Greenspan Shrugged, Now Says Regulation is Necessary

Now that Greenspan has thrown in the towel, the free market ideologues have lost one of their most loyal advocates. From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan called for tighter regulation of financial companies, distancing himself from the free-market culture that he helped to create.

Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony to the House Committee on Oversight and Government Reform. Other rules should address fraud and settlement of trades, he said. Greenspan’s office released the text ahead of the hearing scheduled for 10 a.m. in Washington….

Today, the former chairman asked: “What went wrong with global economic policies that had worked so effectively for nearly four decades?” During his term at the Fed’s helm, Greenspan repeatedly warned lawmakers against inhibiting markets, such as by tightening oversight of certain types of derivatives.

Greenspan, reiterated his “shocked disbelief” that financial companies failed to execute sufficient “surveillance” on their trading counterparties to prevent surging losses. The “breakdown” was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.

Shocked, shocked? Greenspan really has no sense of irony.

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  1. Anonymous

    “Now that Greenspan has thrown in the towel, the free market ideologues have lost one of their most loyal advocates.”

    Balderdash. When Ron Paul (who grilled Greenspan day in and day out for years for his lax policies) starts singing hosannas for central banking and Keynesian stimuli, then let me know.

    Starting at least since he was named Fed Chairman, Greenspan has never been an ally of the free markets. As Ayn Rand suspected, he was a social climber, through and through.

  2. baychev

    It seems to me he is addressing the agent/principal problem inherent in an originate-to-distribute model. This is not backtracking on free markets idology. Markets can function well on themselves as long as the government tries to minimize moral hazard through regulation: break up banks, make sure that rating agencies do not do other business with the companies they rate, brokers and dealers should be separate, etc.
    This is not that difficult but runs contrary to cronyinsm principles and therefore unimplementable.

  3. SilverDollar

    I agree with anon of 3:18. The events of the last 12 months should alleviate all doubt that we live in an economy state controlled nearly as tightly as China’s. If you believe they are growing at 9%, then you can also believe that we’re not currently in a recession. Bollocks to both, I say.

  4. doc holiday

    FYI: Shortly after “Atlas Shrugged” was published in 1957, Mr. Greenspan wrote a letter to The New York Times to counter a critic’s comment that “the book was written out of hate.” Mr. Greenspan wrote: “ ‘Atlas Shrugged’ is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”

    Also see parasitic behavior: Alan Greenspan, the former chairman of the US Federal Reserve, is to become an adviser to Paulson & Co, the $28bn New York-based hedge fund company that achieved spectacular investment returns at the height of the credit squeeze last year.

    Mr Greenspan already holds separate advisory roles with Deutsche Bank and Pimco, the asset management firm. The financial terms of the arrangement were not disclosed.

    John Paulson, president of the hedge fund, said: “Few people, if any in the world, have the experience with, and depth of understanding of, global financial markets [of Mr] Greenspan.”

  5. Jojo

    The End of Libertarianism
    By jacob.weisberg
    Created 10/20/2008 – 9:48am

    A source of mild entertainment amid the financial carnage has been watching libertarians scurrying to explain how the global financial crisis is the result of too much government intervention rather than too little. One line of argument [1] casts as villain the Community Reinvestment Act, which prevents banks from “redlining” minority neighborhoods as not creditworthy. Another theory [2] blames Fannie Mae and Freddie Mac for causing the trouble by subsidizing and securitizing mortgages with an implicit government guarantee. An alternative thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue.

    There are rebuttals to these claims and rejoinders to the rebuttals. But to summarize, the libertarian apologetics fall wildly short of providing any convincing explanation for what went wrong. The argument as a whole is reminiscent of wearying dorm-room debates that took place circa 1989 about whether the fall of the Soviet bloc demonstrated the failure of communism. Academic Marxists were never going to be convinced that anything that happened in the real world could invalidate their belief system. Utopians of the right, libertarians are just as convinced that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along.

    To which the rest of us can only respond, Haven’t you people done enough harm already?

    Full article


  6. pd130

    Except that as I recall, McNamara did show recognition that his own actions related to the debacle in question.

    Of course, that should best be followed by penitential silence.

  7. Anonymous

    Thanks for the link, JoJo. I *still* hear this from my communist friends all the time. They tell me that I am co-opted by “capitalist ideology” and that their communist principles have never been given a fair shake in the real world. When they are presented with the idea that real world implementation always will lead to totalitarian dictatorships, either by the difficult process of change in a reluctant portion of the populace or the power vacuum created thereafter, they quickly change the subject. Anarcho-capitalist libertarians are just as utopian, counterfactual and delusional as these communists. I can’t believe we don’t all openly scoff at them every day. Ron Paul is probably a good man, but his ideas are, to put it nicely, fringe (and wholly without much evidential support). It should not surprise me that the anarcho-capitalists have reacted in the same way…”our ideas have never been tried.” Cognitive dissonance. Powerful delusion. Hayek always made a point, in discussing Germany’s dissent into Naziism, that ideas are powerful. Just be vigilant that the ideas of the anarcho-capitalist fringe don’t continue to infect the general population.

  8. Anonymous

    I was wondering when someone would get around to posting Weisberg’s sophistry and name-calling masquerading as a column. There are plenty of legitimate arguments against deregulation to be made by more serious people than Weisberg, but I guess that’s the kind of fare that has the greatest traction in political discussion, these days.

    “Ron Paul is probably a good man, but his ideas are, to put it nicely, fringe (and wholly without much evidential support).”

    You’re obviously in a big hurry to do your “open scoffing” and not paying much attention to what the man has actually said. He’s called the credit crisis to a “t”.

    Here are some things he said when voting *against* Graham-Leach-Bliley. In the year 1999.
    “today we are considering a bill aimed at modernizing the financial services industry through deregulation. It is a worthy goal which I support. However, this bill falls short of that goal. The negative aspects of this bill outweigh the benefits….

    * The growth in money and credit has outpaced both savings and economic growth. These inflationary pressures have been concentrated in asset prices, not consumer price inflation–keeping monetary policy too easy. This increase in asset prices has fueled domestic borrowing and spending.

    * Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average–and reduce risk for individual institutions while increasing risk for the system as a whole.

    * The rapidity and severity of changes in economic conditions can affect prospects for individual institutions more greatly than that of the overall economy. The Long Term Capital Management hedge fund is a prime example. New companies start and others fail every day. What is troubling with the hedge fund bailout was the governmental response and the increase in moral hazard.

    * This increased indication of the government’s eagerness to bail out highly-leveraged, risky and largely unregulated financial institutions bodes ill for the post S. 900 future as far as limiting taxpayer liability is concerned. LTCM isn’t even registered in the United States but the Cayman Islands!

    * …My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill.”

    Again, those familiar with Austrian economics were more prescient about the present circumstances than anyone, but modern commentators are either ignorant of it or so desperate to dismiss it as “fringe” that they won’t even consider *looking* at its theoretical framework.

    So. We’ll just go with the Keynesian approach until it finally bankrupts the U.S.

  9. BeerdedOne

    Libertarianism may be flawed, but it is NOT to blame.

    Lets be intellectually honest with ourselves and admit that Libertarians are a misunderstood, heterogeneous and largely marginal (in Washington, atleast) political group. The idea that the Bob Barrs’ of the world speak for all libertarians is as ridiculous as the idea that the Bush administration has somehow implemented Libertarian policies since 2000! I’m very unclear what motivation people have to obscure the agenda of the neoconservative / neoliberal corporatists behind a smokescreen of libertarian bashing.

    The question shouldn’t be couched in the regulation/deregulation framework, but in terms of regulation for and by whom?

    Corporatism has invaded our government on both sides of the aisle. Lobbyists hired by corporate interests write the laws that then are masqueraded as the ‘regulation’ or ‘deregulation’ that is needed, depending on the political climate and which party is in power.

    The revolving door of high level industry/government/industry employment assures that the policy implementation is carried out with a high degree of loyalty to big banking. Watch as it happens again in the wake of this crisis.

  10. Anonymous

    No sense of irony? How about no shame! He is probably the single largest culprit in setting the stage for this mess. If the hired hand in charge of the central bank couldn’t see this coming, he is incompetent. If he did see it coming, he is evil. You pick…

  11. ruetheday

    Libertarianism (at least the natural rights variant) is based on the unjustified assumption that the right to private property and the right of contract somehow are absolute and must trump all other considerations. Furthermore, there is the additional unjustified assumption that externalities either do not exist or are so insignificant as to be safely ignored.

    None of these premises are able to withstand a moment’s scrutiny, which is why serious political philosophers don’t spend much time responding to libertarians.

    With regard to private property, if one follows an entitlement theory of justice, ala Nozick, one always ends up with the question of how to justify the initial acquisition of land and other unproduced natural resources. There is no solution to this problem, despite libertarians’ attempts to fudge it with counterfactual, post-hoc rationalizations like labor-mixing and homesteading.

    With regard to contracts, any attempt at developing a moral system based on voluntary contract has to not only answer the question of why contracts should be ENFORCED (i.e., why individuals shouldn’t be permitted to exit agreements as easily as they enter them when either circumstances or their opinions change) but also must consider 1) the bargaining power of each party entering into the contract and 2) the information available to each party upon entry. Libertarians’ excepting of “force” and “fraud” from all agreements is just a simple-minded attempt at punting on the issue of bargaining power and information.

    With regard to externalities, libertarianism relies on the unjustified assumption that all human activities can be divided into voluntary action and force (false dichotomy fallacy) and thus rules out the fact that the actions of individuals can indirectly but significantly affect other individuals without their consent. Every man is an island in libertopia. Outside of libertopia, the daily actions of individuals living in society do, in many cases, affect others.

    Libertarianism debunked in three easy steps.

  12. doc holiday

    Greenspan simply must continue to evolve as a capitalist and show no loyalty or integrity with his withering shell. He must not be bound to his money-based relationships to the current hedge fund he whores for, or bow before the deals with Pimco, et al. As God is my witness, the man must burrow himself into the exchanges and opportunities available in Zimbabwe, before he returns to Mephistopheles for a new assignment:

    Inflation is somewhere in the millions – or perhaps the billions – and the economy is the fastest shrinking on Earth. But Zimbabwe is the “best investment opportunity” in Africa, financiers at a seminar in South Africa have heard.
    In the surreal atmosphere of President Robert Mugabe’s domain, this proposition may have a certain logic.
    Throughout the economic meltdown, Zimbabwe’s stock market has soared because hyperinflation means that people must pour their money into shares to preserve its value.
    On Monday, the Zimbabwe Stock Exchange (ZSE) industrials index rose by over 241 per cent. During the investment seminar, a live feed of ZSE prices showed many stocks going up by several hundred per cent, with the leader, Zimnat, up 1,150 per cent in a day. There were no fallers.
    Meanwhile, the Zimbabwe Dollar plummeted, falling to 306.8 million against its US counterpart in the course of a morning

  13. Hirsch V Gupta

    Anon of 7:12a.m.

    Thanks for posting the text of Ron Paul’s comments from the 1999 act.

    His ideas in 1999 were undenaibly better and more organized than he was able to present it during the campaign or during his questing of the Ben Bernanke atthe hearing where he went off on a tangent and just stayed there.

    Thanks again.


    Hirsch V Gupta

  14. wintermute

    The credit crisis is big enough to spread the blame over thousands of individuals. But the “tall poppy”, head and shoulders above the rest is.. drum roll… Alan Greenspan, take a bow – and please – just exit the stage – forever! We do not want to hear anymore from you. BYE.
    Get lost.

  15. Anonymous

    Greenspan, a man who truly kneeled at the altar of Market Fundamentalism in 3 out of its 4 ugly incarnations.

    Greenspan: the man who called himself a Libertarian, worshiped an Objectivist, and ran his central bank like a Neoliberal.

    The 4 ugly pillars of Market Fundamentalism (don’t forget the ugliest one, Anarcho-Capitalism!) need to have happen to them exactly what happned to Communism: be consigned to the trash heap of history.

  16. Anonymous

    Yves, this is really unfair. Free market “ideologues”, as you call them, were the ones warning about this crisis. Folks like Mish, who subscribe to Austrian economics, know the pernicious role of the Federal Reserve, and have been calling out Greenspan as an ENEMY for a long time – take a look at Fleckenstein’s book for instance, or Grant’s interest rate observer.

    I think you do a big disservice to yourself by conflating those who actually believe in free market capitalism, vs those who believe in crony corporatism and a socialized money supply. To me, it’s akin to trying to confuse Obama as a muslim. It’s distasteful and dishonest.

  17. Mara

    Quote: It’s called the “Claude Raines moment”. It’s predictably written into the script.

    Do you mean the “Invisible Man” Claude Raines or later when he was hocking hemorrhoid creme? I could have either for Greenspan.

  18. David

    Greenspan was truly an acolyte of Ayn Rand and hardly a socialist so why are all the Libertarians claiming their theories weren’t influential to this mess.

    Obama’s connection to High Finance like McCain’s is suspicious but at least he’s objective to Stimulus and Keynesian economics that could get us out of this mess. I suppose just letting the Market work at this point will just be the right thing to make double digit unemployment, lowering of life spans and other maladies of Unregulated 1840’s styles of Classical Liberalism (or Libertarianism).

    Tell me that Scrooge was anything else but a Libertarian?

  19. Anonymous

    Is there another group of people who understand “free market” less than Libertarians? Good dog. Speaking of doG, “invisible hand” enthusiasts believe it is the hand of god and therefore market balance left unfettered will be just.

  20. HC

    The man in charge of the largest counterfeiting operation in the world, enforced by gun point, who willingly intervened in the money markets to distort interest rates is some how a free market ideologue? I am glad politics isn’t your specialty Yves… I mean how is setting price ‘targets’ on interest rates any different than pegging a currency or price ‘targeting’ gasoline or food? Isn’t that the whole point of a command economy? To command the prices and thereby the flow of goods? Owell would be ‘proud’ Yves…

  21. Anonymous

    “Now that Greenspan has thrown in the towel, the free market ideologues have lost one of their most loyal advocates.”

    Yves – have you read Bill Fleckensteins book?

    It is the best refutation of Greenspan that I’ve come across.

    The title is :

    “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.”


  22. Yves Smith


    Nicely done.


    Thanks for the book referral.

    Anon of 4:35 PM,

    Just because someone saw the crisis coming and attributed it to his ideology does not make the ideology valid. I have an astrologer friend who has predicted global economic and political upheaval, end of the economic order as we know it. occurring around this time a full decade ago. I tend to tune that sort of thing out, but he has been proven correct. Does that mean we should all go worship at the temple of astrology?

    Plenty of people of various persuasions saw this coming, albeit all in the minority. Libertarians did not have a monopoly on foresight.

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