The fall of Alan Greenspan is now complete as he admits he missed the bubble.
If Alan Greenspan's magical economic aura hadn't yet burst, it's now gone. Today's sad and grotesquely theatrical House Oversight Committee hearing at which ex-Fed chairman Greenspan testified, has confirmed that.
But it's not because of any of the absurd gotcha questions from electioneering Congressional representatives, the signs being waved around, or the single-cause allegations. ("It was Fannie! It was Freddie! It was the SEC! The ratings agencies!). Noisy, dumbed-down nonsense was sadly predictable with this financial crisis hearing scheduled just before a federal election.
The real issue is that Greenspan has driven home how badly he messed up in presiding over the creation of the largest credit bubble in U.S. history. He missed its causes, its expansion, and even possible fixes at every stage. Greenspan comes across as an adrift theoretician, an aficionado of models with no relevance to the real world. His comments on what is happening are strangely impersonal and dispassionate, like he is watching all of this happen from 20,000 feet overhead, not as someone complicit in what has happened.
In watching the carnage that he helped create, instead of sounding contrite, Greenspan acts more like a bystander at a slow-motion car-crash.
Consider, for example, this snippet of Greenspan's testimony today. He said, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief.” In short, Greenspan is saying that banks’ obliviousness to the best interests of their shareholders is a puzzle.
He should read more history. Because over and over again we have had banking crises in this country; we’ve had more than a dozen in the last 170 years. Over and over again, bank shareholders have taken it on the chin as banks collapsed and had to be bailed out or let fail. The essential issue, as Greenspan should well know, is that banks, as constituted, are inherently highly fragile institutions. They are prone to precisely this sort of shareholder wealth-destroying failure. Banks are best thought of as giant pieces of financial porcelain.
To be fair, in today's testimony Greenspan rightly pointed out that the current bubble wouldn't have happened without mortgage syndication. After all, if we hadn't have been able to break up mortgages into myriad pieces and sell them around the world without a trace left on the originators' books, we wouldn't have been able to keep the bubble going as long as we did.
Good point. I just wish he would have told himself that back in March of 2000. That was when the same Greenspan, then the Fed chair, said in a speech that it was increasingly possible to "reallocate risk" via the "creation, valuation and exchange of…complex financial products on a global basis.” Syndication, in other words, was wonderful. In his gushing comments back then there was nothing about how to make sure that securitized loans didn't create massive agency problems, passing off risk to someone else who cared less, and, as we have since discovered, making it impossible to renegotiate atomized loans.
The crux of the current crisis is the housing bubble, the vertigo-inducing expansion in U.S. house prices from 1996 to 2006. To see and take action on the crisis you had to see that bubble as it inflated, and then do something about it. Here is Greenspan on the subject from earlier today, "The housing bubble became clear to me sometime early in 2006, in retrospect." In other words, Greenspan only noticed the bubble as it began imploding. He implicitly argues that it was unforeseeable. But there were endless stories in the major media and warnings from serious economists, all yammering about the consequences of loose lending standards and a more than doubling of house prices in many major U.S. markets. It wasn't a question of foreseeing anything, just one of noticing what was in front of him—even if it didn't match his models.
But even if Greenspan had seen a bubble, he had another confession to make. According to his comments today, "I did not forecast a significant decline because we have never had a significant decline in [house] prices." Sorry, no. The U.S. has had multiple housing price declines in its history, a number of which having been material. More importantly, however, it is staggering that Greenspan felt that what had happened in other countries—a housing bubble leading to subsequent collapse—couldn't happen here. The only surprise would have been that if it didn't.
As of today, the fall of Alan Greenspan is now complete. His testimony today reconfirmed something important:
Alan Greenspan is a smart man, an able economist and theoretician, and someone able to speak extemporaneously in fully-punctuated paragraphs, but he missed every opportunity to take action with respect to the great financial bubble. That is tragic and awful. In watching the carnage that he helped create, instead of sounding contrite, Greenspan acts more like a bystander at a slow-motion car-crash.
Tracy Quan's latest novel is Diary of a Jetsetting Call Girl, set in Provence and praised in The Nation as a "deft account of occupational rigors and anxieties before the crash." Tracy's debut, Diary of a Manhattan Call Girl, and the sequel, Diary of a Married Call Girl, are international bestsellers. A regular columnist for The Guardian, she has written for many publications including Cosmopolitan, The Financial Times, and The New York Times.
Joe Mathews is a journalist, an Irvine senior fellow at the New America Foundation, and a contributing writer at the Los Angeles Times. He previously served as Justice Department reporter for the Wall Street Journal and as a city desk reporter at the Baltimore Sun. He is the author of The People’s Machine: Arnold Schwarzenegger and the Rise of Blockbuster Democracy.
Gerald Posner is the award-winning author of 10 investigative nonfiction bestsellers, ranging from political assassinations, to Nazi war criminals, to 9/11, to terrorism (www.posner.com). Posner lives in Miami Beach with his wife, the author Trisha Posner.
The Daily Beast is dedicated to news and commentary, culture, and entertainment. We carefully curate the web’s most essential stories and bring you original must-reads from our talented contributors.
Renata Espinosa is the New York editor of Fashion Wire Daily. She is also the co-founder of impressionistic fashion and art blog TheNuNu and a sometimes backup dancer for "The Anna Copa Cabanna Show."
Amanda Fortini has written for The New Yorker, Slate, Elle, and New York, among other publications. She lives in Los Angeles.
Paul Kedrosky is the editor of the business blog Infectious Greed. He's a senior fellow at the Kauffman Foundation, where he is focused on entrepreneurship, innovation, and the future of risk capital. He is also a strategist with Ten Asset Management, a Southern California institutional-money-management firm.
Paul Kedrosky is the editor of the business blog Infectious Greed. He's a senior fellow at the Kauffman Foundation, where he is focused on entrepreneurship, innovation, and the future of risk capital. He is also a strategist with Ten Asset Management, a Southern California institutional-money-management firm.
Paul Kedrosky is the editor of the business blog Infectious Greed. He's a senior fellow at the Kauffman Foundation, where he is focused on entrepreneurship, innovation, and the future of risk capital. He is also a strategist with Ten Asset Management, a Southern California institutional-money-management firm.
Paul Kedrosky is the editor of the business blog Infectious Greed. He's a senior fellow at the Kauffman Foundation, where he is focused on entrepreneurship, innovation, and the future of risk capital. He is also a strategist with Ten Asset Management, a Southern California institutional-money-management firm.
Well constructed observation Mr. Kedrosky. A true piece of journalism.
This is all about Ayn Rand, you know. Stories have appeared before about Greenspan sitting at her feet in his salad days. Let this be a lesson. Never again appoint a Fed Chairmen for whom the math of economics has morphed into rigid religion.
Great article. Well put.
Isn't it pretty rare for Greenspan to admit to a mistake?
http://www.entertonement.com/collections/5274/Greenspan-Didn't-Anticipa te-Financial-Crisis
This is the acolyte of Ayn Rand, the douchebag writer whose philosophy was summarized in her own book "The Virtue of Selfishness." While everyone else figured out Rand was selling low-grade shoe polish, some pseudo-intellectuals recognized her system of malarkey (dolled up as a "philosophy") could give them the pretext they needed to live as venally and self-involved as they would have even without a philosophy. His pathetic rejoinders made me steamed. If I recognized the housing market was in trouble two years ago with no financial expertise, deos this make me smarter than this imprisonable jackhole?
Don't jump the gun. Just like the value of our assets (private & public), Greenspan too can fall further still. I await the quiet thud with resigned anticipation.
The fundamental mistake made by the banks was that too many lent too much money to too many people who could not pay it back. Under any economic, financial or regulatory scenario, that business model will not work.
Come On!! This is much bigger than Greenspan - he's just being used as the fall guy. Every blown up bubble has been engineered to serve those who are already absurdly rich, concentrating wealth into fewer hands. Don't you see that what's happening, however disastrous, was no accident? It's the "Shock Doctrine", where disasters are allowed to occur and play out in order to enact reforms that further globalization and so-called "free" trade. We are heading into the New World Order, and a scientifically engineered mass genocide that will be blamed on market dynamics. Who are the markets serving? After the crash in the 1930's, the new U.S. currency had something it didn't have before - the Illuminati, Masonic pyramid eye. The Federal Reserve is NOT part of the government - it is actually a private, for profit organization (a central bank) whose shareholders consist of foreign banks, as well as Chase, Citi, Bank of America, etc... Bank lending deregulations, and the selling of mortgage debt as investment led to this debacle, and then the Fed is buying the bad investments off?? We are heading to MASSIVE INFLATION and the collapse of the dollar, which was previously the world's reserve currency. We will see the creation of a new world currency and a New World Order.Any Questions?? If so, research "Weimar Republic". I suggest going to the library or buying a book. There is 'corporate sponsored history' that we learn in schools, and there is REAL history. Stop watching TV and propagandized movies, and start being an active participant in your own education. Don't be a consumer of information - be a creators of meaning and critical thinkers. Thank you!! Hate me!
AYN RAND IS STILL DEAD
What is amazing is that America and others failed to learn from the unregulated American capitalism of the 19th century, with its wild booms and busts and great monopolies, oligarchies and trusts. Additionally, they might have learned from Dickensonian England with its unregulated capitalism and the impoverished state of its people.
One can lay this crisis squarely at the feet of the anti-Keynes public figures and intellectuals like Jack Kemp, Milton Freidman, Alan Greenspan (that once devoted fan of Ayn Rand), etc etc etc for blithely believing that most people running corporations and such are fundamentally good when in fact they are neither, just people with all the temptations that go along with almost unlimited temptation.
Ayn Rand's objectivist movement died when she and one of her followers announced to their respective spouses that they would have an affair because they were intellectually superior and it was natural for them to fall in love. (from N. Brandon's book)
Perhaps Greenspan et al should have realized that fiction is fiction (Ayn Rand claimed to have read very little and that she invented her ideas without being influenced by anyone else.) and building an economy on something that sounds neat is rather unintelligent.
It's obvious that the supremely wealthy and those who aspire to wealth could give a damn about the "common peasantry" (us). The world, for at least the past several thousand years, has been dominated by aristocratic elements that inevitably coalesce into plutocracy through corporatism, fascism, dictatorship, or by whatever means. We are serfs bound by the flashy false promises of becoming wealthy. Wealth has been obtained through industrialization, urbanization, tying people up to the umbilical "feeding tube" of modern life, and then billing them for it so that there is no longer much option other than to work for the same corporations. In Mexico, the Zapatista Army, a literally grassroots phenomenon, rose up in direct response to NAFTA. The Zapatistas' claim was that globalization and free trade destroys indigenous societies and cultures. With the introduction of industrial farming, the formerly rural, agrarian, self sufficient communities are undermined and uprooted by the actions of the rat pack of multinational corporations. A curious side note: in the 1960's, the academic discipline of 'Eugenics' was given public relations facelift and was renamed, 'Social Biology'. The wealthy CEO's, bankers, and Ruling Elite families of Europe and elsewhere truly do believe that they are superior, not only socially, but genetically. Ayn Rand is a bitch. I used to look up to her in the naivete of my youth, but now I understand a little bit more of the truth, and realize that Ayn Rand is an elitist, selfish WHORE. Thank you.
Thank you.
As a first time user, your comment has been submitted for review. It can take anywhere from a few hours to a day or two for your comment to be reviewed, depending on the time of week and the volume of comments we receive.
Please log in to leave comments.