline of 40%, in the past three months. There is no basis for making sound financial or economic forecasts. No rational entrepreneur can undertake investment plans under such uncertainties. Foreign investors are scared of inflation and a depreciating dollar and are rushing to gold and safer currencies. It is at best a wait and see attitude.

Central bankers are this week convening for their semi-annual meeting in Washington DC, only to find that the world is no better than it was six months ago. Certainly, they will not surrender their excessive powers and most likely will not accept blame for their imprudent monetary policies that have led to the worst financial crisis in the post-war period.

Interest rate setting by central banks has long been repudiated by monetary economists; it creates distortion between the market and natural interest rates, and triggers a self-cumulative inflationary process. As a form of price control, it creates considerable inefficiencies and misallocation of resources into non-productive uses. With a view to unlocking credit markets, it is an utmost priority both in the US and Europe to free interest rates. Such a step will enable banks to mitigate credit risk, improve their earnings, and for productive borrowers to have access to borrowing. It will dispel inflation fear and pave the way for financial consolidation and recovery. If they reject this step, central banks will only aggravate the current crisis.

Central banks' misguided role
The role of central banks has never been to regulate the economy or promote full employment. It is a simple truth that an economy needs safe money, which serves as a medium of exchange and store of value. The central banks should be principally in charge of managing liquidity and regulating the banking system.

These are the most important functions of a central bank. If properly done, they will contribute to a stable macroeconomic framework conducive to economic growth and employment. Given their total neglect of bank regulation in the past two decades, central banks have a long way to go in updating the regulatory framework, streamline financial products, and mitigating sources of risks and speculation.

Regulating the level of economic activity and counteracting recession should fall under fiscal policies. The government has better means, agencies and fiscal instruments to fight economic recession than central bank monetary policy. The recent world crisis has shown that governments have to address shortages in food, energy, infrastructure, and social programs. Each government can draw a comprehensive stabilization program with properly designed fiscal and sectoral policies without compromising monetary stability.

A 10-year spending program on infrastructure, including education and alternative energy development, would be appropriate today, especially in the United States. At the same time, federal credit should be urgently extended to state and local governments until financial order is restored. However, excessive reliance on credit or ex-nihilo money creation is wrong and hazardous.

Central banks should not interfere with the price mechanism; in this respect, institutionalizing long-term housing price controls would be detrimental to the economy. Central banks have to put in place monetary programming consisting of safe limits on credit and money aggregates. Monetary economists never claim that fixed rules for credit and money supply are free of instability. However, if instability were to occur, it can be addressed by fine-tuning.

The US economic ship could capsize in the coming days and weeks. There is urgency for action before chaos spreads farther a field. The same central banks that have announced a coordinated rate cut should admit that this measure is not the proper solution. It will be damaging to financial institutions and will exacerbate world inflation and economic recession.

Instead, they should announce a coordinated decision for freeing up interest rates. They have to allow banks to undertake orderly and long-term recapitalization, relying in the first instance on shareholders or other private holders of capital and only on a case-by-case basis on federal injections of capital with preferred share ownership for the public. And they must adopt urgent regulatory reform, accompanied by strict supervision and enforcement.

Finally, Bernanke and Paulson must jettison their policy of one bailout at a time. with the intention of addressing other issues later, and adopt a comprehensive plan to address all issues now, including support for state and local governments.

Unfortunately, it would appear that the notion that monetary policy is the panacea for addressing all economic problems has gained total currency among central bankers and politicians.

Hossein Askari is professor of international business and international affairs at George Washington University. Noureddine Krichene is an economist at the International Monetary Fund and a former advisor, Islamic Development Bank, Jeddah.

(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

[Oct 9, 2008] The Reckoning - Taking Hard New Look at a Greenspan Legacy  By PETER S. GOODMAN

NYTimes.com

“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

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. 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.

The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.

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.

Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.

Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.

On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.

Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.

Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.

But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.

Faith in the System

Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is naïve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.

Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.

“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”

In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.

“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”

As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.

A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.

An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.

As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.

Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.

“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.

Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.

“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”

Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.

Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.

“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”

In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.

“There is nothing involved in federal regulation per se which makes it superior to market regulation.”

Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.

But he called that possibility “extremely remote,” adding that “risk is part of life.”

Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.

Resistance to Warnings

In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.

Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.

Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.

“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”

Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.

“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”

Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.

In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”

On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.

Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”

Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.

Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.

In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.

Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”

As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.

“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.

Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.

“He had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”

In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.

“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.

Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.

Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.

“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.

“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”

The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.

Pressing Forward

Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.

“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”

But business continued.

And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.

Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.

The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.

In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.

His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.

“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.

“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”

No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.

“Governments and central banks,” he wrote, “could not have altered the course of the boom.”

Chicago School economist Milton Friedman (may he spend eternity having to listen to Karl Marx for his theoretical sins) was the "trickle down" originator that as one wag said on another blog, is better described as the "tinkle down" effect.

The reality is, this is a bait and switch situation, however we all know that! We also know that short of killing someone the right base will spin and defend anything .  For god's sake  let the media and lawyers deal with her tired antics, because they are adding up making both McCain and Palin continue to look like liars..How many more times do we need to hear about the bridge? And use the sense god gave all of us, as well as great sayings like "If it looks like a duck...' and make the decision to vote these nuts out once and for all....

The second, deeper explanation, is that this is merely the most dramatic symptom yet of the disease that continues to ravage the US financial system.

The balance sheets of too many US banks are awash in toxic assets. Most of them can be traced back to wildly negligent investment decisions made during the boom in house prices and other assets in the last five years. In the last eighteen months US house prices have fallen by more than at any time in the last 70 years and a whole host of assets that were backed by that market have become worthless.

This may be more than just another catastrophic end to another financial cycle, however. It could be the end of a whole financial model - investment banking itself.

“It’s probably no exaggeration to say we are witnessing the end of an era’ said one seasoned financial executive watching events unfold at the weekend.

Fundmentally, across the western world, greed won out over propriety, short term financial gain won out over decades of established practice, and deregulation became the mantra of government.

Bankers made their millions, and the rest of us paid. The tragedy is, they are still in place.

===

If Gerard Baker is correct in his assessment that this could be the end of the US financial model then what will replace it? Globalisation no longer seems such a great idea for sure and de-regulation is a nonsense. Investment bankers are only interested in quick profits today and to hell with future.

[Sep 20, 2008] #1 - Osama Bin Laden, #2 - Alan Greenspan ??

The mess that greenspan made

Across the political spectrum in Europe, the former fed chief's name keeps popping up when the discussion turns to "root cause", and Italy's finance minister sets the bar quite high, putting the world's most famous terrorist in the same company as the world's most famous central banker, as reported in the LA Times.
 

It's a rare day when finance officials, leftist intellectuals and ordinary salespeople can agree on something. But the economic meltdown that wrought its wrath from Rome to Madrid to Berlin this week brought Europeans together in a harsh chorus of condemnation of the excess and disarray on Wall Street.

The finance minister of Italy's conservative and pro-U.S. government warned of nothing less than a systemic breakdown. Giulio Tremonti excoriated the "voracious selfishness" of speculators and "stupid sluggishness" of regulators. And he singled out Alan Greenspan, the former chairman of the U.S. Federal Reserve, with startling scorn.

"Greenspan was considered a master," Tremonti declared. "Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most. . . . It is clear that what is happening is a disease. It is not the failure of a bank, but the failure of a system. Until a few days ago, very few were willing to realize the intensity and the dramatic nature of the crisis."

[Sep 26, 2007] COLUMN-Greenspan, oil, and Osama bin LadenBernd Debusmann Reuters

(Bernd Debusmann is a Reuters columnist. The opinions expressed are his own)

By Bernd Debusmann

WASHINGTON, Sept 26 (Reuters) - Alan Greenspan, the anti-war U.S. left, virtually the entire Arab world, and Osama bin Laden have something in common: they think the war in Iraq is mainly about oil.

The former Federal Reserve chairman's view is expressed with such crystalline clarity, on page 463 of his just-published memoir, that it's hard to believe it comes from the same man whose convoluted utterances on the U.S. economy drove to the edge of despair market professionals paid to decipher them.

But there's nothing ambiguous about this: "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

This is remarkable language from a life-long Republican deeply embedded in a Washington establishment whose members, from either party, do not find it convenient to ascribe selfish motives to the U.S. use of force.

Military intervention is acceptable, of course, to remove tyrants, spread democracy, bring freedom to the oppressed, or save the world as we know it from annihilation by weapons of mass destruction.

Among the Washington power elite, publicly using the word "oil" in connection with the war in Iraq is a bit like talking about bodily functions at a formal dinner party.

It is best avoided, which made Greenspan's statement all the more startling.

Subsequent "clarifications" brought back some of his customary convolution - oil wasn't the only motive but, yes, oil security is critically important - but no change in the substance. Administration spokesmen shrugged off the remark.

PERCEPTION IS REALITY

Much of the Arab world saw oil as the driving factor of the Bush administration's Iraq policies even before the 2003 attack.

Those who had doubts lost them in the chaotic first post-invasion days when U.S. troops guarded the Ministry of Oil and the Ministry of Interior and stood by as looters picked bare and torched official buildings all over the city and ransacked Iraq's national museum.

Perception is reality, as they say on Wall Street, where Greenspan honed his economic expertise. The American tanks that blocked every entrance to the sprawling oil ministry provided an image that stuck.

The millions around the world who had demonstrated against the war, many hoisting placards that said "No Blood For Oil", felt vindicated.

For al Qaeda and the mass murderer who masterminded the attacks on New York and Washington, it was a propaganda windfall.

Osama bin Laden repeatedly asserted, the last time in a video made to mark the sixth anniversary of September 11, that the American design all along had been to replace Saddam Hussein "with a new puppet to assist in the pilfering of Iraq's oil."

Osama's campaign to portray America as an oil-hungry aggressor predated the Bush administration: in 1997 he said that "The U.S. is increasing its presence in Arab countries to capture their oil reserves."

Future generations of historians might discover what really prompted George W. Bush to attack Iraq rather than focus the vast resources of the U.S. intelligence and military machines on hunting down bin Laden "dead or alive," as the president promised after the September 11 attacks.

Meanwhile, the "war over oil" perception is one of the reasons why the United States has made no progress in polishing its tarnished image around the world.

"Anti-Americanism is extensive," notes the latest global attitude survey from the Pew Research Center, and the U.S. image "remains abysmal in most Muslim countries."

EMPIRE IN DENIAL

In a string of interviews following the publication of his memoir, The Age of Turbulence, Greenspan didn't elaborate why he thought it was "politically inconvenient" to talk about oil. My theory: it conflicts with America's image of itself.

Most Americans tend to see their country as a force for good in the world, holding a special place and offering a shining example of freedom and opportunity. Large parts of the world, in contrast, see the U.S. as an empire driven, like others before it, by self-interest and economic imperatives.

The Scottish historian Niall Ferguson calls the United States an "empire in denial" and says it should act like one, with the patience and perseverance necessary to end what it starts, for example staying in Iraq for 40 years or more.

No such ideas from Greenspan, but a chapter in his book lays out in stark detail just how beholden the United States is to oil, how far it is from the energy independence declared as a goal by a long string of presidents, and how profligate Americans are in burning up oil.

One out of every seven barrels consumed worldwide is burned up on American highways, according to Greenspan, and heavy trucks alone account for as much petroleum as all of Germany.

One fact worth noting: if the war is about oil supplies, success so far is scant. Before the invasion, Iraq pumped 2.5 million barrels a day. Now, it produces 1.9 million bpd. (You can contact the author at Debusmann@Reuters.com)
 

Foreign Policy Think Again Alan Greenspan By Stephen S. Roach

Think Again: Alan Greenspan

January/February 2005

U.S. Federal Reserve Board Chairman Alan Greenspan is credited with simultaneously achieving record-low inflation, spawning the largest economic boom in U.S. history, and saving the world from financial collapse. But, when Greenspan steps down next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Has the world’s most revered central banker unwittingly set up the global economy for disaster?

“Greenspan Is Responsible for the U.S. Economic Boom of the 1990s”
Only in part. The United States experienced an extraordinary period of prosperity in the 1990s. Between 1993 and 2000, 21 million new jobs were created in the United States, and in 2000 the country’s unemployment rate briefly dipped below 4 percent for the first time in 30 years. During this boom, the U.S. economy grew at nearly 4 percent a year, adding more than $2 trillion to real U.S. gross domestic product (GDP)—more than the annual output of France.

But many stars aligned to produce that outcome, not just good monetary policy on the part of Greenspan’s Fed. For starters, a judicious focus on fiscal discipline by former President Bill Clinton’s administration brought the budget deficit under control. The Clinton administration managed to lower the deficit every year between 1993 and 1997. By 1998, there was a surplus that lasted until 2001. The 1990s also saw a powerful wave of corporate restructuring and technological change. Together, these two forces set the stage for sustained low inflation and a powerful acceleration of productivity and employment growth.

Greenspan’s leadership in monetary policy undoubtedly played an important role in fostering the conditions that allowed the U.S. economy to surge in the 1990s. The chairman helped achieve the economy’s high-performance potential during that time period. But no one should believe that the economic boom of the 1990s was the work of just one man or just one monetary policy.

“Greenspan Defeated Inflation in the United States”
No. Credit for breaking the back of double-digit inflation goes to Paul Volcker, Greenspan’s tough and courageous predecessor. In the summer of 1979, when Volcker assumed the reins at the Federal Reserve, inflation was raging at 12 percent a year. Eight years later, when Alan Greenspan took over, the inflation rate stood at around 4 percent. During Greenspan’s 17-year era, inflation slowed further to 2.5 percent per year. But 80 percent of the drop in inflation occurred under Volcker’s stewardship at the Fed.

True, Volcker put the United States through its worst recession in modern times. It was the only way to unwind the destructive interplay between wages and prices that drove U.S. inflation. Greenspan’s major challenge was to finish the job Volcker started. That was no easy task, and Greenspan’s successes should not be minimized. In only one of Greenspan’s 17 years at the Fed (1990) did inflation move above 5 percent; in 11 of those years, inflation was 3 percent or lower.

But there were serious complications along the way, not least of all a dangerous flirtation with outright deflation, or an overall decline in the price level, in early 2003. This problem resulted from Greenspan’s biggest gamble—a willingness to push U.S. interest rates to extremely low levels during a period of rapid economic growth. The move gave rise to the destabilizing stock market bubble of the late 1990s, a speculative excess unseen in the United States since the roaring 1920s. The bursting of that bubble in early 2000 transformed an orderly disinflation (i.e., when inflation merely decelerates) into a close call with actual deflation.

“Greenspan Rescued the United States from a Stock Market Meltdown”
Maybe, but at what cost? In early 2004, Greenspan gave a speech to the American Economic Association, arguing that the Fed should feel vindicated in its efforts to contain the 2000 stock market shakeout. By slashing the federal funds rate—the interest rate at which the Fed lends money to other banks—by 5.5 percentage points between January 2001 and June 2003, the Fed limited the severity of the recession that followed the burst of the bubble.

That cure may cause bigger problems down the road. Bubbles have developed in other asset markets (especially corporate bonds, mortgage-backed securities, and emerging-market debt). And Greenspan’s rock-bottom interest rates have led to the biggest bubble of all: residential property. Annual inflation in U.S. home prices is now running at a 25-year high of 8.8 percent, with 15 states experiencing double-digit increases in residential property values between mid-2003 and mid-2004.

At the same time, the home-buying and consumption binge has put individual Americans deeply in debt. Greenspan takes comfort that rising home values compensate for increased borrowing, but that rationalization assumes a permanence to rising property prices that belies the long history of volatile asset markets. So far, the Fed and debt-addicted U.S. homebuyers have bucked the odds. Over the last four years, debt accumulated by U.S. families was 60 percent larger than overall U.S. economic growth. Many households in the United States now spend near record-high portions of their monthly incomes on interest expenses, leaving consumers in a precarious position should either interest rates increase or the growth in incomes slow.

History shows that central banks aren’t always able to cope when bubbles burst. That was the case with the Bank of Japan in the 1990s, after the Japanese stock and property markets collapsed, and it could still be the case in the United States today. The United States dodged a bullet when the stock market tanked in early 2000. There are no guarantees that highly indebted Americans will be as lucky the second time around.

“Greenspan Saved the World from the 1997–98 Asian Financial Crisis”
False. Time magazine devoted its February 1999 cover to the “Committee to Save the World.” Featured were then U.S. Treasury Secretary Robert Rubin, then Deputy Secretary Lawrence Summers, and Greenspan, all celebrating the end of the worst global financial crisis in more than 60 years. In truth, the world weathered the Asian financial storm only to chart increasingly dangerous waters in the years that followed.

Global economic imbalances have intensified dramatically since 1999. The United States’ gaping current account deficit says it all—$665 billion in mid-2004, equal to a record 5.7 percent of U.S. GDP. Never in history has the world financed such a massive deficit. The United States is sucking up more than 80 percent of the world’s surplus savings, requiring capital inflows that average $2.6 billion per business day. And the U.S. deficit is bound to get worse before it gets better.

This huge balance-of-payments gap reflects major disparities between global savings and consumption. A savings-starved U.S. economy is living beyond its means, while Asia and, to a lesser extent, Europe, are plagued by low consumption and high savings. Consequently, the United States is now the world’s consumer of last resort. Asian economies, by contrast, are more prone to save and rely on export-led growth strategies, and they are unwilling or unable to stimulate domestic private consumption.

The result is an enormous buildup of U.S. dollars held by Asian nations (more than $2.2 trillion in mid-2004, or twice Asia’s holdings in early 2000). These countries then recycle this cash back into the United States by buying U.S. Treasuries. This process effectively subsidizes U.S. interest rates, thus propping up U.S. asset markets and enticing American consumers into even more debt. Awash in newfound purchasing power, Americans then turn around and buy everything from Chinese-made DVD players to Japanese cars.

This is no way to run the global economy. Asia and Europe are increasingly dependent on overly indebted U.S. consumers, while those consumers are increasingly dependent on Asia’s interest-rate subsidy. The longer these imbalances persist, the greater the likelihood of a sharp adjustment. A safer world? Not on your life.

“Greenspan Was Alone in Foreseeing the Productivity Revolution”

Yes. In the early 1990s, when the United States was mired in a productivity slump, Greenspan was largely alone in believing that an important shift was at hand. He was right. Worker productivity in the United States grew 3 percent a year between 1996 and 2003, double the anemic 1.5 percent annual increase of the preceding 20 years.

The productivity breakthrough had a profound impact on the performance of the U.S. economy, as well as on Greenspan’s command of monetary policy. High-productivity economies can withstand rapid growth without an increase in inflation. So, as U.S. productivity climbed in the late 1990s, Greenspan boldly let the economy fly without raising interest rates. Investors, of course, were thrilled with Greenspan for not standing in the way of rapid economic growth. The stock market bubble of the late 1990s (which he initially warned of, but later ignored) reflected this exuberance. As Greenspan said in early 2000, “When we look back at the 1990s.… [w]e may conceivably conclude…[that] the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever.”

Within two months of that statement, the stock market collapsed, but the productivity miracle did not. Whether it will endure, though, remains an open question. Most U.S. businesses have an advanced it infrastructure. The lack of new corporate hiring and the sharp falloff in business expansion point to ever more hollow American corporations. Moreover, the pendulum is now swinging back toward greater government regulation, further constraining corporate risk-taking. The drivers of the productivity miracle of the past eight years may not be sustainable, after all.

“Greenspan Spells a Strong Dollar”

Not necessarily. Until recently, the dollar has generally been stable during Greenspan’s 17-year tenure, a noteworthy accomplishment for any central banker. An exception came in 1994 and early 1995, when the dollar weakened sharply, only to regain its strength in the latter half of the 1990s.

But the dollar’s past may not be prologue. Global imbalances—underscored by America’s record balance-of-payments gap—are best corrected through a cheaper dollar. A cheaper dollar means higher U.S. interest rates, which in turn will suppress U.S. spending and enable a long overdue rebuilding of national savings. Conversely, other currencies will strengthen, forcing the export-led economies of Asia and Europe to embrace long-overdue reforms, including lowering tariffs and making labor markets more flexible.

Today, even Greenspan acknowledges that the world needs a weaker dollar. That’s the verdict from America’s record (and rising) current account deficit and from Asia and Europe’s excess dependence on exports. The hope, of course, is that the dollar experiences a “soft landing,” a gentle descent over several years. But in light of the massive U.S. current account deficit, the risk of a hard landing is all too real. The more the current account deficit grows, the greater the odds of an abrupt adjustment. The dollar may be an accident waiting to happen, with a sharp decline in the greenback raising the possibility of collateral damage to stocks, bonds, and price stability. Given the central role the United States plays in driving the world economy, any shock “made in the U.S.A.” could reverberate around the world.

“Greenspan Leaves the U.S. Economy in Good Shape for the Future”

The jury is still out. By congressional mandate, the Fed’s goals include price stability, full employment, and economic growth. Greenspan’s Fed has made progress on all three.

However, some unintended consequences of Greenspan’s efforts may jeopardize the United States’ long-term economic future. Consider the profound shortfall in U.S. savings. The United States’ net national saving rate—the combined saving of households, businesses, and government—fell to 0.4 percent of national income in early 2003, and it has since risen to just 2 percent. Lacking in domestic savings, the United States must import savings from abroad and run massive current account deficits to attract that capital.

Greenspan shares some blame for this problem. It all goes back to the asset economy, his often-expressed belief that financial assets can play an important role in sustaining the U.S. economy. He made that argument in the late 1990s when stock prices went to new highs, and he reiterated it recently with regard to surging home prices.

The catch is, people interpret Greenspan’s analysis as advice. So individuals view the appreciation of their home as a proxy for long-term saving and are therefore less inclined to save the old-fashioned way—by putting away cash from their paychecks. This scenario sets U.S. citizens apart from those in most other Western economies. Only in the United States are people aggressively tapping the savings in their homes (through mortgage refinancing) to finance current consumption.

Moreover, the rapid buildup of debt, both domestic and foreign, leaves a savings-short U.S. economy in precarious shape. The problem is compounded by the 77 million aging baby boomers, now approaching their retirement years, when they need savings more than ever. To the extent that Greenspan has condoned asset-based savings (homes) in lieu of income-based savings (cash in the bank), he has unwittingly compounded the United States’ most serious long-term problem.

“Greenspan Is Politically Independent”

Yes, but… Unfortunately, the Federal Reserve is located in Washington, D.C. That thrusts its chairman into the political arena and has led to some indelicate episodes for Greenspan over the years, including his endorsement of the Bush administration’s 2001 tax cuts as the wisest way to spend the government’s budget surplus—a surplus that has now disappeared into thin air.

Despite such momentary lapses, there is no evidence that Greenspan has politicized U.S. monetary policy. Although Greenspan is a Republican (he first entered public service as an advisor to President Gerald Ford in 1974), he had no compunction in raising interest rates on GOP administrations, including the current one, at inopportune times. Over the years, Greenspan has been critical of fiscal policies pursued by Democrats and Republicans alike.

But with Greenspan, the line between politicization and policy activism is blurred. There is no mistaking Greenspan’s aggressive stance on several key issues driving financial debates and policy. In early 2000, Greenspan made a strong (and ultimately wrong) case for why there wasn’t a stock market bubble. More recently, he minimized the immediacy of the United States’ current account deficit problems and played down the risks of an oil shock. And, in October 2004, he dismissed concerns over the United States’ excess household debt.

The sheer weight of Greenspan’s point of view can bear critically on financial markets and the real economy. To the extent that his intellectual activism aligns with Fed policies, investors tend to take Greenspan’s messages too far. This tendency compromises his position as an independent central banker. Moreover, his recent role as a cheerleader for policies such as tax cuts compounds already serious imbalances and imparts a pro-growth bias to his central banking philosophy that could make the endgame all the more treacherous. That was the case with stock buying in the late 1990s and could well be the case today in condoning the household debt binge, overvalued property markets, and Asian demand for U.S. Treasuries. Greenspan’s stances may not be political—nor may they be prudent.

“It Will Be Difficult to Replace Greenspan”

Hardly. Alan Greenspan’s term as a member of the Federal Reserve Board of Governors expires on the last day of January in 2006, at which time he is required to step down. When he does, Greenspan will have served as chairman for more than 18 years under four different presidents, making him the second longest-serving chairman since the founding of the Fed in 1914.

There is understandable apprehension over the transition to new leadership at the Federal Reserve. Business leaders, politicians, and investors expressed similar concerns when the Volcker era came to an end in the summer of 1987. “There is concern in Washington,” Paul Glastris reported in the Washington Monthly in 1988, “that Alan Greenspan sees himself as the new Paul Volcker and that he may seriously damage the economy.” Yet, aside from a small flutter in the financial markets, the U.S. economy barely skipped a beat when Greenspan replaced Volcker. Shepherding the world’s most dynamic economy is not a personal accomplishment. It has more to do with the interplay between markets, consumers, businesses, politicians, and policymakers than any cult of personality a Fed chairman may or may not have.

A key challenge for Greenspan’s successor will be rebuilding private-sector savings. It’s a critical step if the United States is to close its balance-of-payments deficit and an essential insurance policy for an aging population of baby boomers nearing retirement. Although prudent fiscal policy and budget deficit reduction by the U.S. Congress will be part of any fix, the Fed’s monetary policy can also play an important role in fostering a long overdue improvement in national savings.

At the same time, the next Fed chair must be a true internationalist—facing the increasingly daunting challenges of globalization. The United States has enjoyed an unprecedented dominance of the global economy since the mid-1990s. But, like U.S. geopolitical hegemony, its economic dominance is unlikely to last. The next Fed chairman will have to walk a delicate line between domestic imperatives and the challenges posed by other players in the global economy.

History cautions against rendering a premature verdict on the accomplishments of any one economy, or any one central banker. When Alan Greenspan arrived at the Fed in the late 1980s, Japan and Germany dominated the world economy, and the United States was down and out. Over the last 20 years, the fickle pendulum of economic prosperity swung the other way, as the United States redefined the very concept of global economic leadership. Greenspan will be a tough act to follow. But his success was as much an outgrowth of history as it was a reflection of any one person.

Stephen S. Roach is chief economist at Morgan Stanley.

Simon Jenkins A tribunal must tell us what to fix. And whom to punish Comment is free The Guardian

If the mistakes that have collapsed the world's financial markets had been made by statesmen and had led to war, there would be corpses swinging from lampposts. If they had been made by generals, they would be falling on their swords. If they had been made by judges or surgeons or scholars, some framework of professional retribution would be rolling into action. But those responsible for our finances can apparently vanish into the forest like Cheshire cats, leaving only gold-plated grins. Not for them a Hague tribunal or a Hutton inquiry. They are not just good at shedding risk - they shed blame.

We are seeing what historians of ideas call a paradigm shift. In the last century, the necessities of war and the rise of socialism thrust government intervention to the fore. When that failed in the 60s and 70s, the "Reagan-Thatcher revolution" turned the emphasis back to private enterprise and deregulation. That era has ended with astonishing abruptness. Governments in Britain and the US have been nationalising and spending public money with a will that would have made Attlee or Roosevelt blush.

Those of us who learned economics in the old days were taught that banks had to be regulated oligopolies because their role in a capitalist economy was crucial. It relied on the sustenance of public trust which only government, backed by the citizen as taxpayer, could dispense. In Britain, retail banks, merchant banks and building societies were legally distinct, separated by barriers to prevent cross-pollution of the sort that caused the 1929 crash.

JK Galbraith's book on that crash is the Dr Strangelove of financial holocaust. If it offers one lesson, it is that crashes are not acts of God; they are caused by the interaction of corporate behaviour and state regulation. Nor does the market supply its own discipline. Understanding that, wrote Galbraith, "remains our best safeguard against recurrence".

Such lessons learned in youth tend to stick. Hence I remember feeling queasy when Thatcher's "big bang" of 1986 demolished the firewalls and permitted the trading of risk and reward across the entire financial sector. It was a reform repeated in the US with the repeal of the post-depression Glass-Steagall law. The same nervousness greeted each subsequent shock to the system - the 1991 housing crash, Lloyd's of London, Barings, Enron, Northern Rock. Each time we were assured that new lessons had been learned. Light-touch regulation was working fine, even if sometimes boys will be boys.

The naivety of all this is now exposed. Politicians encouraged the public to treat home ownership as a "right"; property became the citizen's gilt-edged stock. Bankers encouraged staff to speculate with depositors' money by awarding them huge bonuses to maintain turnover. Those charged with the guardianship of other people's savings behaved, in effect, like thieves. Sheer greed drove young men and women mad. Nobody in authority batted an eyelid.

At the same time Gordon Brown "set free" the Bank of England to fix interest rates. I recall one commentator telling me that I should be "overjoyed your children and grandchildren will now never have to experience inflation". No, they are just unemployed. It was a charade. On the back of low inflation, the Bank fuelled a credit boom that was clearly vulnerable if prices rose and/or credit collapsed. Both have occurred.

There is no such thing as a "non-political" official rate of interest. The Bank is now under pressure both to cut rates to beat recession, and yet raise them to beat inflation. It cannot do both. Since it would be 1929-style lunacy to increase rates just now, Brown must in effect tell the Bank to reduce them by shifting his inflation target. It is a blatant and properly political decision.

There is no perfect market. Markets need regulation, just as communities need law. Yet as Galbraith again wrote, regulators may start life "vigorous, aggressive, evangelical, even intolerant", but mellow with age and become "an arm of the industry they are regulating - or senile".

To ignore the danger in 125% mortgages or the City bonus culture showed both industry capture and senility. The first was loan-sharkery, and the second was obscene. So distorting to sound finance are year-end bonuses that they should simply be banned. Those with the responsibility of gambling with other people's savings should do so on salary.

While naive Thatcherism may have taken a pasting, there is no reason why capitalism should protest the presence of big government in what is its proper realm. We do not curb state power when the security of the state is at risk. Nor should we do so when the security of the economy is equally jeopardised.

The strangest phenomenon these past few days has been the eagerness to enforce "moral hazard", a concept regarded by the governor of the Bank of England as a deterrent to risk-taking. This is absurd. The collapse of Enron was no deterrent to Lehman derivative traders. The psychology of money does not work that way. The victims of the credit crunch are not just a few wild traders. They are all participants in the UK economy. I cannot see the sense in letting Northern Rock or Lehman or any other deposit-holding institution go bust just so regulators who have failed in their jobs can seem macho after the event.

This is not a question of blowing taxpayers' money on fat cat financiers. I would happily arrest and try all those whose stupidity and greed are about to cause untold hardship to millions - if I could find a law they had broken. Dr Johnson was quite wrong to say a man is "never more innocently employed than in getting money". But when a building collapses, you do not kill the architect. You try to get him to build it again.

Underpinning financial credit is an absolute function of government and one that has not changed since the birth of capital. It clearly needs constant redefinition. When this saga is through there should be a tribunal of inquiry. Then we can be told what needs mending, and whom to take out and shoot

===

• FromMe2U

  Sep 17 08, 1:03am (about 13 hours ago)

  The current credit bubble had its roots in the appointment of Alan Greenspan as Chairman of the Federal Reserve Board and FOMC following Volcker who'd done a good job of squeezing inflation out of the US economy albeit at odds with Regean's policies..Greenspan immediately set about earning his moniker "Easy-Al"...

  The October 1987 crash was no accident or act of God, it was the direct result of the rampant availability of credit after Greenspan's appointment as well as Portfolio Insurance which like today's toxic deruivatives failed.

  Greenspan's cure was to flood Wall Street with dollars, a gambit he repeated time after time.

  The Japanese Treasury should also be mentioned as in the 1990s they tried to stabilise their economy with ultra cheap credit which eventually also found its way into the US & UK economies.

  The internatiobnal accumulation of US dollars has also been the driver of the rapid rise in the oil price from around USD10 b only 10 years ago: at its peak USD140 b it reflected a price growth of 30% pa probably not to far from the dollar expansion.

  We need some retrospective legislation to prosecute those that sought to reduce the value of the ir currencies, like adulterating gold with lead, and we should request Greenspan's extradition (Sir Alan after all) and prosecute him along ith Brown etc.

  Hearing Greenspan, Brown etc advise on managing the current economic crisis reminds me o the fireman who having started the blaze runs around to take charge of extinguishing it; in the UK Brown toted as the best to deal with the problem seems just like that,giving the arsonist charge of dousing the flames.

  I'd bring back the death penalty to ensure they don't do it again.

===

• Great article, Simon. Except it isn't all about Reagan & Thatcher, as you well know. The man who opened up Pandora's box by repealing Glass-Steagall and replacing it with the Financial Services Modernization Act is none other that William Jefferson Clinton. Slick Willie, along with his pal Greenspan, inaugurated the decade of bubbles by blowing the tech bubble, while Lewinski did the same to him.

  And now, as you correctly point out, it's paradigm-change time. The neocon-neoliberal crusade to roll back the state has taken a mortal hit beneath the waterline.

  More hits are coming as the fundamental depravity of capitalism is exposed. Not only do the CEO's of Frannie and Freddy walk away as if nothing happened although it's public knowledge that they cooked the books but the SEC doesn't even feign the slightest interest. Lehman's CEO floats serenely away on his golden parachute while the cops eat doughnuts, and isn't even kicked out of his seat at the NY Federal Reserve Board!

  The treasury pays lip service to moral hazard hoping to get the banks to blink but finally chickens out and admits it will have to nationalize AIG as well.

  The nature of private capital is accumulation and concentration. Capital concentration means mega-corporations like AIG, that not only wield tremendous, self-serving political power but are also "too big to fail." So by definition, capitalism is a system that enriches the few and plunders the public treasury whenever it runs into trouble. You can talk about moral hazard till you're blue in the face but if the government doesn't pay AIG's gambling debts (aka margin calls) today, it'll be the end of the world tomorrow.

===

• Janissary

  Sep 17 08, 1:31am (about 13 hours ago)

  Does Simon Jenkins or someone else want to explain exactly how "our" deposits were used to gamble? Anyone? No? Maybe because they weren't? Noone has bank accounts with Bear Stearns or Lehman Brothers.

  And again, someone please set out the direct link between the repeal of Glass-Steagall law and the current crisis which has caught on in the Guardian in the last two days? Neither Bear nor Lehman had a commercial/retail banking arm. Merril Lynch is also an investment bank - they're not in the business of opening branches on local high streets. If any high street bank is affected in the next few days (i.e. HBOS) by Lehman and AIG it'll be because of its inability to borrow on the money markets to fund itself - it would face that problem regardless of whether it had an investment banking business or not and HBOS, whose shares have fallen due to that very fear, has virtually no investment banking business anyway. So how would a return of Glass-Steagall in the states or an equivalent law in the UK help? Mr. Jenkins - care to answer? Answer - it wouldn't. What we are witnessing is the failure and death of independent investment banks and the survival of large full-service banks that do everything from the high street up to the City.

  Perhaps we will have some comments about how it was bonuses! The bankers were thinking about their own pocket and not the bank/the bank's shareholders as all they cared about was that year's bonus, right? Except that Goldman Sachs was well-known for being one of the highest payers of cash bonuses whilst Lehman more than any other bank paid a large percentage of its bonuses in Lehman shares - so if the "big bonus puts your interests in conflict with the shareholders" theory hold mean Lehman bankers, being shareholders themselves, WOULD have their interests aligned with shareholders and wouldn't take too many risks whilst the ones at Goldman wouldn't have the same interests as shareholders and would take too many risks and thus Lehman stays afloat and Goldman suffers. Except the opposite happened. Hmmm. Things in the real world don't seem to be as simple as they seem on a CiF thread....

  This article is, like all the others we are seeing in the Guardian, failing to actually diagnose what has gone wrong and so fails to say anything useful or suggest anything helpful.

  Here's something for you all to think about - the key bits of the finance system the public should be very concerned about and so the government should pay particular attention to in protecting are deposit-taking instiutions (where we have our bank accounts) and pension funds (where we invest our retirement money). The key to regulatory reform is to restrict the interaction of THESE instiutions with other riskier institutions like Lehman so as to ensure their stability, without starving high street banks and pension funds of business opportunities and funding. If the impact of Lehman on the bank where we have our accounts can be limited, then the public shouldn't care if an investment bank goes bust affecting other investment banks or hedge fund - the only people who would care would be shareholders and employees of such high-risk institutions, and they know what they are getting themselves into.

  Things like Glass-Steagall are a red herring.

• Verbum

  Sep 17 08, 3:01am (about 11 hours ago)

   

  If the mistakes that have collapsed the world's financial markets had been made by statesmen and had led to war, there would be corpses swinging from lampposts. If they had been made by generals, they would be falling on their swords.

  Simon, mistakes were made by statesmen and they led to wars (Iraq, Afghanistan) and the only corpses are the victims, not prepetrators. And generals made mistakes (i.e. the Fallujah) without having to fall on their swords.

  So I don't worry much about the fate of the Captains of The Industry, be it bankers or share traders.

  In conclusion - this world is run by fatcats for fatcats and they always land softly and safely on all four.

• Verbum

  Sep 17 08, 6:44am (about 7 hours ago)

  It seems that since the implosion of the so called SOCIALISM/COMMUNISM the capitalism went ballistic on the, quite false, assumption that – since the former were wrong – by default the capitalism must be right. Alas, this is like saying that since your neighbour died of pneumonia your tuberculosis is much better.

• Janissary

  This article is, like all the others we are seeing in the Guardian, failing to actually diagnose what has gone wrong and so fails to say anything useful or suggest anything helpful.

  But the article is calling for an enquiry - to find out what actually happened. Do you agree or disagree?

  You spend over 500 words pontificating about side-points the OP made but failed to address the main point. Right at the end you tell us that you have the magical solution.

• stevehill

  Sep 17 08, 8:12am (about 6 hours ago)

   

  But when a building collapses, you do not kill the architect. You try to get him to build it again.

  No. You get a new architect.

  Labour's understanding of the City is close to zero, so they just fawn over it instead, and never do anything which might stop house price inflation, believing that any real prudence will just alienate middle England.

  This is problem rooted in house prices, and is most keenly felt in the two countries most obsessed by them: the USA and the UK.

  Time for a change of government.

• vadid

  Sep 17 08, 9:29am (about 5 hours ago)

  What I retain from Galbraith is that the Fed had set interest rates too low (partly because of Churchill fixing $/Sterling interest rates at the wrong level) which led to a credit expansion which first found its outlet in Florida property and property futures then, from 1927-1929, the US stock market.

• teganjovanka

  Sep 17 08, 9:51am (about 4 hours ago)

  At last! A commentator has used the correct word to describe these people - thieves. This is not a tale of bad regulation, incompetence or greed. it's a tale of criminality, fraud, lies and theft.

• Tox66

  Sep 17 08, 10:02am (about 4 hours ago)

  Agreed: Investigation and punishment. Of course, this should not be confined to the idiot bankers but also to the members of the "tripartite regulation system" which the monumental idiot Brown instituted at the start of his reign. Disaster was predicted again and again when this model was mooted but, of course, ignored in this paper 100% because the criticisms came from, amongst other, Christopher Fildes in The Spectator and he's a "Tory" who can't be expected to "understand" the genius and subtlety of Gordon Brown's statist economics. Not that this lessens the huge culpability of the bankers of course, it just means being simple-minded and blaming "capitalism" or whatever will not catch all culprits.

• KingofFun

  Sep 17 08, 10:22am (about 4 hours ago)

   

  But when a building collapses, you do not kill the architect. You try to get him to build it again.

  Splendidly poor analogy...if a building collapses the last thing to do is re-hire the fool who designed it. No, you sue the architect. Corporate negligence. The same applies here.

  Since we are all about to suffer from these mistakes of judgement or negligence (which?) the point is surely to get recompense.

  if I could find a law they had broken.

  Any lawyers to oblige us here?

• Verbum

  Sep 17 08, 10:29am (about 4 hours ago)

  The crazy thing is that weve made such a holy cow out of making money or ‘creating wealth as it is optimistically called. The premise is that the relatively few bold ‘entrepreneurs will make fortunes allowing bits to drip down the food chain to the lesser beings – generally called ‘the workers. And thus we allow obscene remuneration packages for the executives because they ‘create wealth and thus they deserve appropriate reward. The astronomical pay packets are there to guarantee that only the best will apply. When one questions those pay packets the usual rebuttal is that these are between the Company (its shareholders) and the talented CEO, and essentially this is nobodys business that a CEO of, say, Corporation Y makes X millions a year. This however is a fallacy because the salaries and wages paid by the company are operational expenses and are tax deductible, thus in effect the high pay packets are deducted against the tax paid by the company and therefore minimise the taxable profit, thus reducing the income of the Treasury. Thus the taxpayers are indirectly sponsoring those high pay packets. The boards, which are supposed to control the executive excess and supervise the management of the company (including risk management) are essentially incestuous bodies populated with individuals from top echelons of other companies and assorted former politicians. To put it bluntly – theres no real control. The society is sponsoring the capital through education system, yet even best teachers are paid but a fraction of what an accountant makes in a year. Sometimes I wonder how much we would need to pay to people who really contribute to humankind and make a real and lasting difference – people like Marie Curie, Louis Pasteur, Alexander Fleming and legion of others? I am sure that names of those people will be still remembered and revered in 300 years, while nobody will know the names of the creative accountants running our banks and corporations (maybe except for their victims). In essence we need to ask ourselves a question – what is more important – the welfare of the broadly understood community or society, or the welfare of relatively few entrepreneurs. Before anybody accuses me of being a nasty communist, I must point to the undeniable fact that wealth is a social concept and cannot exist outside the society. Just imagine that you are the richest person in the world. Your wealth becomes your well being only when you can buy goods or services. Imagine then that you are a castaway on a remote uninhabited island; you have all the money in the world and nothing or nobody to spend it on. Tough luck, you cant really eat money... But obviously theres more to good old capitalism – since its major spiritus movens is greed rather than need, it has to be carefully monitored, just like a nuclear reactor, to prevent uncontrolled chain reaction and a meltdown. We may be witnessing something quite akin to a financial Chernobyl right now. The fall out may be quite deadly.

• Sluijser

  Sep 17 08, 10:43am (about 3 hours ago)

  Simon Jenkins, interesting article with some historical meat to it. Some way should be found to retroactively strip those involved of their insane salaries and bonuses for the last few years.

  However, don't agree at all with your moral hazard paragraph. I think that what we are seeing is shareholders everywhere withdrawing from enterprises that have indulged in too much risk. Saving Lehmans brothers wouldn't reduce the credit crunch. It would spare the shareholders at the expense of everybody else. Everytime government saves an institution, its own credit (that is, all our credit) suffers. That means, for example, even less room to spend to counter a recession. Therefore, the US and UK are right to judge each case on its own merits and consequences.

  Janissary

  Does Simon Jenkins or someone else want to explain exactly how "our" deposits were used to gamble? Anyone? No? Maybe because they weren't? Noone has bank accounts with Bear Stearns or Lehman Brothers.

  E.g. banks like HBOS are vulnerable because they invested in securitised US sub-prime mortgages. So yes, depositor's monies were used to gamble.

  And NR's high risk strategy of borrowing money on the markets rather than relying on depositors meant that ultimately their depositor's money was risked.

  Both strayed outside the normal activities for high street banks. Not sure what the UK equivalent to Glass-Steagall was but I'm sure there was one and it was relaxed at some stage.

  Lehman bankers, being shareholders themselves, WOULD have their interests aligned with shareholders and wouldn't take too many risks whilst the ones at Goldman wouldn't have the same interests as shareholders and would take too many risks and thus Lehman stays afloat and Goldman suffers. Except the opposite happened.

  Apres eux la deluge. Since the trick had worked for quite a few years, they very likely thought they would have time to cash in those shares before the whole thing would come crashing down. Pride made them think that they would be too smart to be caught out. Pride and greed may even have made them blind to see the real risk. It is like living on a volcano you know will explode again. As the years go by you think it will last your while.

• Marat

  Sep 17 08, 10:46am (about 3 hours ago)

  "A tribunal must tell us what to fix. And whom to punish"

  Yes a Tribuneral of armed workers.

  1. Why is Parliament not being recalled immediately to set up a Parliamentary inquiry into this looting?

  2. Why is it that the Govt doesnot impel total transparent disclosure of all assetts, deals and policies by all institutions?

  3. Why are we allowing Hedge Funds to gang up and destroy the likes of HBOS?

  4. When will we properly Nationalise the Banks, Building Societies and Insurance thiefs?

  5. When will we Nationalise the Energy and Water Utilities?

  Look what the Labour Party has wrought, telling us that light regulation,Murdoch, Privatisation and Casualisation was the future.

  Market Good Public Bad was the Labour Parties Mantra

  Labour grovelling to Murdoch and his Corporate friends

  Vote Labour short the people

• RayaDunayevskaya

  Sep 17 08, 10:51am (about 3 hours ago)

  "Any lawyers to oblige us here?"

  Not here, but if there are no real regulatory laws, then no one's going to Ford Mondeo Open Prison, are they?

  I think Jenkin's basic premise is correct: the red tape was there to stop overt greed getting out of hand. Reap and sow come to mind.

  Although, as was said earlier, it's hard to attain a proper objective assessment on what's going on at the macro level, the follies are standard ones that occur with free-market captialism. Of course, there is much pidgeonholing (re: dumbing down) of the vagaries of the issue (I agree that this is, essentially, an internal banking cock-up regarding the quaint old notion of credit notes above anything else) , but that doesn't mean that this could have been avoided. As ever, it's easy to point out the problems; solutions are as scarce as a Lehman Brothers' Chrimbo Party invite. How to control free-markets without compromising their 'freeness'? Personally, the merits of a Command Economy have long been lost to modern economists with their constant jacking-off over Friedman's pages, but I feel the solution lies, not on trust (for God's sake!), but on treating City Institutions like errant schoolboys until they learn enough common sense (i.e. tighter regulation). Oh, and much more progressive taxation for both business and personal income to ensure that we all have an increased vested interest in the 'money game'. Perhaps then, we won't be so desperate to chase rainbows which do not necessarily exist.

  One final point which I think is most important: could we please have an advert by the Halifax where that Howard slits his wrists/puts noose over his neck etc. It would cheer a great deal of this nation.

  Cheers!

  'Twas ever thus, no?

• usignuolo

  Sep 17 08, 11:02am (about 3 hours ago)

  Janissary - am I missing something here? I thought the root of all this was the US sub prime mortgage market and that what happened is that loans were advanced which people could not repay while the loans themselves were sliced and diced as packages of derivatives which were then bought by banks as assets, because they thought, the risk had been so diluted that it was no longer a risk. Only of course the mortgagees could not repay them and the instruments into which the loans were sliced and diced were so complex the actual level of the risk was not so much spread but incomprehensible. When the inevitable crash came banks and building societies who borrow on the money markets to finance loans, including mortages, could no longer do so and banks also started to hoard their own deposits. So what with sub prime loans crashing and burning and in the firestorm which followed, no loans for legitimate buyers available, everyone suffers. You do not need to be a customer of Bear Stearns or Lehmans to feel the pain. The second argument being advanced is that the banks were justified in buying up and trading derivatives, and the ratings agencies were justified in advancing them high credit ratings, because of the strength of the US housing market historically underpinned them. No one seems to have stopped to ask where the sub prime customes were going to find the money to repay their loans and whether "incentivising" mortgage brokers and bankers to build empires on top of such a pyramid of hot air, was ever sensible.

• mataharifilms

  Sep 17 08, 11:06am (about 3 hours ago)

  Despite all the infinitely documented disasters and melt-downs of economic and military history, we haven't addressed the question of how to create leaders with the values of integrity and accountability and the right kind of regulatory authorities to keep those leaders on-mission.

  Everything that is written about here by S. Jenkins & others is merely unregulated human activity in a leaderless vacuum, at a interestingly difficult time in our history.

  The Africans say: 'Uninitiated, the youth will burn down the village just to feel the warmth.' For 'youth' read: greedy, un-eldered people with no authentic community allegiance. Things are starting to up burn quite nicely.

  The people we elect and appoint as leaders have to a man or woman almost or no self-awareness or psychology whatsoever, beyond the instincts of animal survival and the burning desire to have control over others for their personal security. Nothing long term will change until this situation is addressed.

FT.com - Home UK - UK - Oxley hits back at ideologues

By Greg Farrell in New York

Published: September 9 2008 19:25 | Last updated: September 9 2008 19:25

In the aftermath of the US Treasury’s decision to seize control of Fannie Mae and Freddie Mac, critics have hit at lax oversight of the mortgage companies.

The dominant theme has been that Congress let the two government-sponsored enterprises morph into a creature that eventually threatened the US financial system. Mike Oxley will have none of it.

Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.

The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq.

He fumes about the criticism of his House colleagues. “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.”

The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.

Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.

Adamant that the only solution to the problems posed by Fannie and Freddie was their privatisation, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.

“We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,” Mr Oxley says.

When Hank Paulson joined the administration as Treasury secretary in 2006 he sent emissaries to Capitol Hill to explore the possibility of reaching a compromise, but to no avail.

Aug. 18 (Bloomberg) -- Alan Greenspan has presided over more hundred-year events in the last 20 years than the rest of us do in a lifetime.

As chairman of the Federal Reserve from August 1987 through January 2006, the Maestro was ahead of the pack when he sniffed out a secular increase in productivity growth, the result of a ``once-in-a-lifetime'' technological boom.

Of course, if he was right about productivity, he was wrong about the policy prescription.

``Prices should have fallen'' as companies are able to produce more with less, said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. ``He fought it tooth and nail. The money had to go somewhere. It went into Nasdaq stocks.''

The burst tech-stock bubble exposed a rash of corporate malfeasance and accounting scandals. An ``infectious greed seemed to grip much of our business community,'' producing a ``once-in- a-generation frenzy of speculation that is now over,'' Greenspan told Congress on July 16, 2002.

Even as he was declaring an end to that generational frenzy, another one was already unfolding. Millions of condo flippers were riding ultra-low interest rates to ultra-high profits, extracting equity from their homes in the process. Now many homeowners find themselves owing more than their house is worth.

Of course, Greenspan argued against the idea of a ``bubble in home prices for the nation as a whole,'' conceding only ``signs of froth in some local markets.'' At the time, home prices were rising at a 15 percent annual rate.

Bubble Radar

Interspersed with the big bubbles in stocks and residential real estate were some singular events for which the cure was always lower interest rates.

Following the near-collapse of hedge fund Long-Term Capital Management in the fall of 1998, Greenspan cut the funds rate by 75 basis points to address the ``seizing up of financial markets.''

Once again, he misjudged the seizure's effect on the economy, which didn't miss a beat. The Nasdaq was the beneficiary of the Fed's largesse, rising 86 percent the following year.

Greenspan's ability to identify asset bubbles -- by his own admission, impossible when he was at the Fed -- improved markedly in the last two years. Everywhere you turned he was identifying a housing bubble, handicapping recession odds, spouting the wisdom gleaned from half a century of following the U.S. economy.

``He's like the forensic pathologist brought in as an expert on how to fix things when in fact he played a large role in causing the problems,'' said Bill Fleckenstein, president of Fleckenstein Capital in Seattle, and author of ``Greenspan's Bubbles.''

Conflict of Interest

Last month, Greenspan showed up on CNBC with Maria Bartiromo and Paul McCulley, managing director at Pacific Investment Management Co. in Newport Beach, California. Pimco happens to be one of Greenspan's three main consulting clients, a relationship that was never disclosed to the audience.

It was positively quaint to see Greenspan and McCulley talking shop -- discussing the likelihood of U.S. recession, slowing global growth and concerns about solvency -- for the benefit of bond investors, er, the viewing audience. All that was missing was a phone number on the bottom of the screen: Call 1- 800-4PIMCO.

And yes, the solvency crisis is a ``once-in-a-century phenomenon,'' according to Greenspan.

Last week, Greenspan showed up on the front page of the Wall Street Journal -- just like old times -- with a forecast for a bottom in housing.

``Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009,'' Greenspan told the Journal.

Qualified Forecast

Lest he be too clear, the master of garblements qualified his forecast, saying ``prices could continue to drift lower through 2009 and beyond.''

``It's a flexible bottom,'' said Tim Iacono, who devotes a blog to ``The Mess That Greenspan Made.''

What doesn't seem to have dawned on Greenspan or those who interview him is the thread that connects all these disparate events: Greenspan himself.

He presided over two bubbles, one bust and lots of little easy-money rescues. In a stroke of impeccable timing, Greenspan left the Fed in January 2006, a month that holds the once-in-a- century record for single-family housing starts.

Greenspan was widely criticized, inside and outside the Fed, for his tasteless appearance at a private Wall Street function for big investors one week after leaving the central bank.

A year later, I defended his right to earn a living after 18 years as a public servant. My point was that Greenspan can talk all he wants. You can choose not to listen.

Word of Advice

It's a woman's prerogative to change her mind. So here goes.

There is something unseemly about Greenspan's conduct. Former presidents don't criticize U.S. foreign policy during times of war, Jimmy Carter notwithstanding. The same unspoken rule should apply to economic policy.

Unlike his predecessor, Paul Volcker, Greenspan cannot leave the global stage or the media spotlight. Ben Bernanke may be the new Fed quarterback, but Greenspan is still calling in plays (or commenting on them) from the sidelines.

The juxtaposition of Greenspan's frequent TV and print appearances with the economic and financial fallout from his policies isn't helping his reputation. There's enough blame to go around for what started as the subprime crisis, but surely Greenspan, the country's chief economic policy maker for 18 years, must shoulder the lion's share.

So here's my advice, Mr. Greenspan. Give speeches for $150,000 a pop and share your wisdom with your key clients, who must pay you handsomely.

When the press calls, just say ``no comment.'' This is an acquired skill, but I'm sure you'll catch on.

As an economist, surely you appreciate scarcity value.

``I'm reminded of the song by Dan Hicks & the Hot Licks,'' Kasriel said. ``How Can I Miss You If You Won't Go Away?''

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

The WSJ Greenspan story- Bad on so many levels

Today's front page story in the Wall Street Journal which carries excerpts from an interview with Former Fed chairman Alan Greenspan is bad on so many levels that it's almost sad to have to write this up, but, here goes.

Former WSJ chief Fed watcher Greg Ip is now gone from the Journal, apparently happily writing away anonymously at The Economist, and David Wessel has occasionally filled the rather large empty shoes left behind.

The results this time are decidedly mixed.

As perhaps part of the general "Murdoch makeover" of the paper where a fluff piece of one sort or another now always appears at the bottom-middle of the front page, the Greenspan interview, also on page one, is an added bonus in the today's edition.

Having lost much of his credibility in recent years, but continuing to mount a strong defense that continues to be effective on a disturbingly large percentage of the population, the amount of caveats and qualifications that David Wessel saw fit to include in today's story was astounding.

Of course the news here was about a possible bottom in home prices in 2009, the remarkably lucid assessment of the government rescue plans for Bear Stearns, Fannie Mae, and Freddie Mac, along with the loopy idea of encouraging immigration to boost demand for housing.

But, look at all the less-than-complimentary commentary that Wessel provided:
 

But his star no longer shines as brightly as it did when he retired from the Fed in January 2006.

Mr. Greenspan has been criticized for contributing to today's woes by keeping interest rates too low too long and by regulating too lightly.
...
In the past, to be sure, Mr. Greenspan's crystal ball has been cloudy. He didn't foresee the sharp national decline in home prices. Recently released transcripts of Fed meetings do record him warning in November 2002: "It's hard to escape the conclusion that at some point our extraordinary housing boom...cannot continue indefinitely into the future."

Publicly, he was more reassuring. "While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," he said in October 2004. Eight months later, he said if home prices did decline, that "likely would not have substantial macroeconomic implications." And in a speech in October 2006, nine months after leaving the Fed, he told an audience that, though housing prices were likely to be lower than the year before, "I think the worst of this may well be over." Housing prices, by his preferred gauge, have fallen nearly 19% since then. He says he was referring not to prices but to the downward drag on economic growth from weakening housing construction.

The commentary became even more harsh when the general public was included after additional excerpts appeared at this post at the WSJ Real Time Economics blog.

A few choice selections are provided below (note that the two apparent "Greenspan Mess" sightings, unfortunately, do not qualify as such as they are in the comments section and not in the main story):
 

Why didnt he mentioned that it was….HIM THAT CREATED THIS NIGHTMARE….IN THE FIRST PLACE…..
Comment by ANONYMOUS. - August 13, 2008 at 5:57 pm

Mr. Greenspan, Thank you for your service to the nation. Now I want to ask you where you were while the problems you speak of were festering. Wasn’t it under your watch that the seeds of today’s problems were sewn? Many of the points you make are valid; the current system is broken, but again, I ask you why you didn’t raise these questions while you were in charge. Today, after the legislation has been signed, it’s a bit late to make these criticisms.

While Im at it, let me also suggest that an action on the Fed’s part could have cooled the tech bubble before it got out of hand; you could have headed off the tech bubble by raising the Margin Requirements. Thanks.
Comment by Jim Ogburn - August 13, 2008 at 6:07 pm

The irresponsibility of the government to overspend that Mr. Greenspan sponsored for years was transferred to the people. Living beyong the means is the recipe for financial disasters.
Comment by Gabriel - August 13, 2008 at 6:29 pm

This clown is responsible for the housing bubble, yet he still has the nerve to show his ugly face.
Comment by Freddie Big Mac - August 13, 2008 at 6:41 pm

Hey Dont blame ME. Mr.Bubble…{ALAN} Started this Night-mare with his policy of..CHEAP,CHEAP MONEY…I Inherited this “DEBACLE”…I know that the ship is sinking fast….But remember…I ONLY WORK HERE….What do you WANT an MIRACLE??????
Comment by BEN BERNANKE. - August 13, 2008 at 8:18 pm

Amazing that I actually agree with this guy on one point: If the government has to give one cent to the GSEs they need to be nationalized and liquidated.

This does not absolve him of responsiblity for creating this mess in the first place. Where were the regulators when Wall Street perpetuated this scam? Why did he keep rates irresponsibly low for way too long?

Even now he is dissembling by saying that prices will bottom next year….though they may continue to drift lower past 2009. So what’s it going to be? Will they bottom or drift lower? You can never get a straight answer from liars and politicians. IMO, he is both.
Comment by Kodiak - August 13, 2008 at 8:22 pm

In his desperate efforts of late to defend himself, Greenspan blames the housing bubble on a global savings glut that pushed down interest rates. But the Fed policy of easy money helped create that overseas savings glut in the first place by triggering a massive US buying spree from abroad. So he can hardly claim that the Fed under his leadership had no role in creating the conditions for the housing bubble. True, once the world was awash in money, the Fed’s efforts to raise rates had much less leverage than usual at home. But the Fed had essentially shot itself in the foot by creating those conditions of excess global liquidity in the first place.
Comment by John - August 13, 2008 at 8:30 pm

Someone should tell this bum to shut up.
Comment by Good Luck - August 13, 2008 at 9:12 pm

I “TOLD” Helicopter BERNANKE….To ALSO KEEP THE RATES “LOW”…Until the “BANKS” Get out of this “MESS”….The only problem is….We are “Destroying” the Entire U.S.A. Economy…..So What.
Comment by ALAN GREENSPAN, Mr.BUBBLE. - August 13, 2008 at 9:35 pm

Alan G, regardless of his arguments to the contrary, facilitated the current housing crisis by:

1) Keeping rates low during a time that global risk spreads (credit and other (e.g., vol)) were at historic lows. We all knew risk wasn’t being priced rationally given the massive glut of liquidity available in the market (at the time).

2) Not caring one iota about bank supervision.

3) Believing arm-chair economists and econometricians (i.e., models) can provide the right answers and

4) Failing to understand the “incentives” created in most organizations to produce accrual earnings, not value.
Comment by Tootrue - August 14, 2008 at 2:51 am

The inescapable conclusion from reading the article is that Mr. Greenspan should have left the chairmanship of the Fed years before he did. His solution to the glut of unsold homes is the latest reason. The man is absolutely off his rocker… The best we can do at this point is to stop giving him a platform for his idiotic views on the economy.
Comment by Joe N - August 14, 2008 at 10:26 am

Greenspan, GO PLAY SOME GOLF!!!!!! You are completely overrated, just be glad that you managed to get away with it and leave the mess for someone else to clean up. You didn’t know what you were doing then, now is the time to keep your mouth shut.
Comment by T. Time - August 14, 2008 at 11:17 am

While readership may get a boost from a story like this, it does little to add to the Journal's prestige which is increasingly questioned since parent company Dow Jones was purchased by Newscorp.

The Fed and Authoritarian Capitalism

Chinese authoritarian capitalism, on display this week in Beijing, has me thinking about America’s democratic capitalism and how we practice it.

Start with the U.S. economy’s most powerful government agency: The Fed, of course. Its decision this week to hold short-term interest rates steady was wrong, in my view; it should have lowered them because recessionary forces continue to increase while wage-price inflation doesn't exist. Wages are dropping in real terms. But my opinion and your opinion count for nothing. The Fed is not directly accountable to American voters, or even to Congress or the President.

Months ago the Fed decided to bail out major investment banks. That put billions of taxpayer dollars at risk without so much as a single act of Congress. Lately the Fed has been looking into the capital assets of these banks and telling them how to bolster their liquidity. Probably a good idea, but here again, nobody authorized the Fed to do this.

Now the Fed is issuing proposed regulations governing the credit-card industry – specifying when credit card issuers can increase interest rates on existing balances, and barring late fees on customers who weren’t given a reasonable amount of time to pay. Personally, I’d also want to stop them from marketing credit cards to people under age 21, and imposing extra charges for paying online.

But what I or you may want is irrelevant. The Fed’s proposal has draawn nearly 56,000 comments, yet the Fed isn’t compelled to read a single one of them. You see, the Fed is acting without congressional authority. Two weeks ago a congressional committee reported out a Credit Cardholder’s Bill of Rights with many of the features of the Fed's regulation, but the banking industry mounted such a lobbying effort against it there’s no way it will get enacted this year, or maybe ever.

In other words, Congress is so immobilized we have to rely on the Fed -- which operates mostly in secret, whose chair is appointed every four years but whose other governors have fourteen-year terms, and which doesn’t even depend on a congressional appropriation for its own funding but draws interest on the portfolio of Treasury securities it controls.

This isn’t Chinese-type authoritarian capitalism, of course, but nor is it, strictly speaking, what we’ve come to expect from a democracy.

posted by Robert Reich | 1:03 PM  

15 Comments:

 Athena Smith said...

At the same time, its independence
is not absolute.
It must report to Congress, which
ultimately has the power to change the Federal Reserve Act.

Tuesday, 12 August, 2008  

 B. Dewhirst said...

Why do you persist on calling this Democratic Capitalism, Dr. Reich?

When was the last time an American voted for the President of the World Bank? The Chairman of the Fed?

 

If given a choice between Greenspan and Bernanke, what sort of a choice would such a vote have been?

 

How did Presidential elections impact whether Greenspan got to keep his job?

 

Does that seem "democratic" to you? In what sense?

Tuesday, 12 August, 2008  

 kayxyz said...

but the banking industry mounted such an intense lobbying effort

I've asked before: how many banks have to collapse before the American Bankers Association runs out of lobbying money? One of the newest Fed governors, Elizabeth Duke, is a former president of ABA. Conflict of interest, anyone?

The credit card assets/revenue streams is highly profitable to banks, given how much they've lost in mortgages, until, of course, the card holders declare bankruptcy and stiff the banks, and it's a US phenomenon only. Per a Business Week graphic? US 5 cards per person; India 30 people per every one card; China 60 people for every one credit card.

On the other hand, there are bloggers discussing just not paying the monthly amounts and letting the banks collapse. Let the people working at the banks find real jobs.

Tuesday, 12 August, 2008  

 Anonymous said...

You have highlighted another example of why we need lobby reform in this country. The lobby system is a bunch of ex politicians that continue to run this country without a democratic voice.

This same group is invested in some of the big government outsourcing companies like Halliburton & Blackwater. The Iraq war is bringing millions to this clandestine body labeled as "lobbyists".

We have lobbyists running our government and outsourced mercenaries fighting our oil wars.

It is too bad that our country has so many "red" states where ignorant and the religious right preside.

This demographic is blindly voting republican, which proves de-evolution is occurring as our democracy vanishes.

Tuesday, 12 August, 2008  

 Anonymous said...

I want to echo b. dewhirst. I've got a lot of respect for your opinions, Prof. Reich, even when I disagree. But, I really can't understand your calling our system a democratic capitalism, unless you are being disingenuous to avoid alienating the know-nothings who think we have such a system.

Our economic system is responsive to multiple authorities:

1. The Fed -- which transfers debt burden from corporations onto the people (i.e. socializes economic loss to protect private gain) and over which the people have zero control.

2. The Executive -- which, de facto, can choose to be responsive or not without consequence. Our current executive has chosen to implement and preside over the most corrupt crony capitalism in our history. Congress and the judiciary have let it act without accountability.

3. The Legislature -- which may appear democratic, but, de facto, has been corrupted by lobbying money. The will of the people has NO power in the face of millions in lobby money. Oh, sure, people can vote, but only for the candidates the lobby money has put forward.

4. The Judiciary -- which, de facto, continues on its path of giving corporations more rights than people.

We may in some principle have a republican democracy that controls our economic system. But, in reality, we have a corrupted crony capitalism with authoritarian aspects.

Tuesday, 12 August, 2008  

 Anonymous said...

All the anti-capitalist wackos have turned this blog into a lunatics asylum.
You have not heard of "appointed" officials? You are truly saying that someone who controls monetary policy should be elected by the brainless and the toothless? Who vote for the guy who has stapled a flag to his chest? Or the guy who appears "likeable?" Or who has not cheated on his wife, as if that is related in the most remote sense to competence?

Please give us the total number of failed banks and please compare that number to the total. Are you serious? A couple of people in a town have the flu and you are calling it an epidemic?

Please cite whatever catastrophic decissions the Fed took in recent years. None?
Well, cite some pretty bad decsisions... hard to prove?

Now cite some catastrophic decisions by elected officials. A couple of huge ones spring to mind.

Imagine the prospective president of the Fed having to campaign and promise what?

Oh sweet Lord, give me strength to keep on reading...

Tuesday, 12 August, 2008  

 kayxyz said...