Monday, June 1, 2009

Greenspan's Blunder?

"If financial crises were distributed along a bell curve--like traffic accidents or people's heights--really bigones wouldn't happen very often. ... Financial crises will happen. ... For reasons to do with human psychology and the failure of most educational institutions to teach financial history, we are always more amazed when such things happen than we should be. ... In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. ... Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis--or predicted the wrong crisis (a dollar crash)--have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation. ... The German government likes to wag its finger disapprovingly at the 'Anglo-Saxon' financial model, but last year average bank leverage was four times higher in Germany that in the [US]. Schadenfreude will be in order when the German banking crisis strikes. ... The reality is that crises are more often caused by bad regulation than by deregulation. ... The biggest blunder of all had nothing to do with deregulation. For some reason, the [Fed] convinced itself that it could focus exclusively on the prices of consumer goosds instead of taking aset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble. ... The old Latin question is highly apposite here: Quis custodiet ipsos custodes? Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure", my emphasis, Niall Ferguson (NF), at the NYT, 17 May 2009, link:

I agree with NF. I saw the Fed's ignoring asset price changes as worse than a blunder. The Fed wanted an asset bubble and it got one. I think Alan Greenspan knew exactly what he was doing.


Anonymous said...

Whoa... Greenspan knew what he was doing?

If so then full blame for this debacle belongs to him... and full karma too... he'll rest in the Dante's 8th circle...

Jr Deputy Accountant said...


Any guess as to AG's motivation? I agree. You cannot tell me that he didn't know exactly what he was getting into. He's certainly smarter than that; I have read Greenspan's comments from waaaaay back in the day when he was still tied to reality, when he prescribed to the libertarian ideals he later took a long hard piss on during his Fed days, and I find it hard to believe that he just decided one day that imploding the economy one bubble at a time would be a good idea.

Unless maybe he went mad? Maybe he had an undiagnosed STD eating up his brain, or a parasite or something.

I look at Ben Bernanke and I see a man who was never equipped for his position. But AG, well he was just *made* to run the Fed, wasn't he? So of course he knew what he was doing. No one could ever convince me otherwise.

Bet he regrets having spent so much time talking about the importance of a gold standard back in the day more than he regrets what he did in his tenure at the Fed.


VBPOutSourcing said...

Would a mark to market tactic better regulate the asset values? Who would regulate the regulators is powerful here when you have assets that cannot be valued fairly by a party who knows nothing of the industry.

Independent Accountant said...

I don't think MTM makes all that much difference. The problem is the Fed's existence. The Fed can print money so it can ignore market signals that it is printing too much, i.e., price changes. The only check on the Fed is when people refuse to use dollars in exchange, lihe during a hyperinflation.

Anonymous said...

The discussion of the Fed's "proper" role ignores the fact that the Fed
is practicing price controls (on money).

In Greenspans book, The Age of Turbulence, there's a passage on page
297 where Greenspan describes his debate with Li Peng and Greenspan told
Li Peng that the US tried price controls (under Nixon) but learned that
they don't work and learned not to do them.

Apparently not.