Alan Greenspan: A Bad Offense is a Bad Defense

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Former Fed chairman Alan Greenspan took to the pages of The Financial Times and the Wall Street Journal to defend his legacy this week. He didn't salvage it.

Not that Greenspan deserves all the blame for the current credit crisis. But he clearly deserves some of it.

No, says Greenspan, there have been real estate booms everywhere. Why pick on the U.S. and him? Except that securitization and the subprime mess are decidedly America's responsibility. Europe and Japan then piled on. And American interest rates are highly influential over international rates.

Greenspan cut short rates sharply, which may think was wrong. I think that's a little overstated. But his true failures lay in two areas. One, he refused to acknowledge the Fed had any responsibility for asset bubbles. Two, he refused to get tougher on regulating the banks. These are major, even historical, failures.

Many warned about these issues as they were occurring, including very orthodox figures like Henry Kaufman, formerly economic guru of Salomon Brothers. So any charge of Monday morning quarterbacking is not valid.

Did Greenspan have to raise rates and jeopardize growth in such a broad-brush way? No, said Kaufman. He could raise margin requirements or otherwise make it more difficult for banks to lend when asset prices were rising fast.

Is it impossible to know when we are in a bubble? This is a typical Greenspan claim, really a rationalization of his free market ideology. It is impossible to know when we are at the top of a bubble, sure. But it is no more difficult to know than to know that the economy is running too hot compared to projected productivity gains, as Andrew Smithers points out in a letter in today's Financial Times. The Fed makes difficult judgments all the time.

Here's what I think is the giveaway on Greenspan's thinking. Greenspan, in defending his lack of regulating the banks more closely, argues in the FT that, "Bank loan officers know far more about the risk and workings of their counterparts than do bank regulators." The quote betrays his bias. Walter Wriston, like almost every banker, used to say this all the time in trying to in win more freedom for his First National City Bank to raise money and make loans everywhere and anywhere -- eventually resulting in whopping levels of bad debt in South America.

Here's a good example of how much bankers know. Wriston's bank was the biggest lender to Penn Central in 1970 when it went bankrupt. Guess what. Management lied to him about how the company was doing. He was furious. He demanded the chairman resign. He didn't know how bad it all was at Penn Central, he pleaded. He asked Nixon to bail Penn Central out, and thereby First National City as well. So much for free market ideology when the chips were down. Nixon refused, but his pal, Arthur Burns, now chairman of the Fed, left the discount window wide open that weekend in a smaller replay of recent events. Wriston was saved from his arrogance.

The truth is that Wriston had a vested interest to believe management even when it lied because he could make money on it. The Federal Reserve and other regulators do not. That is the key reason why we need regulation. It is simply remarkable that Greenspan falls back on this old falsehood, that business knows the risks, government doesn't. Nonsense. Business often wants to look the other way and ignore the risks because it can be so profitable to do so.

Is Greenspan really that simplistic a thinker? Well, let me defer that. But he has a point of view that is not based on the evidence, contrary to what he claims. It is base don a faith that served him very well. The nation?

Comments

[Bluedog12]

Am I the only one wondering whether Alan is wandering around Manhattan talking to himself with nothing on but a raincoat?

[WorkingClass]

Alan Greenspan has been a class warrior throughout his long career. No single individual has done more to transfer wealth upward, thereby creating the present disparity, than Alan Greenspan. He is an enemy of the people. But I thought he was an honest, out in the open, enemy. It is sickening to me to hear him trying to pretend that he is innocent or ignorant. He is neither. Alan Greenspan knew exactly what he was doing when he created the housing bubble. He knew that his member banks would make a ton of money. He knew that postponing the recession would keep Bush in office for a second term. He knew that by the time the scam was exposed he would be retired. He knew that millions of ordinary Americans would be hurt or ruined. And now HE WANTS EVERYBODY TO LOVE HIM. Disgusting. Ugh.

[scepticalobserver]

A lot of people, including Greenspan are going to be remembered for advocating ARM's.

[LeftRight]

That's the same BS argument that the government can't do anything right. Consider the state of aviation before the creation of the CAA (now FAA). There were planes crashing IN MID AIR!!! That just doesn't happen! This was the state of affairs when we let the market of aviation take care of itself! Then the CAA was created and it did a damn fine job of managing the aviation market, both in terms of regulating the manufacturers, AND in terms of providing air traffic control. Now we are moving back towards a market responsibility of BOTH, and we are seeing the effects of this TODAY, when American Airlines had to cancel MORE THAN 800 FLIGHTS, so that they could perform safety checks which SHOULD have been performed over the course of months or years, but have been neglected!

[SamThornton]

Mr. Greenspan is a leading member of the so-called Chicago school of economists who have brought us not only to the current state of affairs but who have also gifted the world with "Disaster Capitalism," spreading the joy of grinding poverty world wide.

Essentially, they are greedy idiots who serve greedier idiots.

[Henry]

There was a long long stretch of time where easy Al had the Fed Funds (the base rate, above which competition takes in) rate down to 1.0%. Never in our life times had there been such.
Rates offered by banks to induce savers were thusly low low and even in real terms negative. Why on earth would a person save at real negative rates?

This brings the notion of the real interest rate into focus. It is argued that the historical "real rate of interest" bops and weaves around 6,0% (that is Prime minus the rate of inflation) The real historical rate needs to be at a level that accomodates incentives for savers. There was none.(real rates for savers were negative) And this arguement takes place at the undergrad level of economics. There is no excuse for anyone at the FED to have missed this. History will be their judge.

[peterg76]

He wouldn't defend himself so forcefully except that he knows the critics are right.