March 22, 2010
On Friday, March 19, former Federal Reserve chair, Alan Greenspan appeared before the Brookings Institution to present his 48-page paper entitled, “The Crisis”. The obvious subject of the paper concerned the causes of the 2008 financial crisis. With this document, Greenspan attempted to add his own spin to history, for the sake of restoring his tattered public image. The man once known as “The Maestro” had fallen into the orchestra pit and was struggling to preserve his prestige. After the release of his paper on Friday, there has been no shortage of criticism, despite Greenspan’s “enlightened” change of attitude concerning bank regulation. Greenspan’s refusal to admit the Federal Reserve’s monetary policy had anything to do with causing the crisis has placed him directly in the crosshairs of more than a few critics.
Sewell Chan of The New York Times provided this summary of Greenspan’s paper:
Mr. Greenspan, who has long argued that the market is often a more effective regulator than the government, has now adopted a more expansive view of the proper role of the state.
He argues that regulators should enforce collateral and capital requirements, limit or ban certain kinds of concentrated bank lending, and even compel financial companies to develop “living wills” that specify how they are to be liquidated in an orderly way.
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. . . Mr. Greenspan warned that “megabanks” formed through mergers created the potential for “unusually large systemic risks” should they fail.
Mr. Greenspan added: “Regrettably, we did little to address the problem.”
That is as close as Greenspan came to admitting that the Federal Reserve had a role in helping to cause the financial crisis. Nevertheless, these magic words from page 39 of “The Crisis” are what got everybody jumping:
To my knowledge, that lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble.
The best retort to this denial of reality came from Barry Ritholtz, author of Bailout Nation. His essay entitled, “Explaining the Impact of Ultra-Low Rates to Greenspan” is a must read. Here’s how Ritholtz concluded the piece:
The lack of regulatory enforcement was a huge factor in allowing the credit bubble to inflate, and set the stage for the entire credit crisis. But it was intricately interwoven with the ultra low rates Alan Greenspan set as Fed Chair.
So while he is correct in pointing out that his own failures as a bank regulator are in part to blame, he needs to also recognize that his failures in setting monetary policy was also a major factor.
In other words, his incompetence as a regulator made his incompetence as a central banker even worse.
Paul La Monica wrote an interesting post for CNN Money’s The Buzz blog entitled, “Greenspan and Bernanke still don’t get it”. He was similarly unimpressed with Greenspan’s denial that Fed monetary policy helped cause the crisis:
This argument is getting tiresome. Keeping rates so low helped inflate the bubble.
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“The Fed wasn’t the sole culprit. But if not for an artificially steep yield curve, we probably would not have had a global financial crisis,” said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala.
“Greenspan and Bernanke are missing the point. It all stems from monetary policy,” Norris added. “If you give bankers an inducement to lend more than they ordinarily would they are going to do so.”
From across the pond, Stephen Foley wrote a great article for The Independent entitled, “For the wrong answers, turn to Greenspan”. He began the piece this way:
The former US Federal Reserve chairman, the wizened wiseman of laissez-faire economics, shocked us all — and probably himself — when he told a congressional panel in 2008 that he had found “a flaw in the model I perceived is the critical functioning structure that defines how the world works, so to speak”. He meant that he had realised banks cannot be trusted to manage their own risks, and that markets do not smoothly self-correct.
But instead of taking that revelation and helping to point the way to a new, post-crisis financial world, he has shuddered to an intellectual halt. It is the same intellectual stop sign that Wall Street’s bankers are at. The failure to move forward is regrettable, dangerous and more than a little self-serving.
These reactions to Greenspan’s paper are surely just the beginning of an overwhelming backlash. The Economist has already weighed in and before too long, we might even see a movie documenting the Fed’s responsibility for helping to cause The Great Recession.
A Preemptive Strike By Tools Of The Plutocracy
The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009. The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry. As I pointed out on April 15, more than a few commentators had been expressing their disappointment with the FCIC. Section (5)(h)(1) of the FERA established a deadline for the FCIC to submit its report:
In light of the fact that it took the FCIC eight months to conduct its first hearing, one shouldn’t be too surprised to learn that their report had not been completed by December 15. The FCIC expects to have the report finalized in approximately one month. This article by Phil Mattingly and Robert Schmidt of Bloomberg News provides a good history of the partisan struggle within the FCIC. On December 14, Sewell Chan of The New York Times disclosed that the four Republican members of the FCIC would issue their own report on December 15:
Beyond that, Shahien Nasiripour of the Huffington Post revealed more details concerning the dissent voiced by Republican panel members:
I gave those four Republican members more credit than that. I was wrong. Commission Vice-Chairman Bill Thomas, along with Douglas Holtz-Eakin, Peter Wallison, and Keith Hennessey issued their own propaganda piece as a preemptive strike against whatever less-than-complimentary things the FCIC might ultimately say about the Wall Street Plutocrats. The spin strategy employed by these men in explaining the cause of the financial crisis is to blame Fannie Mae and Freddie Mac for the entire episode. (That specious claim has been debunked by Mark Thoma and others many times.) This remark from the “Introduction” section of the Republicans’ piece set the tone:
Many economists and other commentators will have plenty of fun ripping this thing to shreds. One of the biggest lies that jumped right out at me was this statement from page 5 of the so-called Financial Crisis Primer:
That lie can and will be easily refuted — many times over — by the simple fact that a large number of essays had been published by economists, commentators and even dilettantes who predicted the housing collapse.
Yves Smith provided a refreshing retort to the Plutocracy’s Primer at her Naked Capitalism website:
The fact that a pre-emptive strike by the Plutocratic “Gang of Four” has been initiated with the release of their Primer could indeed suggest that that their patrons are worried about the ultimate conclusions to be published by the FCIC next month. The release of this Primer will surely draw plenty of criticism and attract more attention to the FCIC’s final report. Nevertheless, will the resulting firestorm motivate the public to finally demand some serious action beyond the lame “financial reform” fiasco? Adam Garfinkle’s recent essay in The American Interest suggests that such hope could be misplaced:
Will this situation ever change?
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