by Jerome a Paris
Mon Mar 17th, 2008 at 06:23:34 AM EST
Alan "Bubbles" Greespan has one of the most disgusting articles I have read on the financial crisis in today's Financial Times: We will never have a perfect model of risk, where he brazenly claims that the now obvious crisis could not have been predicted - indeed that such crises can never be predicted, and thus that not only his policies (the very ones that led us to this unfolding disaster) were correct, but that more of the same is needed now.
It's time to move beyond the old adage "if you keep doing the same thing and expecting different results, you're either insane or an economist" to note the hard, painful truth: they're not expecting different results, they're getting exactly the results they wanted: massive wealth and power increases at the top, at the expense of everybody else.
His article is the most explicit ever call for that age old principle: privatise the profits, socialise the losses. Why is that man still listened to? Oh yes: because the only public that matters are those on the privatised end of that sentence.
Update: full list of earlier Bubbles Greenspan stories
After describing the bubble in US real estate, and how it is crashing (after spending years denying that there could be a bubble), Greenspan notes:
Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief.
Shocked disbelief? From the man who encouraged borrowers to switch to ARMs (adjustable rate mortgages) in 2006, at the very time fixed rate mortagages were at record low interest rates? Who praised the extraordinary inventiveness and depth of the financial markets, which allowed to spread risk around to those that "most wanted or were able to bear it"? Who bragged about the increased productivity numbers made possible by the inflated revenue numbers of financial institutions, themselves propped up by the oceans of liquidity made available to them by one Alan Greenspan? And, most importantly, never lost an opportunity to come to the rescue of financial institutions or markets in trouble, so much so that the "Greenspan put" (ie the notion that the Fed would bail out banks in trouble, so why bother limit one's risk-taking) became part of Wall Street folklore?
I hope that one of the casualties will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance.
On the day where the Fed provides an open-ended guarantee to JPMorgan to cover liabilities arising from its purchase of Bear Stearns, this is quite a grand claim to be making... Even if Bear Stearns's shareholders appear to be wiped out, its creditors in the financial world - ie other banks, asset managers and the like, must be quite relieved today...
Necessary as the bailout may be, to avoid a wider collapse, it is also a quite stark, uncontestable proof that self-regulation is useless when things turn sour, and that only the Fed and public money can save the day amidst market panic. Which should bring to the fore the question about how much that costs and how the financial sector can be allowed to enjoy massive gains in earlier periods if they don't have to bear the corresponding losses.
As Greenspan notes, the cause of the crisis is that bank models were imperfect, being unable to incorporate the irrationality of man; and that, in fact, such irrationality is inevitable, and will always lead to booms and busts, which will always be unexpected and unpredictable.
While this is indeed a correct description of how markets tend to behave, his conclusion beggars belief:
Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.
ie, given that crises will always happen, and are a fact of life, we should do absolutely nothing (like, horror of horrors, regulation), to try to prevent them or limit their impact...
In other words: government should always bail out the financial system because it is prone to crashes, but should absolutely not try to touch or limit its profits while things go well.
This is as blatant and explicit as you can get: keep the profits private, but make the losses public. Let the happy few get rich, and make the dumb masses pay - it's for their own good.
This is not incompetence - this is unrepentant, brazen praise of looting, and a call for more.