Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, October 23, 2008

Greenspan Rings Hollow

Alan Greenspan testified before Congress today. He is just shocked, shocked I say over this credit crisis! He had no idea that it would get THIS bad!

He admits that more regulation was necessary and it was an error on his part to have let things go unregulated for so long. Now I am not an expert on financial regulation, but if I recall, it was Mr. Greenspan who refused to raise interest rates.

He was surprised that banks did do more to protect their stockholders and then blamed over-eager investors for the current problems. Well, the first part of his argument showed a fundamental flaw of logic, the second part is probably a fair statement. We operate on a quarterly system and stockholders expect to see rising profits and values every quarter. The only way banks could do that was by making more loans and selling the securities. And the demand for securities was so high, that all sorts of crazy deals were done, as we now know. And so, to my friends in England and France who like to blame all of this on the US, your markets willingly bought these securities and contributed to the market hunger for them. No one held a gun to the head of HSBC and made him buy them. We are all in this together!

The truth is that Greenspan refused to raise interest rates and dampened one bust (tech bubble) by allowing another one to inflate, and then his policies sustained the inflation. He himself talked about "irrational exuberance". But that didn't move him to start regulating.

Another observation: every day we are hearing about another $150 bil here and there that is being spent to prop up the financial system. It is unclear to me if we are doling out the original $700 bil in $150 bil in increments or if this is like the Iraq war where we add one appropriation after another, but don't count it the overall budget. If the former is the case, I promise you all we are printing money. So wait about 3 years and that $4.00 gallon of milk will be costing you $7.00!

7 comments:

The Law Talking Guy said...

I actually read Greenspan's autobiography, "The Age of Turbulence." He is a disciple of Ayn Rand. He knew her personally and was a strong and long-time devotee. He really believed her pile of garbage. He was always uncomfortable with being a central banker.

THAT is why he doesn't understand what happened. He is shocked, shocked, that "hands off" turned out to be wrong.

Raised By Republicans said...

"We're all Keynesians now." - Richard Nixon (1972)

Dr. Strangelove said...

Quick note: Milton Friedman said "We are all Keynesians now" in 1964. Nixon may also have echoed it later.

The Law Talking Guy said...

Ah, but can you pronounce it correct? I believe it sounds like "canes" not "keens"

Raised By Republicans said...

I believe it's pronounced

\ˈsō-sh(ə-)list\

;-)

Uswest said...

Interesting. I didn't know he was an Ayn Rand follower. But it totally makes sense now that I know it. And he wasn't the only one of our decision makers who believed Ayn Rand. That much is now apparent.

Spotted Handfish said...

I share the frustration with Mr Greenspan. His attitude has always been that the Reserve should mop up after a bubble bursts, which is fine as long as you don't have some fundamental flaw in your regulations, or that there aren't other influences on the system such as other countries keeping their currency pegged low.

I'm not sure what is the situation with regards to US is adding amounts to the original $700B, but the costs aren't going to be that high. My understanding is that they are swapping current assets which no-one will buy due to the gummed up money markets for treasury bonds with such a low yield there is practically no interest paid. The assets that the government are getting are at a discount, so in the long term, even with defaults, the government may even make a profit. People want treasury bonds because there is no risk of default (by definition the government can raise taxes or print more money to cover them). That is of course assuming you are a large enough country and not someone like Iceland (the banks they nationalised had a combined debt something like four times GDP).

I guess this seeming like a US problem was always going to happen. It appeared in the US first through the subprime mess, but when you think about it the US economy is so large it was dragging everyone else along with it so probably had to appear in the US first.