OMG! Greenspan Goes Populist?

Bloomber News:

U.S. regulators should consider breaking up large financial institutions considered "too big to fail," former Federal Reserve Chairman Alan Greenspan said. Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York."If they're too big to fail, they're too big," Greenspan said today. "In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe that's what we need to do."

You know we're in big trouble when Alan Greenspan agrees with me about busting up Wall Street. (On his night table does Das Kapital now lie next to Atlas Shrugged ?)

For the apostle of free markets to admit that financial free markets are not self-correcting is an enormous concession.

Unlike the ideologues on cable financial programs, Greenspan has the intellectual honesty to say that this crash was caused not by government regulations or because other outside pressures interfered with inherently stable, self-correcting financial markets. To the contrary he is admitting that financial free markets crashed and burned on their own.

1. He admits, albeit indirectly, that financial markets left to their own devices will grow ever more concentrated into larger and larger institutions.

2. Those large institutions then have an implicit bailout guarantee and no longer suffer the consequences of their own failure, an essential feature of functioning markets.

3. When such institutions do fail, the systemic risk they create is so great that they must be bailed out. Not doing so would send the economy into another Great Depression.

4. By implication he is also saying that once an institution realizes it is too big to fail, it will act as if it no longer faces severe market discipline. It knows it won't be allowed to fail so it can gamble even more (with other people's money of course).

5. Therefore, we must do what the populists and progressives forced us to do at the turn of the 20th century...Bust the Trusts!

But there's more to his admission that is left unsaid. Because too-big-to-fail institutions distort markets, it also means that they distort the pay mechanisms of those markets. Because they can take risks without bearing the full consequences, they also can reap outsized rewards. Distorted markets inevitably lead to distorted profits and pay.

This was in-your-face week for distorted profits. The too-big-to-fail institutions that should have crashed last year under their own weight, now are showing record profits during the worst economic downturn since the Great Depression. Amazingly, these profits are even larger than the excesses reaped during the peak of the housing bubble. (Meanwhile the BLS U6 Jobless Rate hovers at 17.0 percent.)

Of course, Greenspan knows full well that these profits, and the recored bonuses that will soon to follow, are fundamentally illegitimate. They exist only because of the bailout. (For those who believe Goldman Sachs, JP Morgan Chase, and Morgan Stanley succeed because they have the best talent, imagine where those frims would be right now if we hadn't bailed out A.I.G and if we hadn't pumped more than $13 trillion in TARP funds, liquidity, and asset guarantees into the financial markets. Those genius institutions would all be in bankruptcy court.)

Milton Friedman and Ayn Rand provide no guidance for Alan Greenspan or the rest of us for how to deal with the aftermath of too big to fail. Greenspan's call for busting up the big boys is only part of the solution. The other part is repatriating these illegitimate profits and pay before they end up in offshore bank accounts. The welfare kings of Wall Street have no right to pocket our money. It's also economically unsound for the economy to allow these distortions to continue.

The solution is obvious:

-- A windfall tax of 90 percent on all Wall Street profits retroactive to January 1, 2009.

-- Institute the President's Wage Cap: No one in institutions that are too big to fail shall receive more pay than the President of the United States until the unemployment rate drops below 5 percent. (Oh the suffering of having to live on only $400,000 a year!)

It's doubtful that Alan Greenspan would go this far. But I suspect that in the confines of his own mind, he would understand both the logic and justice of this argument.

Before financial amnesia sets in (caused by the latest Dow 10,000), we need to remind ourselves again and again that this crisis was caused by the failure of financial markets. Big government didn't cause the crash. Regulations didn't cause the crash. We let markets run wild just the way Friedman and Greenspan had wanted. And those markets imploded. Financial institutions became too big to fail. They were bailed out. And now they are gorging themselves on government welfare.

Greenspan is willing to admit part of his mistake and to call for drastic government interference to correct the gigantic distortion in financial markets. Let's hope the rest of us have the courage to advocate the additional steps needed to end our pell-mell slide into the billionaire-bailout abyss.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.

 

 

Follow Les Leopold on Twitter: www.twitter.com/les_leopold

Comments

[dart79]

Maestro and Summers are both worried. History will view them unfavorable and associate them to the biggest redistribution of wealth. They are scared because the masses are getting impatient and are onto their bs. Geithner and Bernancke need to listen too. Timmy and Helicopter Ben, can you see the pitch forks yet?

[givesflack]

I think 20 years of running the Fed lead to this "once in a century occurrence" as he put it is his to defend. He should definitely face prosecution for creating the laws and conditions for the catastrophe we are still experiencing and have experienced throughout his tenure. Decades of wage reduction/loss due to his policies and the interest free giveaways and tax breaks to the rich and now this humongous crippling bailout is all connected to him, Bush/Reagan and Wall Street. He cannot be allowed to live freely when he's damaged the lives of so many for so few and especially his chosen comrades. I accept this epiphany of his as his way to dodge responsibility like his kind always manage to do because he has media that allows him to confuse the public to dismiss his involvement. He's can't and shouldn't be let off. Try him next to Blankfien, Paulson, Bush and Geithner too. Have a good day.

[nThenwhat]

YES ... I agree ... do it NOW!!

[LHB58]

The theoretical framework within which Alan Greenspan was working for most of his life is much more complex and all-encompassing than most non-economists can imagine. To learn it is a life's work. The variant that Greenspan embraced is what is usually called the "strong" version of Efficient Capital Markets Theory. One of its earliest and foremost proponents, Eugene Fama, was the odds-on favorite to win the Nobel Prize in Economics this year. There is little doubt that he would have won, if the bursting of the recent asset price bubble would have been delayed for a few years. I've argued for decades with other financial economists about the extent to which this theory explains financial market behavior. Given that I have much more of a vested interest in him being wrong than most people, I'm suprised that I seem much more inclined to cut him some serious slack than most people.

There are thousands of other economists working in the country's most prestigious universities who are currently teaching the same things in their Money, Banking and Finance classes that Greenspan recently repudiated. Give the man some serious credit for admitting he was wrong. For a professional economist, such an admission is like renouncing one's citizenship. His failings notwithstanding, very few people have that kind of courage and integrity, when all is said and done.

[Booblius]

"Milton Friedman and Ayn Rand provide no guidance . . " Neither does Nostradamus. Greenspan probably got around to reading "Animal Farm" and "Lord of the Flies", but unfortunately too late for the economy; or as we uneducated folk call it----our homes, retirement and dreams.

[nThenwhat]

I respectfully think you're missing the point ... this isn't complex and doesn't require flowery language or a lot of explanation of economics, economists or economic theory. Greenspan is either one of the most inept economists in history, or, one of the biggest financial criminals in history.

Greenspan became unwilling, or unable, to distinguish the forest from the trees. I think I'm being extremely gratious in saying that: PERHAPS it wasn't intentional and that he perhaps he became disoriented by his celebrity or theory, or even old age. But, in the final analysis, he was a central player in what amounted to an historic financial coup d'etat on the U.S. Treasury ... a sacking of the global economy ... and his punishment should not include continued access to the conversation about what to do next. I think we need a little less dwelling on economic theory and a little more legal action against irresponsible / inept economists who do great damage.

[steppenwolfsayshi]

I take Orwell's perspective that a failure to have objectivity is a type of sin. It leads to all manners of evil. I agree that it takes courage for Greenspan to admit that he was wrong now, but wouldn't it have been better if he had the intellectual integrity to change his position years ago before the economic system crashed because of his policies? The writing was on the wall, but he decided to ignore it.

[superstition]

He changed his position all the time, depending upon the political situation. I remember him railing against debt when Clinton was in office and then saying debt was no problem when Bush was elected.

[andycan]

Greenspan should go to jail for irresponsible policies that led to bankruptcy and homelessness for millions of people.

[steppenwolfsayshi]

I'm not sure he said that markets weren't "self-correcting." The correction would be called the Second Great Depression.
I guess Greenspan finally decided free markets could in some rare instances lead to macroeconomic volatility. (Sarcasm added).
I wonder if he still thinks the currency market will neatly self-correct?

[doneflyin]

Ooooh Alan! Ayn's ghost will bust your chops for this heretical confession, your loss of faith in the sacred screed of Capitalism now, Capitalism forever.
John Galt you ain't. Go away.

[Jannsmoor]

I don't know whether to laugh or cry. The great libertarian economist whose policies have crashed the world's economy and sent millions of middle class Americans into poverty, makes a concession. And what is that concession? Not that he was stupid to advocate self-regulated markets. Not that he lays awake at night thinking of all the destruction he has wrought. No, he concedes that 'too big to fail' banks create a distortion in the free market and should be broken up.

What has led to the 'too big to fail' banks Alan. How about some regulation to prevent them from getting so big? Where were you when this was all festering? Even I could tell you self-regulation is illusory, a completely stupid idea, and has not worked at any time in the history of the world.

Or should I just be glad he agrees with me for once in my lifetime - the 'too big to fail' banks should be broken up. But shouldn't the rating agencies who sold their integrity to hand out triple A ratings be taken to the woodshed? Shouldn't there be some accountability there?

[HamletsMill]

They were all rabid ideologues just like the mullahs if Iran. They were the American Taliban. It is the exact same brain chemistry. Only they did far more damage than Al Qaeda with two airliners and two buildings. These were incredibly destructive people. They were like some interdimensional force that manifested and took down the entire world.

The Magic of the Marketplace
http://www.youtube.com/watch?v=wx3KMX6T8bo

Now this is where we are a s a society hook, line, and sinker!

They Live - Obey, Consume, This is your God
http://www.youtube.com/watch?v=7Lwlx3GnLGs

The whole saga is just unbelievable!

[Cleanerman]

This is so sad reading about the ongoing greed. To think the vast majority of Americans live on wages, unimpressive salaries, or are currently unemployed altogether. There should be no debate about breaking up those entities "too big to fail". It should just be done, the sooner the better.

[WorkingClass]

Its too little too late. Greenspan is retired AND discredited. Thanks in large part to Greenspan we now have a Politburo made up of the Treasury, the Fed and Goldman. Who, in that den of thieves, cares what Alan is saying in his dotage? And who else matters? Central planning is what we are stuck with until we get a new Republic.

[marco01]

This is why Bush and Obama were right to bail out the banks. But Obama will be wrong if he doesn't break them up and impose proper regulations.

[HamletsMill]

Exactly. If we fail to act now to break them up, we will certainly deserve our fate when the other shoe drops.

Matt Taibbi's latest:

http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle

[Desmo]

"Greenspan has the intellectual honesty to say that this crash was caused not by government regulations"

Les, What would you call the FOMC? Government regulators?

Can you honestly say that the FOMC's choice to hold the Fed Funds rate at all time lows for an extended period of time wasn't the reason for overinvestment in the real estate industry?

The FOMC (government regualtors) created the housing bubble!

[Desmo]

Les,

Have you researched Alan Greenspan's history? Yes, Greenspan started his economic carrer out as a deciple of Ayn Rand and the Austrian School of Economics. He wrote a very good esay on the evil of central banks, and the need for a gold standard. Then somewhere along the line, Greenspan became a Keynesian balance wheel theorist. As the head of the central bank he abandoned free market theories and used government intervention in an attempt to solve problems. Do you honeslty believe that the head of the central bank is someone who embraces free markets? True free marketers realize that government manipulation of the money supply was the number one cause of the current economic condtion. All Alan Greenspan has proven is that GOVERNMENT INTERVENTION IN MARKETS ALWAYS FAILS.

[DosGatos2]

Government intervention is not always a failure. The creation of the interstate highway system--a government program!--enabled the creation and growth of numerous small businesses. Over time however, big industries tends to oligopoly or monopoly. The players will do anything they can to preserve their advantages ((which are in essence market distortions). Government has to be big enough and strong enough to keep business small so that it can manage systemic risk properly.

Anyone who has ever raised a child knows there needs to be rules. Imagine getting up and going to work tomorrow and finding out all traffic regulations have been abolished. Have a lovely drive.

[therealredstateblues]

the anti govt folks never want to talk about Conrail either. in the 70's congress took over several failing NE railroads they were profitable the second year. They brought in experienced railroaders from all over to fix the system - Conrail was profitable and sold back to the private sector at a profit

[superstition]

A bigger concession would be to stop appearing as an "expert". Allison Kilkenny:

"Why is Alan Greenspan still being asked about the economy, and what does it take, exactly, to become a discredited figure in this country?

And yet there he was on the TV this morning, making new 'serious' claims from his brain Ouija board because he is an 'expert.' Greenspan's ability to make these kinds of public predictions without fear of being pelted by rotten tomatoes is facilitated by America's proud tradition of rewarding white collar failure. A black kid busted with a dime bag of weed usually won't get a second chance to straighten up and fly right. Yet, lifelong losers like Alan Greenspan and Timothy Geithner, who became Treasury Secretary after screwing up his job at the Federal Reserve Bank of New York, continue to fail upward."

"Alan Greenspan Is the Definition of 'Epic Fail'"
http://www.huffingtonpost.com/allison-kilkenny/alan-greenspan-is-the-def_b_309241.html

"I think it's safe to say that Alan Greenspan will go down in history, along with George W. Bush, as a reckless and radical proponent of failed laissez-faire policies, as well as one of the worst public officials in American history."

"Alan Greenspan Has Written His Own Epitaph"
http://www.huffingtonpost.com/joseph-a-palermo/alan-greenspan-has-writte_b_133318.html

[LHB58]

I tried to urge some compassion toward Greenspan in a separate post above, but you make a good point. Rather than go harder on everyone who makes a mistake, however, I'd be more inclined to cut everyone some slack, just as I hope for forgiveness for myself. Ironically, three years ago, I was considered a crank in most intellectual circles for my heated criticism of the man.

[superstition]

"Rather than go harder on everyone who makes a mistake, however, I'd be more inclined to cut everyone some slack, just as I hope for forgiveness for myself."

Forgiveness isn't the same thing as enabling someone who failed so spectacularly to tout economic policy. As Allison said: "...what does it take, exactly, to become a discredited figure in this country?"

He would be easier to forgive if he were to apologize completely and resign from his position as "expert" in the public forum.

[DI-1957]

Sound like the point Arian made about the pols changing the tune once out of office. I'm not impressed. He was and is a lying thief of our money, our jobs, and our future. So now the tune is changed, disgusting!

[yappnmutt]

if you listened closely greenspan was advocating for the free market by addressing how the too big to fail banks skew the market because their size gives them an unfair advantage which hinders the functioning of the free market.

if the free market worked the big banks would have already been divied up into much smaller entities because they were bankrupt(may still be bankrupt). .gov intervened and saved the zombie banks to the benefit of the big bank investors by borrowing from the pocket books of the middle class. the myth that they are too big to fail and would cause a collapse of the world financial system was used to obtain .gov intervention. if .gov had simply guaranteed liquidity for regular bank functions and let the derivatives market reorganize(bankrupt a lot of rich people, banks and a few .govs) the entire episode would have probably been over by now. instead the world, ex. asia, will suffer for years with the usa and british middle class getting sick for years to come.

[HamletsMill]

Yep. The true Austrian school would have set "you bet wrong now you die". I understand why they preserved AIG but the duty now after all this is to break all of them up and unwind eveything in an orderly manner. If they don't it is truly one of the greatest moral outrages in all of human history and it will be a seminal moment in American history. Some sort of French Revolution will be next. I hope it will be electronic, populist, and activist. We are at the end of the road a s a society. This is a 500 year event.