Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
The repeal of Glass-Steagall, initiated in 1980 and completed in 1999 has given us  the savings and loans crisis and the subprime crisis, both with a lag of about 8 years. Regulation works. It worked for 50 years. But, as John K. Galbraith said in the foreword of the 1975 edition of his 1954 classic The Great Crash 1929,
In the wake of the 1929 crash, and with a view to preventing another runaway boom and the associated abuse, the Congress passed some tolerably astringent legislation including the Securities Exchange Act of 1934. It was not, at the time, especially necessary. Markets and financial adventure were then and for a long while after restrained not by the S.E.C. but by the memory of what happened to so many in 1929.

By the sixties this memory had dimmed. Almost everything described in this book had reappeared, sometimes in only a slightly different guise. Instead of the investment trusts there were now the mutual funds. Matching Blue Ridge and Shenandoah in general scope and financial peril were the International Investment Trust and the Fund of Funds. Matching and possibly surpassing the vaulting imagination of Harrison Williams and Waddill Catchings, of Central States Electric and Goldman, Sachs was that of Edward Cowett and Bernard Cornfield, the miracle men of I.O.S. The admiration for skill in deployment of corporate capital that was once lavished on Samuel Insull and Howard Hopson settled now on the men who were parlaying smaller firms into big conglomerates. There were glamour stocks in both periods; in both periods glamour was a substitute for substance. Scholars and politicians lent their names and blessings to the new promotions as had their counterparts forty years before. In the sixties as in the twenties men intended by nature for mentally undemanding toil became rich for a while. It was only that the market was going up. Some things in 1970 were worse. Wall Street houses were markedly more incompetent in their management than in the twenties and expanded much more recklessly. The consequences when the collapse came were far more troublesome than in 1929.


Yet the lesson is evident. The story of the boom and crash of 1929 is worth telling for its own sake. Great drama joined in those months with luminous insanity. But there is a more sobre purpose. As a protection against financial illusion or insanity, memory is far better than law. When the memory of the 1929 disaster failed, law and regulation no longer sufficed. For protecting people from the cupidity or others and their own, history is highly utilitarian. It sustains memory and memory serves the same purpose as the S.E.C. and, on the record, is far more effective.

It's been another 40 years...

As for Greenspan's

We will never be able to anticipate all discontinuities in financial markets. Discontinuities are, of necessity, a surprise. Anticipated events are arbitraged away. But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own. Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria. But risk management can never reach perfection. It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response.
all I have to say is that just because something is unpredictable doesn't mean it is unexpected.

Actually, maybe his specific claims about risk modelling merit a separate deconstruction diary.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Migeru (migeru at eurotrib dot com) on Mon Mar 17th, 2008 at 07:51:22 AM EST
[ Parent ]

Others have rated this comment as follows:


Occasional Series