Joe Nocera gets most of the story right in his discussion of the Financial Crisis Inquiry's Commission's (FCIC) report today. There was gross negligence, greed, and outright fraud, but none of this would have lead to catastrophic consequences if we didn't have a housing bubble. (For that matter, having a housing bubble driven economy virtually guaranteed catastrophic consequences, even without the financial abuses. Spain, which had a well-regulated banking system and no financial crisis, keeps reminding us of this fact, with its 20.6 percent unemployment. The commission was off on the wrong foot from the outset in looking at the "financial crisis." The real crisis is an economic crisis caused by the collapse of an asset bubble which had been the engine of growth in the economy.)
Nocera blames the mass delusion that house prices could rise endlessly with no foundation in the fundamentals of the housing market. This is absolutely right, but there is a key point missing. We have regulators, most importantly central bankers like Alan Greenspan and Ben Bernanke, who are not supposed to succumb to mass delusions. They are supposed to make their assessments of the economy based on a measured analysis not the hysterical rantings of the deluded masses.
Using simple economic analysis and the arithmetic we all learned in 3rd grade it was possible to recognize the housing bubble as early as 2002. It was also possible to know that the bursting of the bubble would be bad news for the economy and that the news would get worse as the bubble grew larger.
The Fed had enormous power with which to shoot at the bubble. First, Greenspan and Bernanke could have used the resources of the Fed to document the evidence for the existence of the bubble and highlight the consequences of its bursting. Note that this is not about mumbling "irrational exuberance." The idea is have the Fed's research staff put out paper after paper showing that house prices were hugely out of line with their historic levels with no plausible explanation in the fundamentals. This research could have been highlighted in Congressional testimony and other public appearances by Greenspan and other top Fed officials.
The second step involves the Fed's regulatory power. The deterioration of lending standards and outright fraud in issuing mortgages that is documented in the FCIC report was knowable to regulators at the time. (I knew about it because people from around the country were telling me about abuses by their friends/relatives in the mortgage industry. And, I have no regulatory authority.) The Fed could have used its regulatory authority to crack down on the banks that were issuing fraudulent mortgages and to prod the SEC to go after the investment banks that were securitizing them.
Finally, if steps one and two did not work, the Fed could have raised interest rates. Greenspan has always been dismissive of the idea that higher interest rates could have popped the bubble, noting that long-term rates stayed low in 2005 and 2006 even as short-term rates rose by several percentage points. This is again a silly cop out.
Suppose that Greenspan started a round of rate increases with the explicit target of popping the housing bubble. For example, suppose he announced the first half point rise in the federal funds rate and said that he would continue to raise interest rates until the real value of the Case-Shiller 20 City index fell below its 2000 level. This likely would have gotten the attention of financial markets and had some impact on house prices.
Instead Alan Greenspan, with Ben Bernanke at his side, did nothing. In fact, at several points he seemed to foster the bubble by dismissing the concerns of those who raised questions about the run-up in house prices.
There is a real problem of incentives here. Greenspan and Bernanke would have gotten serious heat from the financial industry if they had done the right thing and shot at the bubble. After all Angelo Mozillo, Robert Rubin, and many other rich and powerful types were getting very rich. On the other hand, they seem to have suffered zero consequence from doing nothing, even when their failure to act had absolutely disastrous consequences.
The lesson here for future central bankers is to keep the financial industry happy and everything will be fine. If that is the case, then we should expect more irresponsible behavior from the industry and possibly more bubbles. The problem is that the cops are on their payroll.
It is not too late -- we could still fire Bernanke and take away Alan Greenspan's pension. Unfortunately, the financial industry is not about to let that happen nor is the business media likely to even let these options be discussed in polite circles.
Heidi Grant Halvorson, Ph.D.: Self-Serving Bias: Why Some Leaders Don't Learn From Their Mistakes
What is it about human nature that makes people want to blame the guy who used to have the job?
The Chairman is just an employee - hired help of the Executive Branch. Chairman Greenspan served under FOUR Presidents - each of which could have chosen someone else. They all knew Chairman Greenspan's philosophies.
Are you saying that the employer has no responsibility over the employee?
Why do you not want to take away the pensions of the last 4 Presidents? Why do you not want to take away the Pensions of the senators who confirmed the Chairman? Why do you not want to take away the pensions of the Congresspeople who supported the Chairman?
Shameless scapegoating.
The voters got the government they voted for. Elections are important. Maybe they will pay attention next time.
WHY THIS MEANS BERNANKE CAN NOW DO NOTHING....HE IS SCEWED EVERY WHICH WAY
http://hat4uk.wordpress.com/2011/01/30/after-delusional-davos-its-back-to-the-real-world/
Not sure how to take the Slog Blog because I partially agree and partially disagree. Need to think about it some more. Its UK orientation, and the timing (coming after a decline in the UK economy) should contrast the economic policies of the US and UK, which have led to the negative growth in the UK while the economy in the US continues to grow, albeit at an anemic pace. Economic stimulus can have real and substantive effects, depending upon how the stimulus is structured (infrastructure works best in this regard). That's because our economy is run by human nature and not on rational foundations. The effects of stimulus are limited to correcting over-reactions, and the corrective effect cause restart real growth. I'm not yet convinced gold is not already over-priced, and equity markets are already beginning to recover from solid foundations. The recession has squeezed out most of the excesses from the economy, and is beginning to reflect the perception that the current rate of growth is sustainable if not improvable.
I guess time will tell.
The current system, which maintains separation of the Fed from government, has been a healthy system of checks and balances. The Board of Governors meets only when government representation on the Board is in the majority, even though the majority of Board members are from industry. Therefore, industry members must rotate their participation on the Board. The Fed is also overseen by Congress. And while the chairman is appointed by the president, the Chairman is the executive member, and that person's leadership is generally given great deference.
Greenspan was given more deference than he deserved. The independence of the Fed in its open market operations and FOMC meetings conducted in private enable the Fed to act without undue pressure from the political party in power. So, the Federal government cannot arbitrarily expand the money supply in order to assure re-election. Monetary policy is made independently of federal fiscal policy, and the Fed may work with government's fiscal policies, as it is doing now, or it acts in counterveiling ways when government runs excessive deficits, which Greenspan should have done during GWBush but inexplicably did not, thereby contributing to the magnitude of the damage from the financial crisis. This was Greenspan's personal philosophy at work-- Ayn Rand libertarian philosphy of allowing markets to regulate themselves, which students of the Great Depression, like Bernancke, Giethner and others in the administration, have taken into account as the crisis unfolded, and intervened as regulators must if we are to avoid total catastrophy.
When it comes to bad guys in this crisis, FCIC is the pot calling the kettle black.
What we must have are Federal entities that (perhaps a gutted and fixed Fed) that can reign in Wallstreet excess and act proactively to ensure this doesn't happen. By necessity, this will require a completely different operational paradigm as the current structure of the Fed (revolving door with Wallstreet) is quite compromised.
The role of the Federal Reserve is monetary policy, which sometimes must be used to counter-balance fiscal policy excesses. Ideally, the two would work together, as they have in our current crisis.
Greenspan reported that long term Treasury rates were oddly low -- the historical signal of coming recession, which we did eventually get in spades -- in response to the rising Fed rate. He insisted that it was not a recession signal, that it was a complete (famous quote now) "conundrum", and that he absolutely could not know who was responsible for those low long term rates (i.e. who was buying). How could he not know? How could the Treasury not know? Does the Treasury keep secrets from the Fed? Why was it important to him to make us believe that he did not know why somebody was furiously buying long Treasuries? Who was it? Somebody please tell me.
Okay, not just me, but anyone who could see the bubble coming, and understood that consequences, and understood that the efforts made during the Bush administration to stimulate the economy were just going to make the inevitable recession that much worse. It did not take mcuh sophistication to understand that if homes were rising 7% a year, and wages were rising at less than half that rate, sooner or later homes would be unaffordable, and prices would correct. And since almost no one pays cash for a home, the home buyers were engaged in "leveraging" their homes through mortgages.
When someone buys a home, the costs of re-selling that home are going to be around 10%. So anyone buying a home with zero down was actually under water the moment they signed the papers. It wasn't just bank greed that caused this, the greed of home buyers was part of it. Many were addicted to debt and continuously refinanced the equity out of their homes, exposing themselves to bankruptcy with just the slightest reduction in home values. But leverage is a great seducer.
The idea in the monds of many buyers was to buy a home for nothing down, sell it in a couple years and make a tax free capital gain with no money invested, believing the house would continue to increase in value 7% a year.
So, some of us who work with financial institutions on a daily basis could see this coming, and we were the buyers of Treasuries driving the prices up and therefore the yields down, as a hedge against financial collapse. It was a good bet, and easy to justify. Treasuries were virtually risk-free, and in recession they typically rise in price even more (which they did) as interest rates continue to fall. The only thing no one could predict was exactly when the bubble would burst.
All business leaders who abused their privileges and roles during the run-away financial bubble should have their golden parachutes taken back as punishment, if not jail as well. Only then will the financial wolves begin to behave ethically. Not out of principle, but only because the pain threshold gets raised high enough so that it is not worth it to them.
You could buy four or five income producing properties with little money down and roll the loan cost into the loan and even use the projected income from one property to meet income requirements on another. All with $70,000 that you borrowed while being completely unemployed.
Seminars across the nation taught people how to manipulate the system and you couldn't watch TV for five minutes without seeing a Get Rich in Real Estate advertisement.
I am still laughing, painfully.
The difference for most was they believed in a dream, a dream that assured them that they to could have it all. Although many fell to the charms of greed and self grandeur, I believe it was without malice and of course I believe that this could not be said about the Investment Firms, Bankers and Mortgage Companies. They without a doubt committed crimes.
Nice talking with you.