Greenspan's Hidden Agenda
The former Fed chief's plug for nationalizing banks is vertigo-inducing. It's also a conflict of interest—and a sign of just how far he has fallen.
There is something sad about watching former Fed Chairman Alan Greenspan lose most of the intellectual underpinnings of his life. A few months ago he famously conceded that there was a "flaw" in the economic model with which he thinks about the world, and that he was "distressed" by that realization. (Of course, his flaw ended up costing the economy trillions of dollars, so merely being distressed seems a bit mild.)
Now Greenspan tells us that temporarily nationalizing broke US banks might be OK. If that doesn't stop you in your tracks, it should. The man often called the high priest of laissez-faire capitalism is saying that he can imagine briefly taking some of the most troubled US banks into state ownership because that is better than the alternative of letting the market sort it out. That is vertigo-inducing indeed, like Lenin doing an about-face on the whole capitalism thing. It is, quite rightly, getting a lot of attention. After all, if Greenspan thinks there are problems with laissez-faire capitalism, and with market-based solutions to banking problems, what is he likely to say next? That marginal revenue doesn't equal marginal cost for profit maximization? The economic mind boggles at the idea.
People forget all too readily, but Greenspan is a consultant to Pimco, the largest bond manager in this quadrant of the galaxy and its strategy is to chase government protection.
Marginally more seriously, it is worth asking why Greenspan is saying these things now, and whether there is any better chance he is right now than he was before (and before (and before)). First question first, he is saying these things now, I think, for a couple of reasons, one obvious, another less so. The obvious reason is that saying anything else would be dumb. We have poured centi-billions down the bilious black hole that is the US banking system, and, while a complete crack-up has been arrested, there seems little prospect that billions of dollars more won't be required with any more assurance of success. After all, the fundamental problem remains: Banks own assets that are worth next to nothing, and they are carrying those assets at prices nowhere near nothing. If they marked those assets to their real values, the banks would have to stop pretending they are solvent. It's much more fun to hoard government cash and pretend that things that are worth $0.05 are worth $0.75.
Greenspan knows that. And he also knows nothing will change until banks are forced to reprice assets that currently trade on a cycle with the arrival of the Pleiades. What's more, he is finally conceding that won't happen if the banks are left to their own devices. In the interim we will have what are not-so-fondly called "zombie banks" roaming the financial landscape. Granted, it is a myth that we need banks lending so we can have more debt to get us out of debt—that bit of circularity escapes too many people—but we do need banks all the same. Having the current crop playing mirror-world Price Is Right games with their assets while they wait out the current recession/depression isn't helpful.
But there is more to it than that. I don't think Greenspan is just burnishing his reputation or rethinking his intellectual underpinnings. He is also looking to his own interests. People forget all too readily, but Greenspan is a consultant to Pimco, the largest bond manager in this quadrant of the galaxy. And Pimco has made it clear that its strategy is to go wherever government protection goes—the company's Bill Gross says they want to "stay under the umbrella" of government-protected banks. As a holder of senior bank bonds, Pimco would likely be safe in any nationalization, while most of the rest of the shareholders, both common and preferred, would be wiped out. So, in calling for nationalization of banks, or at least saying it would be OK, in some sense Greenspan is talking the book of a very large bank bondholder.
So, should we ignore Greenspan altogether? Feel free, but don't come to the wrong conclusion. Ignore him because he presided over the creation of the current financial crisis. Or ignore him because he is late coming to an obvious conclusion. Or ignore him because he has a conflict of interest that people reporting his comments generally don't disclose. But for once, Alan Greenspan is right. Temporarily nationalizing insolvent banks is a good idea, and we shouldn't dismiss it just because a discredited and conflicted former Federal Research chair is saying so.
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.