Greenspan’s Amnesia
Alan Greenspan continues his campaign to deflect attention from his failure to regulate the shadow banking system. In today’s Financial Times piece he points to the success of FDIC-insured institutions as evidence that what is needed to prevent a crisis like the current one is adequate supervision of capital requirements:
What, in my experience, supervision and examination can do is set and enforce capital and collateral requirements and other rules that are preventative and do not require anticipating an uncertain future. It can, and has, put limits or prohibitions on certain types of bank lending, for example, in commercial real estate. But it is incumbent on advocates of new regulations that they improve the ability of financial institutions to direct a nation’s savings into the most productive capital investments – those that enhance living standards. Much regulation fails that test and is often costly and counterproductive. Regulation should enhance the effectiveness of competitive markets, not impede them. Competition, not protectionism, is the source of capitalism’s great success over the generations.
New regulatory challenges arise because of the recently proven fact that some financial institutions have become too big to fail as their failure would raise systemic concerns. This status gives them a highly market-distorting special competitive advantage in pricing their debt and equities. The solution is to have graduated regulatory capital requirements to discourage them from becoming too big and to offset their competitive advantage. In any event, we need not rush to reform. Private markets are now imposing far greater restraint than would any of the current sets of regulatory proposals.
What’s amazing about the American public is that the pitchforks come out over the AIG bonuses–the more we learn about them, the clearer it is that Liddy made the right call paying the bonuses and Obama should have gotten out in front and explained why they were justified–but we sit here complacently allowing Greenspan to peddle this hogwash.
The Fed Chairman is a bank regulator. To have the Chairman who presided over the biggest failure of the banking system lecture the world on regulation is breathtaking, not to mention tone deaf. Whatever the complexities of regulating the shadow banking system or supervising the ratings agencies are, acting as if the Fed Chairman bears no responsibility for the excesses that took place on his watch is a recipe for moral decline.
Source:
We Need a Better Cushion Against Risk
By ALAN GREENSPAN
Financial Times; March 27, 2009
http://www.ft.com/cms/s/0/9c158a92-1a3c-11de-9f91-0000779fd2ac.html
March 27th, 2009 at 9:14 am
Dylan Ratigan
quit ….
or was fired ?!?!?!?!?
March 27th, 2009 at 9:14 am
Mr Greenspan claimed:
“The important lesson is that bank regulators cannot fully or accurately forecast whether, for example, subprime mortgages will turn toxic, or a particular tranche of a collateralised debt obligation will default, or even if the financial system will seize up. A large fraction of such difficult forecasts will invariably be proved wrong.”
question:
————————
Is he stupid or lying? I believe the people most attuned to problem loans such as these are “Bank Examiners” and “Auditors”. These are the people who are supposed to make sure that policies and procedures, such as ensuring loans are made to borrowers who have the ability to repay, are followed. Weren’t he and the FDIC ultimately responsible for that little detail? Oops. I guess he’s indirectly confessing incompetence or dementia.
March 27th, 2009 at 9:23 am
Moral decline – heh. We are Rome.
March 27th, 2009 at 9:29 am
Do you still listen to that moron
March 27th, 2009 at 9:45 am
I’m amazed this man even has a forum anymore but then again there’s no penalty for being catastrophically wrong in our culture anymore, so why not?
March 27th, 2009 at 9:48 am
Pg. 187 “Greenspan’s Bubbles” William A. Fleckenstein
“Viewing his own “accomplishments” through rose-colored glasses obfuscates the harsh reality we are all forced to live with now. Yet, Greenspan’s major short-coming – and critical flaw – was not his mistakes but his refusal to admit them. Thus, he never learned from his errors in judgment, repeating them time and again over the course of 19 years.”
“The financial world Greenspan has left behind will be a treacherous one to navigate that will leave many wounded in its wake. There is no debate: Greenspan was no “maestro;” he was the master of the United States’ decent into financial turmoil. The evidence speaks for itself.”
March 27th, 2009 at 9:50 am
Testimony of Chairman Alan Greenspan
The regulation of OTC derivatives
Before the Committee on Banking and Financial Services, U.S. House of Representatives
July 24, 1998
Reading this testimony in light of what has gone on illustrates the willingness of Greenspan to ignore all financial calamities in our nation’s history to give his blessing to derivatives.
http://www.federalreserve.gov/BOARDDOCS/TESTIMONY/1998/19980724.htm
Professional counterparties to privately negotiated contracts also have demonstrated their ability to protect themselves from losses from fraud and counterparty insolvencies. They have managed credit risks quite effectively through careful evaluation of counterparties, the setting of internal credit limits, and judicious use of netting and collateral agreements. In particular, they have insisted that dealers have financial strength sufficient to warrant a credit rating of A or higher. This, in turn, provides substantial protection against losses from fraud. Dealers are established institutions with substantial assets and significant investments in their reputations. When they have been seen to engage in deceptive practices, the professional counterparties that have been victimized have been able to obtain redress under laws applicable to contracts generally. Moreover, the threat of legal damage awards provides dealers with strong incentives to avoid misconduct.
March 27th, 2009 at 9:52 am
Was he asleep? Yes.
Is he arrogant? Yes.
Is he taking responsibility? No
Add it up and you get an idiot.
Having said that, I don’t want to scapegoat him or forget that plenty other jerks had their hands in this mess too.
March 27th, 2009 at 9:57 am
Neal @ 9:52 – Agreed. “Bailout Nation” will spell it all out.
March 27th, 2009 at 9:58 am
Greenspan is not alone in this. I have yet to hear any top officials in the US and very few “famous” economists acknowledge that there are limits not just to leverage and risk, but to debt itself.
Without that recognition and an understanding of where those limits lie, we will repeat this credit collapse. In fact, our government is manic in its efforts to restore debt to unsustainable levels – using confiscation of future earnings because individual citizens have, wisely, refused to incur greater debts on their own.
If you refuse to support the current banking system by borrowing money or picking up needless debt, your money will be taken from you and used for that purpose. The confiscation will be done by either the mechanism of future taxes, a decrease in future benefits or inflation… but it WILL be taken.
March 27th, 2009 at 10:07 am
This situation of increased regulatory activity/response seems a corollary of another recently encountered event in this country. The Republicans spent 8 years being led by George W. Bush as they performed irresponsible and destructful acts in the leadership of this country. The result was the voters throwing them out of office and their present crying, moaning and whining of how the present results are going to harm the country, even though they brought it on themselves. Following the same vein of thinking, the greedy financial/investment executives spent many years performing irresponsible and risky destructful acts regarding investments in this country, which resulted in the crash of the economic system. Now they are crying, moaning and whining about how the present, resulting activities are going to harm the country’s economic future, even though they brought it on themselves. Sort of makes you sick to your stomach over how much the future of everyone’s well being in this country and the world is in the hands of people like this.
March 27th, 2009 at 10:09 am
Poor guy, trying to keep his reputation from tarnishing, that means willing to be intellectual DISHONEST! He also got presidential medal for his complicity in the mess we are in! WHAT A COUNTRY!
March 27th, 2009 at 10:11 am
I wonder who well his book is selling these days.
March 27th, 2009 at 10:11 am
That’s “HOW” well….sorry, need another cup of coffee!
March 27th, 2009 at 10:14 am
market may have another push in her culminating monday . xlf has some sticky traction to it. if xlf hit 10 i would feel much more comfortable with a larger short position.
March 27th, 2009 at 10:25 am
Barry,
It’s amusing how you say that the President should have gone out and put his neck on the line to ensure that incompetent fat cat corporate criminals get their share of the take. I wonder if this happens in Somalia–do pirates sue each other there if they feel they’ve been cheated out of the booty?
These guys are lucky we didn’t strap them to a chair and run 2,450 volts of electricity through those brilliant minds of theirs.
March 27th, 2009 at 10:33 am
“market may have another push in her culminating monday”
Agreed. I am playing this as sell-off Friday but nobody goes home short these days. Expect short covering rally at 3.30 just like last week. The rally is getting tired but I don’t think it is quite done. It’s funny how XLF 10 jumps off the chart. I watch that as well, but I probably won’t wait for 10 to get short. XLF 9.75 is close enough, or if we just start seeing lower highs from here.
That was a VERY sharp move down in EUR:JPY and I didn’t like it. UUP 25 looks like a firm floor for the $. Once the EoQ window dressing is over, I am not going to hang around on the long side.
March 27th, 2009 at 10:38 am
Even the Wall Street Journal is struggling to find a way to forgive him
http://online.wsj.com/article/SB123811225716453243.html
March 27th, 2009 at 10:43 am
@dss:
“You can trust us, we’re sophisticated professionals,” seems to have been the thing for the banks and IBs to say to Congress back in 1997-98.
I think a core issue here is that the banks which, like it or not, do and must have a central role in self-regulating their industry, don’t really care that much about systemic risk. That’s somebody else’s problem.
So the dilemma is that thinly staffed federal and state regulatory agencies are either seen by the public as “asleep at the wheel” or as impediments to efficiency. I think preventing TBTF is the real issue here. You can try to dis-incentivize mega-mergers by taxation and securities regulations, as Greenspan suggested, but ultimately somebody needs to do the hard work of risk management at the national and international levels and that is not happening. We have to acknowledge that our government has neither the technical sophistication nor the independence/lack of conflicts of interest among key figures to adequately represent the public good in monitoring the financial sector.
Short of implementing a very crude/blunt instrument approach, like a “Balanced Budget Amendment” to the US Constitution that removes congressional and executive authority to incur deficits over a certain limit (thereby addressing the moral hazard problem by removing the ability of government to backstop systemic risk and causing financial institutions to evaluate risk as if their life depends on it), what else can we do?
March 27th, 2009 at 10:43 am
@ Neal Says: March 27th, 2009 at 9:52 am
Was he asleep? Yes.
Is he arrogant? Yes.
Is he taking responsibility? No
Add it up and you get an idiot.
My numbers come up with different results. Mine add up to sociopath.
We should all be thankful. He was only in charge of money. Had he been running the military we’d all be sitting in nuclear winter right now and he’d be telling us how peaceful everything is
@Mannwich Says: March 27th, 2009 at 10:11 am
I wonder who well his book is selling these days.
It seems his book is following the same value path his money does
http://www.amazon.com/Age-Turbulence-Adventures-New-World/dp/0143114166/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1238164858&sr=8-1
March 27th, 2009 at 10:45 am
Too bad for him. If he had died sooner, he would have gone in the ground thinking he was “the Maestro” and some sort of “genius”. Of course, he may still think that because, well, what do we little people know anyway and who cares what we think?
March 27th, 2009 at 10:55 am
Mannwich,
Herbert Hoover went to his grave in 1964 absolutely convinced that he had been right all along had the world only followed his dictates more faithfully. Greenspan probably feels the same way. Needless to say, the world strongly disagreed with both of them.
March 27th, 2009 at 10:58 am
@Transor Z Says: March 27th, 2009 at 10:43 am
Short of implementing a very crude/blunt instrument approach, like a “Balanced Budget Amendment” to the US Constitution that removes congressional and executive authority to incur deficits over a certain limit (thereby addressing the moral hazard problem by removing the ability of government to backstop systemic risk and causing financial institutions to evaluate risk as if their life depends on it), what else can we do?
Force all transactions into the light of day. If these elephants have to report everything within a few days of doing a deal they will make sure that they can handle that kind of scrutiny. It seems to work for insider sales. If skewing creates a potential for a countermarket then a countermarket will form and the market will take care of the excesses.
Most excesses and ‘conspiracies’ cannot survive the light of public scrutiny which is why the powers like to do them in secret. Even with a complicit lapdog media
March 27th, 2009 at 11:02 am
Amnesia .. NOT.. my Beastmaster eye from Fly reveals disaster capitalism at work
sorta like the 20’s Prohibition makes markets for multiple factions
work for:
Save the People thumpers . booze runners . the law . glass manufacturing . fixup construction
March 27th, 2009 at 11:07 am
What’s amazing about the American public is that the pitchforks come out over the AIG bonuses–the more we learn about them, the clearer it is that Liddy made the right call paying the bonuses and Obama should have gotten out in front and explained why they were justified–but we sit here complacently allowing Greenspan to peddle this hogwash.
Barry, thanks for finally saying this, about Greenspan, and the damn AIG bonus. I know I’m in the minority here but I agree they should have been paid. I had a relative complaining to me the other day about the AIG bonus and then in the same breath said “if Greenspan were still around we wouldn’t have these problems”
I just bit down hard and said nothing, what would the point be.
Greenspan and the Fed stole/are stealing a lot more from people than AIG could ever have dreamed of.
March 27th, 2009 at 11:07 am
2 camps in play – sell off continues here or we reboot to higher highs. i actually picked at faz @19 for descent risk/reward.
i believe if faz can take out 20 in the next hour or so that would be quite bearish for the market going forward.
March 27th, 2009 at 11:08 am
“I think a core issue here is that the banks which, like it or not, do and must have a central role in self-regulating their industry, don’t really care that much about systemic risk. That’s somebody else’s problem.”
Transor,
Interesting… and true. The bankers do bear responsibility for their industry, but not for government policy. Disasters never happen from just one cause; there is always a coincidence of events. In this panic we have several – economists’ misunderstanding of the credit bubble, governments misunderstanding and blindness and neglect (and even outright encouragement of irresponsibility), bankers’ incredible greed without responsibility, a mortgage industry out of control and individuals caught up in bubble psychology.
The pain, however, is falling selectively and not in proportion to participation.
March 27th, 2009 at 11:17 am
sold faz for small loss. i like scenario b – higher highs this afternoon.
March 27th, 2009 at 11:23 am
we should see a higher high on the spx by 1 pm.
March 27th, 2009 at 11:29 am
@leftback,
good observation on UUP, I wouldn’t try getting long oil right here, too bad for most, they just missed a nice move.
I have trimmed a few of my energy positions and sold off most of my FCX this morning for a huge gain. Don’t plan on selling my MON or DBA.
Is anyone ever playing around with PRFM?, I bought a little a few weeks back @ $24, there is no volume, if you had enough money you could move it.
March 27th, 2009 at 11:36 am
@ How the Common Man Sees It at 10:58 am
“Force all transactions into the light of day.”
Right on! Maximum transparency! as with Denninger’s solution for CDS:
“1. Force them all onto a regulated, public exchange exactly as is done for listed options, stocks and futures.
2. Mark all positions to the market nightly.
3. Have a central counterparty for all contracts, as is done with the OCC for listed options.
4. Allow and in fact mandate that the central counterparty enforce, on a nightly basis, margin requirements.
End of problem.”
IMO, ALL public corporations (and private if part of shadow banking) ought be required by SEC to list their exposures to such instruments.
March 27th, 2009 at 11:44 am
Barry:
Say again. Why were the AIG bonuses justified? I must have missed something.
March 27th, 2009 at 11:46 am
OT: Here’s a dishy little rumor-mongering piece re: Larry Summers from today’s Boston Globe:
http://www.boston.com/news/education/higher/articles/2009/03/27/a_summers_tale/
March 27th, 2009 at 11:57 am
Greenspan deserves more than a few pokes of our pitchforks!
March 27th, 2009 at 11:59 am
@ JohnnyVee at 11:44 am
Barry:
Say again. Why were the AIG bonuses justified? I must have missed something.
~~~~~~~~~~~~~~~~~~~~~~~~~~
Don’t believe Barry said the bonuses were justified, only the paying of them, inasmuch as they were contractual obligations and as $165 million = less than 0.01% of the $185 Bn (s0 far) AIG bail-out, a proportionate effort (0.01%) should be expended spent in trying to recoup bonuses vs 99.99% in salvaging what can be out of AIG
March 27th, 2009 at 12:10 pm
Good article regarding the need for transparency, and what FDR did.
http://www.tnr.com/politics/story.html?id=686e3d61-aa6f-4431-acac-d067fe28ed8e
March 27th, 2009 at 12:12 pm
Oh, and while we’re at it on Greenspan, here’s one that might get a lot of you spun up. Brooksley Born recalling, among other things, Greenspan saying he didn’t think there was a need for laws against fraud. Of course, one of Obama’s problems is that he brought Larry Summers back, and this article serves as a reminder on that front also.
http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html
March 27th, 2009 at 12:35 pm
“Alan Greenspan continues his campaign to deflect attention from his failure to regulate the shadow banking system. In today’s Financial Times…”
This is why more and more people are going to the blogs(and The Big Picture) to get the real news and honest analysis. The mainstream media simply serves a conduit for the power structure. The good news is that people get it and slowly, but surely, tune out. The death of the old media is a welcome development.
March 27th, 2009 at 12:49 pm
Editorial defending Greenspan:
http://online.wsj.com/article/SB123811225716453243.html
March 27th, 2009 at 1:18 pm
“These guys are lucky we didn’t strap them to a chair and run 2,450 volts of electricity through those brilliant minds of theirs.” frank411
Spoken like a True lover of the State..
No Trials, No Juries, Just Decisions–Stalin would be pleased..
March 27th, 2009 at 2:13 pm
hate to disagree with all the great minds here on the dollar, but it looks headed to 24.60 tout de suite, next week, i mean.
March 27th, 2009 at 3:22 pm
its just spin. to not have own up what he allowed to happen in his watch
March 27th, 2009 at 3:27 pm
Because monetary policy is considered as much arty as it is science there is a gap of plausible deniability. Greenspan has set up a squatters camp right in the center of that gap
March 27th, 2009 at 3:29 pm
Whoops. Next time I’ll proof read before I hit the submit button
March 27th, 2009 at 3:37 pm
Sorry, I must be missing something. Why exactly is it ‘clearer it is that Liddy made the right call paying the bonuses and Obama should have gotten out in front and explained why they were justified’?
I reach the opposite conclusion the more I hear about it.
March 27th, 2009 at 4:01 pm
>>franklin411 Says:
>>Herbert Hoover went to his grave in 1964 absolutely convinced that he had been right all along had >>the world only followed his dictates more faithfully. Greenspan probably feels the same way. Needless >>to say, the world strongly disagreed with both of them.
Uh, no. The 18 page GOP “plan” calls for no more spending. Obviously, the GOP believes Hoover was right and want to prove that Government isn’t the solution. Well, certainly not if they are in charge.
March 28th, 2009 at 6:57 am
Ain’t senility great? I betcha Greenspan won’t be the last to claim, “I don’t remember that senator.”
As this depression gets rolling folks are going to call for the heads of the responsible to be offed and put on display. And the politicians will comply or they’ll be handed their walking papers.
Better to fess up and crawl away than stand up and deny. Greenspan’s denials are putting him at the top of the list.
March 28th, 2009 at 9:07 am
Here’s my take on people like Greenspan. When one has absolute faith in markets, drugs a god, or whatever, as an individual you aren’t responsible for anything. The definition of religion fits these
kinds of strong absolute beliefs rather well.
“a cultural or behavioural aspect of ritual, liturgy and organized worship, often involving a priesthood, and societal norms of morality (ethos) and virtue (arete)”
Greenspan was a true believer in Ayn Rand ( read his book AGE OF TURBULENCE) if you really want to understand what made Greenspan tick. Alan spent a lot of time with Ayn in his younger years. So when he has absolute faith in the markets as a fix everything belief, you personally aren’t responsible for anything. (You might ask how a true believer in Ayn RAnd came to run the biggest central planning agency this side of the old Kremlin but you have to read Alan’s book to get that answer and he does answer that question).
Just like consulting with the higher father while making the decision to invade some third rate Middle Eastern country listening to voices can get you in trouble. Obviously if your higher father told you to do it, you have no responsibility, and can sleep like a baby. No worries mate.
March 29th, 2009 at 4:34 pm
Organized religion gets rightfully blamed for many things, but those who believe that god caused Bush to invade Iraq under some spell, because they listen to god are badly misled.
As an atheist, it matters not to me which god gets gored. Bush entered Iraq for far more sectarian ‘reasons’ and they can all be captured under one catgory: follow the money and when the trail runs cold you will know why the war was begun and why Obama won’t end it. And behind all of it you will find AIPAC, and all of its grovelers and sycophants.