Mr Greenspan finds a flaw
Alan Greenspan is funny too.
[A] humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.
A state of shocked disbelief…that people who ran lending institutions were more excited about their own bonuses and profits than they were attentive to shareholders’ equity. Is it just me or does that seem ever so slightly naïve?
Not quite just me; Henry Waxman had a similar thought.
“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?” Mr. Greenspan conceded: “Yes, I’ve found a flaw.”
Ah, have you! Well spotted!
Mr. Waxman noted that the Fed chairman had been one of the nation’s leading voices for deregulation, displaying past statements in which Mr. Greenspan had argued that government regulators were no better than markets at imposing discipline. “Were you wrong?” Mr. Waxman asked. “Partially,” the former Fed chairman reluctantly answered, before trying to parse his concession as thinly as possible.
How would things be looking now if you’d been entirely wrong?
Just in case we think that the big bonuses are a thing of the past, banks receiving infusions of cash from the US government have already set aside about 20 billion dollars (yes, billion) for the upcoming bonus round, according to CNN. Greenspan might have spotted a flaw(!), but no one has put their finger in the dyke. Isn’t it about time that acknowledging a flaw means that something has to change?
In fairness to mr Greenspan there is plenty of blame to go round, a lot of these sub prime loans were semi political,in an effort to end what used to be called red lining a lot of bad loans were made on property in less than prime locations.
“In fairness to mr Greenspan there is plenty of blame to go round, a lot of these sub prime loans were semi political,in an effort to end what used to be called red lining a lot of bad loans were made on property in less than prime locations.”
| Richard. | 2008-10-26 – 07:57:38 |
Come on, Dick. Spit it out. You’re talking about “those people”, aren’t you?
mcb,
‘those people’ does that include ‘that guy’?
In fairness to OB, I nowhere said that Greenspan is the sole source of blame. I didn’t imply it, I didn’t suggest it, I didn’t intend it; that was not the subject of the post. Saying there is plenty of blame to go around misses the point of the post by several thousand miles.
I’m getting so sick of this…
Y’know, when I first saw the right-wing talking heads bring out 30-yr-old legislation as the root cause [hell no, not the root cause, the enabling factor for the root cause, which was dumb n***ers screwing up the righteous white purity of the US housing market, let’s be straight about what they were implying].. phew, anyway, when I first saw that garbage being spouted, I really did ask myself if there was anyone stupid and blinkered enough to fall for such an obvious racist piece of scapegoating claptrap.
And now I know.
That’s Dick’s cue to engage in his patented brand of mealy-mouthed non-retraction retraction.
Oh gawd – I didn’t even read the rest of Richard’s comment.
Richard…please stop it.
To repeat, the legislation that lies behind this talking-point is over 30 years old. The various financial instruments responible for the collapse of confidence in the financial markets were not even dreamed of back then. They were invented by people operating in relatively-unregulated sectors of the markets – sectors kept relatively unregulated by the active engagement of politicians influenced by their own ideologies and by well-paid lobbyists and other shills – in order to make piles and piles of money for the already-wealthy. This is not disputable [except in the sense that one can come up with garbage reasons for disputing anything]. This was a glorious morning for the free-market radical right, as the money flowed as if by magic. Then it turned to sh*t, and so the roaches came out of the woodwork to blame Jimmy Carter.
Give. Me. A. Break.
ChrisPer, I’m guessing that you (again) don’t know what you’re talking about. You perhaps don’t know what ‘redlining’ means. But then (again) if you don’t know, you should be more cautious in your denunciations. If you do know, your denunciation is simply nonsensical.
Thanks for the illumination G.
I will read the article.
Next time you could just take my word for it. It’s quicker, and it gets you to the same place.
Thank you G. You don’t know how widespread this particular meme is-that the crisis is because of the CRA and the poor.
I think the real underlying problem is a cultural one-a get rich quick culture that demands consumption at all costs. This is a universal problem which our modern economy and media culture depends on. It’s funny how we “War on Drugs” yet our entire economy is based on an equally unhealthy consumerism. Does a family of three really need a 4,000 square foot house and three cars? As someone who allowed himself the full range of this particular addiction, I speak from experience. :(
Spot on, BrianM. I think the worst of the predatory lenders targeted the exact same demographic as that most insidious and effective government-sponsored scam, the lottery: Poor, desparate people who have no real opportunity to achieve the bogus American dream of riches they’ve been fed their whole lives.
The lottery is a tax on people who can’t do math, as the old quip goes – and, I would add, those who lack critical thinking skills. Bad mortgages? Same thing, except that people lose their homes and tens of thousands of dollars instead of a couple bucks a week.
Hey…a buk or two a week is fine for a fantasy. Better than buying a soda. :)
Yeah but it’s more than a buck. I know poor people who actually budget substantial sums for the lottery – $20, $40 a week.
Desperation, I guess.
Not disagreeing at all vis a vis the cynicism of a State-run lottery. Or the horrors of tribal casino culture.
Is Brad deLong left-wing enough for you, G?
http://www.prospect.org/cs/articles?article=republic_of_the_central_banker
“The current financial crisis has its roots in Greenspan’s decision to keep interest rates very low in 2002 and 2003 to head off the danger of a deflation-induced double-dip recession, and his subsequent decision that the costs of cleaning up after a housing bubble were likely to be less than the costs of the high unemployment that would be generated by a preemptive attempt to pop a housing-speculation bubble. Two years ago, I would have said that Greenspan’s judgment here was correct. Six months ago, I would have said that his judgment was probably correct. Today — in the middle of the largest nationalizations in history — I can no longer state that Greenspan made the right calls with respect to the level of interest rates and the housing bubble in the 2000s.”
So the mistake that was the root cause of the problem would have been made by deLong too.
It’s fine to slam one political argument about the cause of the mess as long as you recognize that the mess would have occurred if the other side had been in power too.
see http://www.aei.org/docLib/20080930_Binder1.pdf for a sophisticated exposition of one right-wing view of what went wrong at Fannie Mae and Freddie Mac.
‘Fannie Mae and Freddie Mac purchased and guaranteed “many more low-documentation, lowverification
and non-standard” mortgages in 2006
and 2007 “than they had in the past.” He said the companies increased their exposure to risks in 2006 and 2007 despite the regulator’s warnings.
Roughly 33 percent of the companies’ business involved buying or guaranteeing these risky mortgages,
compared with 14 percent in 2005. Those
bad debts on mortgages led to billions of dollars in losses at the firms. “The capacity to raise capital to absorb further losses without Treasury Department support vanished,” Lockhart said.’ [Lockhart is director of the Federal Housing Finance Agency]
Note the years .
Sound like the ‘meme’ that the right-wing analysis is completely wrong needs a fact-check too.
By 2006 the Fannie/Freddie’s had long since ceased to be the pseudo-governmental organs they originally were, and were overt players in the bubble market, driven by financial rather than political considerations – or have you forgotten who was in charge of the US Govt in 2006? [Or are you, indeed, arguing that it was GWB who did this?] Either way, 2006, the start year referenced above, is an awful long way from the 1970s legislation that dear Richard started by spouting about near the top of the thread.
Welcome back, Dave.
The last time we disagreed you claimed there were thousands of scientific papers on climate models predicting the climate. When I produced an expert on the subject explicitly contradicting that claim you did not reply. Will this turn out the same I wonder?
Anyway, “By 2006 the Fannie/Freddie’s had long since ceased to be the pseudo-governmental organs they originally were, and were overt players in the bubble market, driven by financial rather than political considerations “
is a nice rhetorical manouevre but I point out that the American political system does not work that way. A minority party can get its way in some areas in a way impossible in countries like the UK.
As the AEI report I linked to above puts it, “Fannie and Freddie reaped significant benefits from the careful management of their political risk. In June 2003, in the wake of the failures of Enron and WorldCom, Freddie’s
board of directors suddenly dismissed its three top officers and announced that the company’s accountants had found
serious problems in Freddie’s financial reports. In 2004, after a forensic audit by OFHEO, even more serious
accounting manipulation was found at Fannie, and Raines, its chairman, and Timothy Howard, its chief financial officer, were compelled to resign.
It is eloquent testimony to the power of Fannie and Freddie in Congress that even after these extraordinary events there was no significant effort to improve or enhance the powers of their regulator. The House Financial
Services Committee developed a bill that was so badly weakened by GSE lobbying that the Bush administration
refused to support it. The Senate Banking Committee, then under Republican control, adopted much stronger legislation in 2005, but unanimous Democratic opposition
to the bill in the committee doomed it when it reached the floor. Without any significant Democratic support, debate
could not be ended in the Senate, and the bill was never brought up for a vote.”
Note, by the way, just who were in favour of better regulation and who were against.
As regards the 1970s point, I was just refuting G’s implicit argument that there has to be close temporal alignment between causes and effects. I gave this example of very close temporal alignment where the consequences are to damn his favoured party. If he rejects my example and the longer-term argument from Richard then he has to tell us what temporal alignment he will accept.
There are no laws of our universe that prevent causes that are in operation for a long time to be without seriously bad effects until a long time has passed.
Well done, Dave. At least this time you gave a response, even if it’s just more rhetoric unsupported by evidence.
Do you have anything to refute the evidence that the lack of proper regulation of Fannie Mae and Freddie Mac was mainly down to the Democratic party? And that it was Republicans who wanted this regulation?
From the horse’s mouth:
http://gregmankiw.blogspot.com/2008/09/distorting-history.html
“If Senator Obama really wants to transcend partisan politics, as he would sometimes have us believe, he might want to give a slightly more balanced view of the history of how this all started. He also might want to take note that the Bush administration warned about some of these problems five years ago and had its reform efforts stymied by prominent members of Senator Obama’s own party.”
Mankiw was deeply involved in these efforts – see http://www.economics.harvard.edu/faculty/mankiw/files/fanfred_ft.pdf.
OK, it goes like this: I don’t agree with you. If I could be bothered, I could, as you must surely know, dredge up from the intertubes people of at least equal standing to your favoured examples to say the exact contrary of what they do. [Partisan hackery is not in short supply. Greg Mankiw, for example, apart from spending several years working directly for the GWB administration, also works for the American Enterprise Institute. For those two reasons alone, nothing he says will ever be taken seriously by me, or millions of other people.] We could do this for a long time. It would be pointless. We could also descend to abuse. That would be quicker, would get the blood flowing a bit faster, but would also be pointless.
Neither you, nor anyone whose views you appropriate to your argument, will be persuasive on matters of disagreement where there is an equal weight of evidence for other interpretations, and where the views you prefer are also the ones preferred by, for example, in this case, the deeply corrupt, immoral persons who currently run the Republican Party. If they told me the sun was going to rise in the east tomorrow, I’d get a second opinion from someone I trusted NOT to be a lying sack of shit.
And a very good day to you, sir.
You are brilliant at rhetoric! You have not produced one bit of evidence to back your argument so airily dismiss what evidence I produced. And all this from an academic email address!
BYW Mankiw is a professor at Harvard.
So what if he’s a professor at Harvard? In what parallel universe does that not mean he can be a partisan hack too? Has not the latest winner of the Economics Nobel been roundly condemned as just such a creature by those who would uphold the AEI’s vision of reality? Have you really never noticed how dedicated economists are to shilling for their own version of reality, no matter how incompatible it is with anyone else’s? You expect me to write you a 5000-word research paper or something?
I’m sure at some level this exchange is amusing you, but I’ve already clearly stated why it is a waste of time, so I am closing it, finally, now. No doubt your response will be clever and snarky, but rest assured I will not read it.
I expect you to provide some evidence for your statements. We are talking about contingent reality, not propositions from Euclid.
Even if what all my sources were liars they could still be telling the truth in this case. Do you think someone defending a Ph.D thesis can hold up some opposing views, declare them to be from dishonest sources and then expect his thesis to be accepted?
Since G, to whom I was responding, is a fan of Obama, deLong should be left-wing enough for G to take his opinions seriously. I was try to get past any partisan blinkers G might have.
The excellent British financial journalist/commentator John Plender, in his book “Going off the rails”, has some intriguing comments on financial regulation, made more interesting for having been made in 2003.
I give one quote, from a chapter called “Dr Pangloss comes to Wall Street”.
“The paradox lies in the fact that despite huge resources being poured into the technology of risk management, everyone in high finance knows that risk management is fundamentally flawed… Andrew Crockett, the central bankers’ banker, puts it like this:
‘Indicators of risk tend to be at their lowest at or close to the peak of the financial cycle i.e. just at the point where, with hindsight, we can see that risk was greatest… There is a sense in which risk accumulates during upswings, as financial imbalances build up, and materialises in recessions. The length of the horizon here is crucial is crucial. Yet, so far, the ability to anticipate and hence prepare for the rainy day has proved inadequate’.
Worse, the system of capital charges imposed on banks encourages them to over-lend in booms and under-lend in recessions. This is Alice in Wonderland territory – not least because a proposed reform of the regulatory regime for bank capital..[comment by PP: see http://en.wikipedia.org/wiki/Basel_II ].. threatens to exacerbate existing flaws instead of eliminating them. Some of the world’s best monetary economists have concluded that the new system is so perversely designed that it will, in and of itself, produce crashes”.
Regulation has not worked because we have been unable to properly determine the risk. The scary thought is that we may never overcome this problem.