Greenspan: “It’s not my fault!”

It’s Not My Fault

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.

That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble.

The emphasized sentence is I think key in showing the cognitive dissonance of one of the leading ‘free-market, anti-regulation’ financial pundits in America. On one hand he is saying that less regulation of the markets in developing nations created too much capital which led to the present crisis but further on in the piece, he writes

However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living. Remember, prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance. To achieve that with a modest level of combined domestic and borrowed foreign savings (our current account deficit) was a measure of our financial system’s precrisis success. The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud — not increased micromanagement by government entities.

I understand that he is not writing an economics treatise in the pages of the WSJ but didn’t he bother to go back and read what he wrote? On one hand he is saying that decreased central planning increased production all over the world which provided lots of capital that had to go somewhere, so much of it went into real estate. On the other hand, this turned out to be a bad thing – the change from centralised planning by national banking systems to unregulated markets – because it was too much capital and therefore real estate prices skyrocketed in many nations as borrowing became cheaper. Mr Greenspan seems to be saying that the world financial system was just great until suddenly, almost mysteriously it wasn’t so good. He does not seem to be willing to accept any responsibility for the connection between the Fed’s lending rates to banks and the banks dropping mortgage interest rates. In the article he tries to dispute the validity of the work of a former colleague at the Fed, now Professor at Stanford, John Taylor, who argued for tighter lending standards by the Fed beginning in 2003.

Greenspan’s reply seems to be based on his belief that there are “broader global forces” which are acting beyond the control of governments and that it really wouldn’t have made a difference in slowing or halting the onrushing fiscal crisis the world now faces even if the various central banks had tightened up financial monitoring and regulation.

I know the gentleman is extremely intelligent and well-versed in the ways of the market, an ardent supporter of capitalism – but – I really think he is trying to deny reality when trying to excuse the failures of the Federal Reserve System, and to brush aside the failures of free-market ideology.

His testimony before Congress in October of last year when he admitted he was “shocked” at the failure of the financial system was the first indicator to many that the gentleman wasn’t seeing the same world as most of us.

Greenspan softened his longstanding opposition to many forms of financial market regulation, acknowledging in an exchange with Waxman that he was “partially” wrong in his belief that some trading instruments, specifically credit default swaps, did not need oversight.

Waxman cited a series of public statements by Greenspan saying the market could handle regulation of derivatives without government intervention.

“My question is simple: Were you wrong?” Waxman asked.

Greenspan said he was “partially” wrong in the case of credit default swaps, complex trading instruments meant to act as insurance against default for bond buyers. –

Greed is not good, it has in the present case produced a period of prosperity that was based on myths. A time that could be compared to the seemingly healthy athlete who suddenly drops dead from a brain aneurysm that could have been detected except for a refusal to see a doctor. The prosperity was based on lies, greed and self-delusion, not just in America but in many countries. Now we have to work thru this mess and hopefully, a better more balanced system of capitalism and socialism will be the result. I refuse to accept Greenspan’s and others belief that we have to live with an economic system that cycles from prosperity to depression/recession in an never ending sequence of prosperity followed by pain just because it is the nature of “highly competitive markets”


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