Greenspan, Bubbles, and Responsibility

We are now in the season of scapegoats. The brays for justice and villains grow daily, and this week has seen a walk of shame as various participants in the credit debacle sit in front of Congress to be scolded and upbraided for their sins. Many of the goats today, and none more than former Chairman of the Federal Reserve Alan Greenspan, were heroes only a short while ago - yet another vivid illustration of the ancient words of the mythical king Croesus: "Count no man happy till he's dead," or to put it another way, "it ain't over till it's over."

We have seen this passion play before, when J.P. Morgan, savior of the world in 1907, hero for single-handedly corralling the leaders of Wall Street to make sure the financial system remained solvent, was hauled in 1913 in front of Arsene Pujo, a Louisiana Democratic congressman whose committee was investigating whether the so-called "money trust" had corralled a disproportionate share of the nation's wealth. Shockingly, Pujo concluded that it had, to the benefit of the few and the harm of the many. A familiar lesson, soon forgotten. Morgan was humiliated and already in ill-health and died soon after his appearance.

The same fate is unlikely to befall Greenspan, who in addition to being somewhat haler also acquitted himself better than the truculent Morgan. But the arc is similar, as it was for lions of 1990s capitalism such as disgraced Enron executives or even Jack Welch, the once-idolized but then criticized titan who led General Electric through acquisitions and mass-layoffs until his retirement just as the bubble burst in 2000 and 2001.

Greenspan's testimony was remarkable in many ways. He took responsibility for his mistakes, including not just specific policy errors but fundamental flaws in his own ideology. But he also tried - to uncertain avail - to shed light on the ease of hindsight and the difficulty of foresight. Yes, we want and perhaps need villains when things go sour, and yes, there often are venal, corrupt individuals who can wear the crown of thorns that we collectively desire them to wear to expiate our sins. Yet after the punishments and the shame, we are left with the harder truths of collective guilt and responsibility, and the devilish difficulty of forecasting future outcomes of present decisions with any degree of certainty.

True, there was something startling about a man of his experience confessing to shock that the self-interest of financial institutions led not to rational calculus of risk but to irrational pursuit of profit. That Wall Street (and yes, Main Street) is driven by greed as much as anything else should not have been surprising to anyone steeped in a sense of the past and an awareness of the world at large. But that is the sinkhole of ideologies - they can be maintained in all their rigidity only by turning a blind eye to manifold aspects of reality that don't conform. Or as the old joke about economists goes, never let reality get in the way of a good theory.

Still, there was something sad and noble about Greenspan, who seemed genuinely contrite and aware of his role, more than the bland former executives who seemed either in denial or despair and offered little in the way of insight about how we might learn from their faults other than "don't be an arrogant jerk." True, true, but that should have been learned long before. From Greenspan, we glean the perils of intellectual castles of sand, which however gleaming, are often blown away in the face of human passions that hover, always, ready to deconstruct the gossamer threads of civilization and ready as well, thankfully, to weave them delicately back together.

Comments

[Maschine]

Let me get this straight. these are the guys who rely on CORE CPI data that EXCLUDES energy and food.

So, lets fudge the numbers so everyone feels better...R­ugbymom, you are right, this was a scam and mature responsible people are required at the top to protect what was then and what is now, one of the most important institutions of a country, the economy.

I despise Greenspan, he had it all wrong from the late 90's and I personally hold him responsible for disrupting millions of peoples lives.

Do not forget, he is the one who called us irrational and put the brakes on a golden age in American history. Why ? be3cause he didn't understand it. Not good enough.

[marijam]

Alan Greenspan gives senior citizens, and those who have been on-the-job for more than 15 years, a bad name. He makes a case for tossing the old out, for the new, just when America needs to think about what is going to be done with baby boomers who aren't going to be able to retire because of the meltdown.

[joebaggadonuts]

Your eye is as much off the ball as Greenspan's was (assuming he actually was not intentionally stoking an economic shock ala Naiomi Klein).

This disaster should be viewed as a warning to not believe that statistical models can accurately predict real events. QED, man.

Read Taleb. If you want to avoid the passion play, don't stoke it. Start here: http://www.edge.org/3rd_culture/taleb08/taleb08_index.html

[peterg76]

It's called "lying." Greenspan is not the first con artist to use it.

[JBS]

Greenspan didn't take responsibility for NOTHIN!.

There's nothing noble about his pathetic attempt to shift the blame and to wriggle out from responsibility.

Greenspan was and remains a laissez-faire crackpot without one iota of understanding of what he did wrong, and no hint of remorse for the harm he's done the people of this nation and the world.

[SeeDaddy]

In short, Greenspan admiited that supplyside economic theory, the foundation of Reaganomics and the GOP, was bogus. Milt Friedman was wrong too. Back in the early 1980s, the were some economists who did point out the flaws of degulation, but they were vastly out numbered, silenced and quit fighting. Twenty-seven years of accummulated weight of deregulation and tax cuts for corporations and the extremely wealthy eventually collapsed the economy. A new, yet to be defined, economic paradigm will emerge over the next 5-10 yrs. For now, Reaganomics is dead.

[S1m0n]

Greenspan's claim that 'the system' had worked fine for forty years was dishonest.

The present system isn't forty years old. In fact, the rules were changed creating a new, untested system on Greenspan's watch.

[JM51]

Greenspan's performance was right out of Casablanca. He was playing the part of Louie the poor corrupt official. He was "SHOCKED, SHOCKED" to find out there was gambling going on in the establishment ,while he's handed his cut and leaves the premises with full pockets. What a performance. He was laughing at all of us all the way to the bank.

[magicwanz]

"And though she feels as if she's in a play,
She is anyway."
Lennon/McCartney

Perhaps even when we know history, we are doomed to repeat it.

[ShawnMichel]

Mr. Greenspan is a true believer, a Randian fundamentalist who refused to look at fact and instead stuck to his outworn and disproven ideology. And so the market is crashing and collapsing.

He deserves no quarter. So give him none.

[freebeer]

No quarter. Agreed.
And how about some serious truth?
http://globalresearch.ca/index.php?context=va&aid=10651

Don't let the title of the article put you off, this is the best summary of our financial history I have seen so far.

[Mildmannered]

See the WSJ editorial -- Another Bubble Bursts

http://online.wsj.com/article/SB122480934587765107.html

[realpolitic]

"True, there was something startling about a man of his experience confessing to shock that the self-interest of financial institutions led not to rational calculus of risk but to irrational pursuit of profit." Why would someone like Greenspan so trust in the integrity of markets to the point where he thought that they could be self-regulating? Markets are made up of the decisions of countless men and women. Is it any great insight that many would choose to seek enormous profit if they could foreseeably insulate themselves from risk? Is it so inconceivable that so many would choose short-run profits to enrich themsleves over long-run stability. Any school kid would make these assumptions about greed. I guess Greenspan avoids being a Greek tragic figure by admitting his conservative ideology led him astray. Let's trust evidence and experience and not ideology, which conservatives elevate to a litmus test for entry into their select club.

[evensteve]

"But he also tried - to uncertain avail - to shed light on the ease of hindsight and the difficulty of foresight.­"

This profound truth is often overlooked -- people have an incredibly huge tendency to look at the past and think they could have predicted the present even though that is so much more difficult. For the people who post things like "this was so obviously going to end in this way", how many of you shorted the stock market (i.e. bet that the market would go down) because it was such an easy way to make big money. The answer of course is none.

And for those those quick to say that it was all so obvious -- why don't you make 3 predictions today and see how good they are when we check back in 6 months.

That said, it doesn't mean we can't learn form this disaster and do things to avoid it in the future.

Per greenspan, you have to give the guy credit for his admission, can you imagine Bush saying that (or McCain or Obama).

The fed chairman is the most powerful person in the economic world (yes -- more powerful than the pres) and this one made mistakes despite all the 'maestro' talk when he was in power, but at least he admits to them somewhat which is a great model for the rest of us.

[MatoSka]

"American prosperity" in the last twenty years has been based on the pumping up by Greenspan via the Fed for years after it was known the treacherous waters that lay ahead. It is worth our while to try and go beyond the bubble analogy. For years, Greenspan testified before Congress. For years, Congress abrogated their responsilities

"the keys for Congress are to clearly establish a viable objective for the Federal Reserve and to ensure the Central Bank is fully accountable for achieving this goal. This can be fostered by establishing appropriate incentives for monetary policy makers as well as mandating enhanced reporting and disclosure requirements related to progress in achieving stated objectives. Oversight, therefore, should promote policy transparency which can help to promote the credibility of a given monetary policy. "

http://www.house.gov/jec/fed/fed/fed-impt.htm

This one rightfully deserves to be put on the doorstep of Congress. Prolonged low interest rates were promoted and artificially stimulated investment that created new (and bogus) forms of asset valuation. It's not corruption, though there was plenty of that as well. It was the strategy to prolong the "good times", anyway they could. Greenspan, who was often referred to as a genius, had virtual dictatorial powers over financial and monetary markets. In 2004, the Senate approved Greenspan's fifth term as Fed Chair, with only Jim Bunning voting NO. http://query.nytimes.com/gst/fullpage.html?res=9C00E0DA1739F93BA25755C0A9629C8B63 Sen. Bunning (Rep., KY) also voted against the $700 billion bailout.

[rugbymom]

And they brand Obama as naive???

The reason we have all those regulatory agencies is because after 1929, in hindsight, it became obvious that the financial fat cats, left to their own devices, would overleverage, lie, cheat, exploit poor and middle-class people, and do whatever they had to, for their own short-term gain. (These tendencies aren't limited to fat cats -- original sin is rather widely distributed -- but they are more likely to have the power to make major trouble.)

How could a man with as long experience as Greenspan believe that, au contraire, if you remove all the regulations everyone will act in the long-term best interest of the commons? Only by ignoring both history and any understanding of human nature -- and by deliberately rejecting the warnings over the past ten years from other people, including some of his staff, that the overleveraged bubble was unsustainable and risky.

God willing, after January 20 we will get some grown-ups in these jobs who understand basic human nature, the need for checks and balances, and the interdependence of economic life. Allowing a few people living high while the rest suffer is not a long-term balanced approach.
.

[HTooley]

Great Post rugbymom!
Now we will have to hold the next Congress's feet to the fire by performing our oversight of them as citizens. It is our duty to do so. Our current generation(s) now have the opportunity to witness the results of greed firsthand. It will no longer be something found in a history book, or told to you by your departed loved ones.

There will be some pain, and there needs to be some pain to learn about the consequences of our actions. All the more reason to hold the next Congress's feet to the fire to pass significant regulatory legislation that is transparent and enforceable.

Be ever viligent! The fight to get our country back is just beginnng.