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REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?
ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
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Fed Rethinks Stance on Popping Bubbles – WSJ.com
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The Federal Reserve and academics who give it advice are rethinking the proposition that the Fed cannot and should not try to prick financial bubbles.
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The bursting of this decade’s housing bubble, which was accompanied by a bubble of cheap credit, has wrought inestimable economic damage. The U.S. economy was faltering before the crisis in credit markets recently intensified, rattling financial markets and sending home prices down further. Even if the government’s decision to take stakes in major banks works, it could take weeks for money to flow freely again.
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While it is too soon to pronounce an about-face in Fed thinking, policy makers’ views clearly are evolving. The Federal Reserve’s longtime line on financial bubbles has been that they were impossible to identify. Even if the central bank could identify a bubble, policy makers said, trying to lance it would be far worse for the economy than letting the bubble run its course and dealing with the consequences.
Economists’ view that central banks shouldn’t meddle with financial bubbles was informed by the Fed’s disastrous efforts to pop the stock-market bubble in the late 1920s, which led to the 1929 stock-market crash and contributed to the Great Depression. That view was reinforced when the Bank of Japan’s pricking of the late 1980s’ stock-market bubble shepherded in a decade of economic stagnation.
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The Fed’s view on bubbles helped fuel what became known as “the Greenspan put” — the conviction among investors that the Fed would let them take excessive risks and step in as custodian if the bets they made went awry. By giving market participants an incentive to assume greater risk than they would have otherwise, the Fed’s laissez-faire position on bubbles may have contributed to the surge in credit that helped push housing prices skyward in the first half of this decade.
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“Monetary policy, for which we in the Federal Reserve are responsible, is a blunt instrument with economy-wide effects,” said Federal Reserve Bank of Minneapolis President Gary Stern. “We should not pretend that actions taken to rein in those asset-price increases, which seemingly outstrip economic fundamentals, won’t in the short run curtail to some extent economic growth and employment.”
Fed officials are leaning toward regulating financial firms with more of a focus on how they are contributing to risk throughout the financial system. This approach could also have drawbacks, said Princeton economist Hyun Song Shin.
“These Wall Street people are very intelligent, and their incentives are so vast that they’re going to find a way to go around the rules you set down,” he said. “Leaning against the wind by raising interest rates in the face of what seems like a credit boom is one way of at least damping down on potential excesses.”
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Greenspan’s most disturbing legacy sprang from a different source. As a young man he found in Ayn Rand the moral guidance he felt he needed for the rest of his life. Rand, founder of a libertarian philosophy she later termed “objectivism”, had made virtues out of individualism and enlightened self-interest, and was deeply suspicious of all collective effort. Greenspan grew to share Rand’s views. In particular, he was sceptical about efforts to help the less fortunate. “What attracted me to Reagan”, he explains, “was the clarity of his conservatism which was to say that tough love is good for the individual and good for society.” This “implies much less government support for the downtrodden”.
Bill Clinton was elected in 1992, in part to reverse what Reagan had wrought. Clinton promised to provide all Americans with the health care, education, job training and other supports they needed in order to adapt to a fast-changing economy, as well as repair the nation’s roads, bridges and ports, which had been neglected for many years. Yet by the time Clinton came to office, the federal budget deficit had grown so large he had to trim his ambitions. Ironically, that deficit had ballooned largely because Ronald Reagan had cut taxes and increased spending, mostly on the military. Although he was chairman of the Federal Reserve Board during Reagan’s final years in the White House, Greenspan’s memoirs don’t suggest he warned Reagan against the widening deficit. It seems more likely that Greenspan agreed with Reagan and others in his administration that deficit spending as Reagan undertook it would serve to “starve the beast”, forcing any subsequent Democratic President – such as Bill Clinton – to offer less support to the downtrodden.
The question we faced at the start of the Clinton administration (I was a member of Bill Clinton’s Cabinet) was how much deficit reduction was necessary, and how much of Bill Clinton’s original agenda would have to be jettisoned as a result. Greenspan urged Clinton in no uncertain terms to mak
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Alan Greenspan and Ayn Rand, Financial Crisis Roots, Congressional Testimony | wowOwow
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“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.”
So said former Fed Chairman Alan Greenspan in his dramatic testimony before the House Committee on Oversight and Government Reform, as he was grilled by committee members on the causes of the nation’s financial crisis. Greenspan, whose laissez-faire capitalist leanings led him to reject decades of calls for more robust government oversight of financial markets, was repeatedly interrupted by the lawmakers in a contentious exchange that clearly shows the gloves are off in regard to the former chairman’s legacy.
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To readers of Atlas Shrugged,
Ayn Rand’s 1957 magnum opus, Greenspan’s hands-off philosophy of marketplace management sounds very familiar. At its core, the book supports a radically utopian political-economic system called Objectivism, which suggests that the morality of rational self-interest, as opposed to religious or government intervention, should be the foundation of the ideal political structure.According to a short description of Objectivism given by Ayn Rand in 1962, “The ideal political-economic system is laissez-faire capitalism … In a system of full capitalism, there should be (but, historically, has not yet been) a complete separation of state and economics, in the same way and for the same reasons as the separation of state and church.”
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In other words, Ayn Rand’s theory of the “morality of self-interest” exactly parallels Alan Greenspan’s testimony today about his now-shaken belief in the ability of “self-interest of lending institutions to protect shareholder’s equity.”
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Greenspan’s critics have long charged that his refusal as Fed Chairman to impose greater government regulations on mortgage lenders is one of the causes of the sub-prime mortgage meltdown.
Committee Chairman Harry Waxman (D-CA), in a heated exchange told the former Fed Chairman that he had “the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others, and now our whole economy is paying the price.”
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Archive for November, 2008
what I’m reading 11/26/2008
Posted by rosshunter on November 26, 2008
Posted in Uncategorized | Leave a Comment »
what I’m reading 11/25/2008
Posted by rosshunter on November 25, 2008
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The End of Wall Street’s Boom – National Business News – Portfolio.com
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The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.
But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.
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