What did Alan Greenspan concede?
From all the hullabaloo I thought he had granted the death of capitalism but no. Here are his prepared remarks. Here is part of the Q&A.
He did admit that risk models had failed by selectively overweighting periods of euphoria and that the credit default swaps market had exploded in our face. He also knows that there are hundreds of trillions of dollars in open positions in other derivative markets and most of them have worked relatively well in this crisis; his words indicated as such. He also stressed that capitalism has had a string of forty years of numerous successes and that recent experience is an outlier. He is still not sure what to make of the current failure.
Greenspan also said: “Whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets,” he said. “Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”
His policy recommendation was the modest one of requiring banks to keep a share in any mortgage.
I don't agree with all of his detailed points (e.g., too much emphasis on subprime securitization), but I thought the overall ideological "flavor" of his remarks was essentially correct. For differing, and yet not totally different, point of view, here is John Quiggin on Greenspan. Here is the Ayn Rand Center on Greenspan.
Comments
Its pretty clear that with the Foreign Government Bailout of 1998, the super-low interest rates post 9/11 that the government would bail out banks.
Mr. Greenspan is surprised that banks would take such risks? Why? He created the environment that gave them a free option on risk-taking.
Mr. Greenspan never fails to blame others for failing his own principles. As we now enter, the Greenspan Recession.
Posted by: Eddiew21 at Oct 25, 2008 8:16:16 AM
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Does our monetary policy system depend upon our first finding a superstar Fed chief such as a Volker or a Greenspan to run the system? If so, then we actually don't have a "system" at all.
Posted by: Some Guy at Oct 25, 2008 11:13:08 AM
The main causes of the crisis, being poor investments, are:
1) The implicit system of government guarantees to intervene in a financial crisis.
2) Lack of transparency and collateralization in certain trades and transactions. In other words, more precision in the trades to determine the correct level of capitalization, and the guaranteeing that the collateral be there.
I understood him to be conceding 2. We need enough regulation, or better, supervision, to guarantee that these trade conditions are always met, especially in trades that involve the shifting of risk to a third party or the magnification of risk, where the correct amount of capital is difficult to determine.
I don't see either of these as having any large claim on the worthwhile nature of our capitalist system.
Posted by: Don the libertarian Democrat at Oct 25, 2008 11:53:42 AM
It's not what he conceded. It's the way it was reported in the media. It will become a political soundbite ("even Greenspan admits deregulation failed") that will be impossible to refute with any brevity. You'd be fumbling around like Jack Kemp trying to explain how the Mexican bailout stole the savings of the middle class--just as ours will to us--while Al Gore just shrugs.
Posted by: David at Oct 25, 2008 12:24:10 PM
Gtreenspan offers us no material insight. He played god and was found out to be just a man.
The major challenge we face is that regulatory models look at tail risk and the Fed manages a mean.
Posted by: martina at Oct 25, 2008 12:45:02 PM
The problem wth greenspan's statement is a simple one. The key phrase is what follows:
"looked to the self-interest of lending institutions to protect shareholder’s equity"
He adds fuel to a fire lit fueled by dogmatic ignorance on the left, e.g., markets are "unregulated".
There's only one appropriate response: exactly what the hell is he talking about?
What "lending institutions" are unregulated? Banks sure aren't, they are perhaps the MOST regulated enterprises going. Google provides 777,000 hits for the phrase "regulates banks". There's not only plenty of rules and regulations, there's plenty of NEW ones. Hasn't he heard of FDICIA passed in 1991? Among its major provisions:
Among its major provisions:
(1) raised the FDIC's authority to borrow from the Treasury Department from $5 million to $30 million.
(2) revised deposit insurance coverage, linking the premiums banks pay for FDIC insurance to their financial strength.
(3) required banking regulators to intervene in restructuring banks and thrifts that fail to meet minimum capital requirements.
(4) required the FDIC to use the method least costly to the insurance fund when merging insolvent banks into healthy ones.
(5) required annual on-site examinations of banks and thrifts.
(6) required banks and thrifts to disclose fair market value of their assets. (Nice to see the accounting standard setter-FASB jump on that bandwagon, huh?)
(7) required audited financial statements in annual reports of banks and thrifts with assets of $150 million or more.
(8) introduced a new formula for computing capital adequacy.
(9) imposed new limits on executive compensation and lending to senior officers and bank directors. (Oh how this helps)
(10) extended U.S. Banking regulations and on-site examinations to branches of foreign banks.
(11) required disclosure of more information (Truth in Savings) on interest rates paid to depositors.
And then there's Sarbanes-Oxley, which although not specifically a banking law, requires an that external auditors attest to the sufficiency of internal controls-the policies and procedures that ensure accurate financial reporting and adequate security of the auditee's assets.
As for protecting shareholder equity, the greatest danger to that was having laws like the CRA, which assumes that banks irrationally & simplistically "redline" geographic areas to limit lending risk, so the government can require explanations and take actions against banks that
There's regulation by the state regulators, if they are state chartered, the Fed, the OCC, The FDIC, even the very forms mortagages are recorded on have very specific instructions on how to complete a "HUD 1" settlement statement.
This concession speech may make Mr. Andrea Mitchell popular with the K street cognoscenti at dinner parties in the new Obamanation, but its verity is really, really lacking.
Posted by: Superheater at Oct 25, 2008 11:45:20 PM
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