Thursday, October 23, 2008

Horton hears a who, Greenspan finds a flaw

Greenspan thinks what he used to believe is flawed. At least that is a partial admission that he got something wrong. So let's look at what he said.

Let me decode the Greenspan testimony for you non Fed speaking novices:

Greenspan said today,

"We are in the midst of a once-in-a century credit tsunami". Translated that means DON'T BLAME ME for a once in lifetime occurrence.

Addressing the House Oversight Committee he said, "You, importantly, represent those on whose behalf economic policy is made, those who are feeling the brunt of the crisis." Translation: I feel your pain but DON'T BLAME ME.

G-Man said, "In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences". Translation: In other words although I'm about to say I didn't see it coming, I told you so.

Next Alan says "This crisis, however, has turned out to be much broader than anything I could have imagined." Greenspan goes on for about 250 words telling us how bad it is and is going to be (thanks Alan). He then mumbles something about being shocked that something called counter-party surveillance failed.

He then goes on to make the most facile pea-brained assertion about what went wrong. He blames originators and excess demand for these securities. Originators only originate what they can sell. Saying that they are at fault is like killing the messenger for bring the wrong news. Saying that demand was the problem is like saying the bullet is what killed the man. But who held the gun and pulled the trigger? Greenspan has nothing deep to say about this at all. He vaguely blames using market pricing from a period with too much good news and backhandedly blames a paucity of capital. He is too busy crying at the funeral of Ayn Rand to delve deeper.

His solution? He tearfully says that securitizers should be forced to keep a portion of what they securitze- as if anybody is going to be securtizing anything anytime soon. But what about his proposed solution? I swear isn't that solution the very thing that was the problem? Didn't the banks that generated these things buy and hold them too? Isn't that why they are in such trouble? So why is that a solution? It didn't stop anything.

I don't think that Greenspan begins to grasp the enormity of the problem. In the Q&A session, however, he danced around allegations he was at fault while He was Fed Chairman. He disputed the facts of a well-known account of how a Fed Governor, Ned Gramlich told him of mortgage problems that he told Gramlich to ignore. The committee did not press him on it. Greenspan said he disputed the facts and went on a tangent about the lines of authority at the Fed. One thing we know is how anti regulation and against government interference he was; he dominated all those lines of authority at the Fed. Things did not happen that he did not want to happen.

In the end Greenspan cannot see that he was the most visible public regulator of his day. He went around the country and the world preaching deregulation. He did not attend to his own regulative duties at the Fed and THAT is why things ran amok.

There is nothing more dangerous to a system than to think it is being monitored and regulated when it isn't. I don't think people on Wall Street were any more greedy at this turn of the century than at the last one. But having regulators who were, not just asleep at the switch, but telling you that they did not believe in pulling the switch makes for a dangerous situation. In the end there was no counter-party surveillance because all participants drank the same Kool-Aid. They did not see anything that needed surveillance. There were no regulators to pose a contrary view. Every bank held too many of these too risky securities. And it happened because guys like Alan Greenspan the Great non regulator glued the switch open. He was not asleep. He was watching it and he was applauding. I see him as the poster boy for what went wrong. many others were at fault. Many of the checks didn't clear and the balances didn't balance. But in the end it was the regulators who refused to regulate.

Greenspan's testimony does not speak to that issue at all. But he can mourn the passing of his ideal. When I was in High School, I read Atlas Shrugged and The Fountainhead. They were interesting stories about people I thought had a certain sickness and obsessiveness. I like the books 'as a good read' but not the ideology. Yet I became an economist and markets are glorified by that science.

Even the financial markets need oversight. Believe in markets if you like, but they are not the stuff of fairy tales. Was there really a King Arthur and Knights of the Round-table whose hearts were pure? Yeah, right. But a good read. Markets are real-world real-life entities and they need to be modernized on occasion and they need oversight. The people in those books do not exist. Greenspan should shed tears for real people and real events and for a philosophy he took real far- too far.

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