NationStates Jolt Archive

"I have found a flaw," said Greenspan, referring to his economic philosophy.

Well he didn't 'find' it so much as it came banging on the world's door.

"I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms," said Greenspan.

Yes, there's a distinction between profiteering and protecting.

The full question and answer:

Congressman Henry Waxman "My question is simple. Were you wrong?"

Greenspan "Partially ... I made a mistake in presuming that the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ... I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well. The overall view I take of regulation is, I took an oath of office when I became Federal Reserve chairman. I'm here to uphold the laws of the land passed by Congress, not my own predilections."

My question is, should that be it, go home, sit on your retirement and get some rest?

My question is, should that be it, go home, sit on your retirement and get some rest?

What else do you want from him? He hasn't chaired the Reserve since 2006.

What else do you want from him? He hasn't chaired the Reserve since 2006.

I want an angry mob tearing limb from limb, riots in the city centre and chaos on the streets of New York, but I'm a little bored at the moment and could do with the distraction.

This actually struck me as the most shocking news of the day. How long was Greenspan held up as some kind of financial Yoda or Gandalf or something, relied upon for the last official word on economic wisdom? And to hear him not only admit that his approach screwed our shit up, but to look up at Waxman with that lost look on his face and talk about how he just doesn't understand where it all went wrong, that it never occurred to him that, if you set up a system that rewards corrupt and reckless practices with amazing profits and no consequences, financial institutions would engage in corrupt and reckless practices with abandon rather than regulate themselves -- well, I was just a bit gobsmacked. I really wondered how lost the economic wonks of the world must be now. Do they all feel the way Greenspan looked today? Because without their Gandalf, they really do have nothing left. I don't think this old man is going to return as Greenspan the White to guide them out of confusion, and I also don't think we will learn that Frodo still lives. Not this time.

This actually struck me as the most shocking news of the day. How long was Greenspan held up as some kind of financial Yoda or Gandalf or something, relied upon for the last official word on economic wisdom? And to hear him not only admit that his approach screwed our shit up, but to look up at Waxman with that lost look on his face and talk about how he just doesn't understand where it all went wrong, that it never occurred to him that, if you set up a system that rewards corrupt and reckless practices with amazing profits and no consequences, financial institutions would engage in corrupt and reckless practices with abandon rather than regulate themselves -- well, I was just a bit gobsmacked. I really wondered how lost the economic wonks of the world must be now. Do they all feel the way Greenspan looked today? Because without their Gandalf, they really do have nothing left. I don't think this old man is going to return as Greenspan the White to guide them out of confusion, and I also don't think we will learn that Frodo still lives. Not this time.

Despite my flippancy, I also found it to be the most interesting bit of news, not to the extent of a LOTR analogy but close enough to light a cigar.

Sometimes I look at everything and think 'it's all winging it really', but then I think that those leading us must know something I don't, see something I can't and I reassure myself in this way.

We're sleepwalking through history - that phrase grows ever larger in my thoughts, from describing specific events such as Iraq and the financial crisis to the overall state of affairs.

We're sleepwalking through history - that phrase grows ever larger in my thoughts, from describing specific events such as Iraq and the financial crisis to the overall state of affairs.
Hate to tell you this, but humanity has been doing that since the very beginning.

Thus is life.

Hmm - if only people listened to John Maynard Keynes and Dwight David Eisenhower. Why is it that in America if you have the loudest mouth and the best beer drinking habits "have a beer with Bush" you win, whereas if you have countless years of experience you lose. If Gore was president, this wouldn't have happened. Remember to vote as Fox News tells you to in 2008 and remember to keep on watching that fair and balanced network, and CNN - the most trusted name in news!

Very interesting bit of news. Wow.

He was lying. What he said doesn't actually reflect the record of how he behaved when he was Fed. Chair.

He's right in the sense that all else being equal the self interest of organizations will tend to ensure that they behave in a way that protects their capital; for if they don't, they go bankrupt and there are all sorts of lawsuits and whatnot. But in order for that type of behavior manifest there has to be market discipline, i.e., banks etc. must bear the consequences of their own bad decisions. Under Greenspan however, everything possible was done to remove market discipline. Junk bond problems? We'll he'll change the reserve requirements. Mexican debt default problems? Ha, just bail out mexico. LTCM, no problem! Dot com bubble, just drive interest rates down to zero and blow a housing bubble. Banks were constantly protected from the consequences of poor decisions and excessive risk appetite. So from their perspective it was silly not to take those risks. (Not that I am justifying it, I am only explaining the climate).

After twenty years of making sure that no one bears the consequences of their bad actions its pretty obvious that firms that don't engage in excessive risk taking behavior will be marginalized because they just won't generate the returns that firms who are properly hedged/risk averse. This means their stock price goes down, and the management gets replaced until they also start to take the same risks (it also explains why private organizations like BBH who don't have to answer to public stock holders were able to avoid taking some of these risks).

Naturally this is only part of the reason why there is such a mess now, but it's important to remember that these are the conditions that Greenspan himself created. He's well aware of it. This belated mea culpa is just his way of avoiding having to make more embarrassing admissions of failure. Basically, had he let people sink in 98 (after which things really started to get insane, because there was a clear message that the government was prepared to protect banks from any foolish risk taking) then we probably wouldn't have the mess we do now.

My question is, should that be it, go home, sit on your retirement and get some rest?

In a weird way, this actually confirms Greenspan's beliefs that government regulation is ineffective, at best.

In a weird way, this actually confirms Greenspan's beliefs that government regulation is ineffective, at best.

When you're in charge of government regulation and believe them to be ineffective... like duh, self-fulfilling prophecy?

Lacadaemon has it right. He constantly interfered in the market with his decisions, "managing" one crisis after the other and thus contributing significantly to a climate that in the end finished with a crisis too big to manage. I don't know whether he actually believes what he's saying right now, but it's BS nonetheless. It's actually pretty annoying for him to now make public comments on fundamental issues like whether or not markets work (or make comments that are necessarily going to be reported that way in the media).

At any rate, it seems to me like his big failure with regards to the current mess was the way he viewed securitisation as an effective way to make risk disappear. That's stupid, but not really an issue of ideology.

I really wondered how lost the economic wonks of the world must be now. Do they all feel the way Greenspan looked today? Because without their Gandalf, they really do have nothing left.
I have yet to meet an economic wonk who thinks Greenspan was as great as you say they think he is.

He had one brief moment of genius in the nineties, when he was still new. Prices looked like they were going down, people in the Fed were wondering whether deflation was on the cards, and he put his foot down, attributed it to productivity gains thanks to IT and made sure the Fed didn't interfere. That's it.

Volcker, now there's a Fed chairman for you most people will think is pretty cool. He really needs to be brought back with a vengeance.

If Gore was president, this wouldn't have happened.
Evidence?

Hmm - if only people listened to John Maynard Keynes and Dwight David Eisenhower. Why is it that in America if you have the loudest mouth and the best beer drinking habits "have a beer with Bush" you win, whereas if you have countless years of experience you lose. If Gore was president, this wouldn't have happened. Remember to vote as Fox News tells you to in 2008 and remember to keep on watching that fair and balanced network, and CNN - the most trusted name in news!Hard to say. It probably would have happened, anyway, seeing as Bush's part in it is relatively limited and it's unlikely Gore would have pushed for more regulation considering how entrenched the financial gurus are. However, we probably wouldn't have Iraq weighing on public debt in addition to the crisis...

I have yet to meet an economic wonk who thinks Greenspan was as great as you say they think he is.

He had one brief moment of genius in the nineties, when he was still new. Prices looked like they were going down, people in the Fed were wondering whether deflation was on the cards, and he put his foot down, attributed it to productivity gains thanks to IT and made sure the Fed didn't interfere. That's it.

Volcker, now there's a Fed chairman for you most people will think is pretty cool. He really needs to be brought back with a vengeance.




I was referring to Greenspan's public image. You have to know, of course, that he really was presented to the general public as if he was the king of economic wisdom. To see this guy, who was the go-to guy for everything economy-related for so long, admit what many had been thinking but few would dare say out loud -- that he really had no idea what he was doing -- well, to me, that is, or should be, a scales falling from the eyes moment.

Maybe we shouldn't be so trusting of so-called authorities, after all, hm?

And here you are, wishing for Volcker...

Greenspan is completely lying his ass off, in some ways trying to cover himself by just claiming 'this is what seemed to be the best thing to do according to current economic knowledge', which of course, is bullshit.

I was referring to Greenspan's public image. You have to know, of course, that he really was presented to the general public as if he was the king of economic wisdom. To see this guy, who was the go-to guy for everything economy-related for so long, admit what many had been thinking but few would dare say out loud -- that he really had no idea what he was doing -- well, to me, that is, or should be, a scales falling from the eyes moment.


Well, Greenspan made a lot of people a lot of money...at the beginning. His guru status in the public eye didn't really get going until the late nineties after he kicked off the dot.coms (really a teleco bubble) in the aftermath of Long Term Capital Management's failure.

To be fair, he actually was warning about stock market excess in 1996 (go figure), but something happened to him after that. Drank his own cool-aid I expect.

His real shining moment, I would say was when he saved the exchanges in 87. But he got consistently weirder as he got older. Victim of his own ego really.

In any event, there were a lot of vested interests in promoting the man and keeping in the fed chair, because he had proved himself time and time again to be a friend of institutional money. He'd also always explain away the latest bubble for them too. So a great deal of effort was put in to promoting him as the 'maestro'. Take for example CNBC, which is owned by GE, which has a massive - and at that time, very profitable - finance arm.

Well first off - Gore would not have gone into Iraq. Secondly, there would have been no tax cuts for the rich. Also, Gore would have re-enforced the New Orleans' Levees, (thus not driving down the housing prices in the South US, where the crash began). Gore would have also lobbied for more efficient cars, and offered GM and Ford subsidies for producing those cars, i.e. those two wouldn't be dead in the water now. http://www.youtube.com/watch?v=1Z891rVFZlY GM wouldn't have comitted to the Hummer. Thus the oil demands would be reduced. The US Budget would be running at a surplus.

So when the housing crisis would have hit, Gore would have at least $5 trillion to stop it. If the rest of the economy was booming, the US could have EASILY recovered from the Housing Bust. Let's all remember the locked box: http://www.youtube.com/watch?v=wzakr36YAGI&feature=related

Plus Al Gore may have seen the housing crisis coming, because he wouldn't have been focused on the Iraq War so damn much!

To see this guy, who was the go-to guy for everything economy-related for so long, admit what many had been thinking but few would dare say out loud -- that he really had no idea what he was doing -- well, to me, that is, or should be, a scales falling from the eyes moment.
That's fine, but what does that have to do with "economic wonks"? We know better than the public when it comes to telling who is talking smack about economic issues.

Maybe we shouldn't be so trusting of so-called authorities, after all, hm?

And here you are, wishing for Volcker...
That's because Volcker was a pretty good Fed chairman, who had an understanding of the real economy and a solid footing in Wall Street at the same time. Bernanke is lacking in the latter department. I'm hardly the only one talking about him though, his name keeps coming up every time someone needs "expert opinion".

So when the housing crisis would have hit, Gore would have at least $5 trillion to stop it. If the rest of the economy was booming, the US could have EASILY recovered from the Housing Bust.
Well, first of all I really don't think he could have managed to save $5 trillion. But that's not really the point.

The US economy was going pretty well. I don't know how you define "booming", but a big housing bubble tends to give people money to spend, and a lower dollar was even helping out exporting manufacturers a little. But because real estate is so central to the spending behaviour of consumers, it doesn't really matter how well everything else is going, it's got potential to pull the floor from underneith everything.

And in trying to manage the crisis, money clearly wasn't an object. It wasn't like any rescue plan was prevented because it cost too much. You may, strangely, think that Al Gore would have all this money just sitting around ready for action, but that doesn't change the fact that when Bush needed it, there were ways to find it too.

I think everything else you said doesn't really have anything to do with the crisis. I certainly agree that Gore would have been a better president than Bush, and few people would disagree with that today. But that doesn't mean he would have magically foreseen everything and saved everyone.

Well, first of all I really don't think he could have managed to save $5 trillion. But that's not really the point.

The US economy was going pretty well. I don't know how you define "booming", but a big housing bubble tends to give people money to spend, and a lower dollar was even helping out exporting manufacturers a little. But because real estate is so central to the spending behaviour of consumers, it doesn't really matter how well everything else is going, it's got potential to pull the floor from underneith everything.

And in trying to manage the crisis, money clearly wasn't an object. It wasn't like any rescue plan was prevented because it cost too much. You may, strangely, think that Al Gore would have all this money just sitting around ready for action, but that doesn't change the fact that when Bush needed it, there were ways to find it too.

I think everything else you said doesn't really have anything to do with the crisis. I certainly agree that Gore would have been a better president than Bush, and few people would disagree with that today. But that doesn't mean he would have magically foreseen everything and saved everyone.

No on the $5 trillion? Well the Iraq War alone would have saved at least $2 trillion. Also, I don't find a bubble as booming. The best example of the bubble is a chain letter that says: "give me $5, and mail it to six other people". Eventually the bubble is going to burst. So I would never define the bubble as a booming economy. To me a booming economy consists of quality and quantity, i.e. the people work at the jobs that they're best at (which are most likely the jobs they want) and the unemployement is virtually non-existant, because that maximizes production and therefore booms the economy. A bust would be the exact opposite, with 1/3rd unemployement and Palin the Unqualified as president.

Also, Al Gore said that he would save money, by, instead of cutting taxes on those who make over $250k individually, place some of the government surplus in government trust funds. And money is a problem, the US Gov't. thinks that it can always print more money, but that's the exact logic that led to the Banking Crisis of 1929 - ouch! The dollar's gotta be worth something. I don't think that he would magically forseen everything and saved everyone, but he would have clearly prevented the housing market from becoming the disaster it is today, with 401ks losing around $400 billion, rather then $3 trillion, and then Gore would've refunded $400 billion, bought up the houses and rented them out to low income people who made no downpayment. So that's GM/Ford crisis solved, banking crisis solved, housing crisis - semi-solved. No risk of a depression, because right now only a moron would say that it's not a recession, or that the fundamentals of the US economy are sound.

He eliminated the natural rules of the system that he knew were there and then acted like the rules never existed.

Suppose 50 people were all in a room together. There is security, but there is no reason to assume that the people in the room would be uncivil to each other. Now assume all security leaves, but before they do, they decide to leave $100,000 dollars in cash in the middle of the room. Bedlam ensues, people are stampeded and beaten. Upon questioning the security guards say, "How were we to know that people just aren't civil to each other?"

That is what happened here.

Greenspan is a liar and a villain.

"save me ayn rand noooo"

We're sleepwalking through history - that phrase grows ever larger in my thoughts, from describing specific events such as Iraq and the financial crisis to the overall state of affairs.

Welcome to the world. You have no idea how stunned I was when I realized other people were human, and not all that different from me. I was shocked when I got my first internship in the field, and I discovered that these fancy experts you see on TV are just making it up as we go along.

I can only conclude that humanity has been doing this from day one, and that, tragically, it's the only method that works. There have been countless attempts to engineer society, and they've never succeeded.

And money is a problem, the US Gov't. thinks that it can always print more money, but that's the exact logic that led to the Banking Crisis of 1929 - ouch! The dollar's gotta be worth something.

I'm not sure what you're talking about here, because 1929 experience the exact opposite of monetary expansion, the money supply actually contracted. M2 fell by a third between 1929 and 1932, after all.

Pretty graph (http://www.econbrowser.com/archives/2005/10/dewald.jpg)

I'm not sure what you're talking about here, because 1929 experience the exact opposite of monetary expansion, the money supply actually contracted. M2 fell by a third between 1929 and 1932, after all.

I believe s/he's referring to the monetary expansion pre-crash. I think most economists on the left and right agree that it played a part, though generally both also agree that if the Fed had lowered interest rates agressively instead of pursuing a contractionary policy, as it did post crash, would have prevented the Great Depresssion.

Once again, I'm forced by everything I see and hear to believe that economics is voodoo.

Once again, I'm forced by everything I see and hear to believe that economics is voodoo.

Great, lets just print a hundred trillion dollars and give it to everyone! There's no reason to assume that anything will happen, since it's all voodoo, right?

Greenspan is completely lying his ass off, in some ways trying to cover himself by just claiming 'this is what seemed to be the best thing to do according to current economic knowledge', which of course, is bullshit.

And you would have done better?

Once again, I'm forced by everything I see and hear to believe that economics is voodoo.

You and me both.

Economics is fubar.

And you would have done better?

What the fuck? I'm not claiming anything of the sort.

What the fuck? I'm not claiming anything of the sort.

Then leave Greenspan alone. He is ancient.

Then leave Greenspan alone. He is ancient.

Why?

I'm just amused that people are only pissed at his policies when their ramifications actually came to pass. People loved him during the 90's, when cheap and easy credit powered bubble after bubble and the US economy rode the IT boom to record heights, but now that the effects of that credit expansion must be dealt with, they're ripping in to him. The amount of self-righteousness and anger directed towards Greenspan is rather laughable given their utter acceptance of excessive liquidity in years past.

They're lying just as much as he is, and it's wonderfully amusing.

I'm just amused that people are only pissed at his policies when their ramifications actually came to pass. People loved him during the 90's, when cheap and easy credit powered bubble after bubble and the US economy rode the IT boom to record heights, but now that the effects of that credit expansion must be dealt with, they're ripping in to him. The amount of self-righteousness and anger directed towards Greenspan is rather laughable given their utter acceptance of excessive liquidity in years past.

They're lying just as much as he is, and it's wonderfully amusing.

Hey, I was too young to even know about him in his prime. :D

I'm just amused that people are only pissed at his policies when their ramifications actually came to pass. People loved him during the 90's, when cheap and easy credit powered bubble after bubble and the US economy rode the IT boom to record heights, but now that the effects of that credit expansion must be dealt with, they're ripping in to him.

Why shouldn't they? They trusted his judgment and his advice, they believed him when he claimed that the negative ramifications we have seen wouldn't actually happen. He was dead wrong; they, quite rightly, feel betrayed.

The amount of self-righteousness and anger directed towards Greenspan is rather laughable given their utter acceptance of excessive liquidity in years past.

When the public trusts experts to do what they are supposed to be expert at, they refrain from exercising their own judgment. That's the entire point of the Federal Reserve structure. But it goes both ways: if the people in charge of the Fed are to be given free reign, they must also take full responsibility.

I'm just amused that people are only pissed at his policies when their ramifications actually came to pass. People loved him during the 90's, when cheap and easy credit powered bubble after bubble and the US economy rode the IT boom to record heights, but now that the effects of that credit expansion must be dealt with, they're ripping in to him. The amount of self-righteousness and anger directed towards Greenspan is rather laughable given their utter acceptance of excessive liquidity in years past.

They're lying just as much as he is, and it's wonderfully amusing.

Actually it seems that the only people what are actually ripping him for the right reasons now (credit expansion, not deregulation) were ripping him back then too.

No on the $5 trillion? Well the Iraq War alone would have saved at least $2 trillion.
That's Stiglitz' estimation of all economic costs of the war. Only a part of that would actually be government budget.

Also, I don't find a bubble as booming. The best example of the bubble is a chain letter that says: "give me $5, and mail it to six other people". Eventually the bubble is going to burst. So I would never define the bubble as a booming economy. To me a booming economy consists of quality and quantity, i.e. the people work at the jobs that they're best at (which are most likely the jobs they want) and the unemployement is virtually non-existant, because that maximizes production and therefore booms the economy. A bust would be the exact opposite, with 1/3rd unemployement and Palin the Unqualified as president.
What do your own definitions, which nobody else shares, have to do with anything?

The US had a bubble in real estate, but that doesn't mean the rest of the economy can't have been doing okay. Even the often maligned manufacturing industry was showing some potential after the Bear Stearns collapse, when the dollar tanked a bit.

Also, Al Gore said that he would save money, by, instead of cutting taxes on those who make over $250k individually, place some of the government surplus in government trust funds.
$5 trillion worth? Just tell me, how would he save half the country's GDP within 8 years? The Bush tax cuts cost the government about $340 billion p.a. in lost revenue (maybe less if there was a significant growth impact). Where does Al Gore find the rest?

And money is a problem, the US Gov't. thinks that it can always print more money, but that's the exact logic that led to the Banking Crisis of 1929 - ouch! The dollar's gotta be worth something.
I don't think you understand the mechanics of the Depression.

I don't think that he would magically forseen everything and saved everyone, but he would have clearly prevented the housing market from becoming the disaster it is today, with 401ks losing around $400 billion, rather then $3 trillion, and then Gore would've refunded $400 billion, bought up the houses and rented them out to low income people who made no downpayment.
Where are you taking these numbers from?

So that's GM/Ford crisis solved, banking crisis solved, housing crisis - semi-solved. No risk of a depression, because right now only a moron would say that it's not a recession, or that the fundamentals of the US economy are sound.
Right now it just looks to me like you're talking out of your backside.

Once again, I'm forced by everything I see and hear to believe that economics is voodoo.
"Forced" isn't the right word. You choose to, since you're quite willing to make statements like this by infering from examples you pick specifically for this purpose.

He eliminated the natural rules of the system that he knew were there and then acted like the rules never existed.

Suppose 50 people were all in a room together. There is security, but there is no reason to assume that the people in the room would be uncivil to each other. Now assume all security leaves, but before they do, they decide to leave $100,000 dollars in cash in the middle of the room. Bedlam ensues, people are stampeded and beaten. Upon questioning the security guards say, "How were we to know that people just aren't civil to each other?"

That is what happened here.

Greenspan is a liar and a villain.


God knows I have no esteem for the fucker, and I would certainly class him as a second rater, but I don't think I would say he was a pre-meditated villain.

You have to look at him in the context of his bailouts. Given that he is a rabid objectivist, most of his early crisis management could be classed as defending against the 'looters'. What he failed to realize is that people don't generally behave like Howard Roake, and also, looting behavior is just part of life and trying to stop it is futile. But then things started to run away from him, and he got into a hell of a mess. So he ended up trading on hope.

I've been thinking a lot about his testimony over the weekend, and I have changed my opinion insofar as I now think that he was genuinely shocked that CEO's won't always automatically behave in the most ethical fashion given the option, but rather tend to maximize their own short term gains. In other words he was shafted by his own ideological blindness.

Mind you, that doesn't mean he wasn't a crap fed chair. And I've never said otherwise.

Though really what I think about his motives is beside the point. He was still rubbish.

Though not as bad as Bernanke.