Alan the Penitent

by Russ Roberts on October 23, 2008

in Politics

Alan Greenspan has been forced to admit the heresy of his youth. He has recanted. The New York Times reports:

Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve
chairman once considered the infallible maestro of the financial
system, admitted on Thursday that he “made a mistake” in trusting that
free markets could regulate themselves without government oversight.

Note that the phrase "free markets could regulate themselves without government oversight" is from the reporter, Michael Grynbaum. It’s a very strange phrase to apply to financial markets that have substantial government oversight and regulation. The story continues:

A fervent proponent of deregulation during his 18-year tenure at the
Fed’s helm, Mr. Greenspan has faced mounting criticism this year for
having refused to consider cracking down on credit derivatives, an unchecked market whose excesses partly led to the current financial crisis.

Although
he defended the use of derivatives in general, Mr. Greenspan, who left
office in 2006, told members of the House Committee of Government
Oversight and Reform that he was “partially” wrong in not having tried
to regulate the market for credit-default swaps.

Oh I see. Greenspan thought derivatives didn’t need their own regulation. But that wasn’t enough of a confession for the Great Waxman:

But in a tense exchange with Representative Henry A. Waxman,
the California Democrat who is chairman of the committee, Mr. Greenspan
conceded a more serious flaw in his own philosophy that unfettered free
markets sit at the root of a superior economy.

Again, that last part is Michael Grynbaum talking, not Greenspan. Now for some actual quotes from Greenspan as the article continues:

“I made a mistake
in presuming that the self-interests of organizations, specifically
banks and others, were such as that they were best capable of
protecting their own shareholders and their equity in the firms,” Mr.
Greenspan said.

Referring to his free-market ideology, Mr.
Greenspan added: “I have found a flaw. I don’t know how significant or
permanent it is. But I have been very distressed by that fact.”

Mr.
Waxman pressed the former Fed chair to clarify his words. “In other
words, you found that your view of the world, your ideology, was not
right, it was not working,” Mr. Waxman said.

“Absolutely,
precisely,” Mr. Greenspan replied. “You know, that’s precisely the
reason I was shocked, because I have been going for 40 years or more
with very considerable evidence that it was working exceptionally well.”

So let me take a crack at this. Alan Greenspan thought that banks would never put themselves in a position where they might go bankrupt. Investment houses would never take on too much risk. After all, that could mean disaster and the threat of disaster should encourage prudence. And yet, many banks and investment houses evidently did take on too much risk. The incentives failed.

I too am surprised at how imprudent they were.  Did they miscalculate? Trust the ratings agencies too much? Misread the systemic risk if other firms failed? Did they fail to appreciate the bite of mark-to-market accounting rules that the government required? Or perhaps, this whole incentive thing that is at the root of capitalism, the profit and loss system that incentivizes firms is overrated. People are impulsive and make systematic errors

Those are the key questions of this mess. I have not seen them answered yet.

Meanwhile, I keep coming back to this quote:

“I made a mistake
in presuming that the self-interests of organizations, specifically
banks and others, were such as that they were best capable of
protecting their own shareholders and their equity in the firms."

And the alternative? What should protect the shareholders? The altruism of regulators?

Too bad Henry Waxman never has to answer the questions.

Be Sociable, Share!

Comments

comments

98 comments    Share Share    Print    Email

{ 49 comments }

Steve Fraser October 23, 2008 at 7:13 pm

It is always important to remember that journalists don't often study the subjects they report on. Mr. Grynbaum's superficial understanding, along with obvious bias towards a government "fettered" capitalistic system shows through.

Markets are thoroughly infiltrated with regulation – it's the enforcement of those regulations that failed. Perhaps the original enabling legislation was flawed in the extreme. Who would we hold accountable for that? Mr. Waxman? Mr. Dodd? Mr. Frank? Ms. Pelosi? Mr. Gramm?

The idea that banks would be predisposed to remaining in business seems sound – yet greed, coupled with legislative mandates to increase subprime borrowing, extremely low interest rates for too long, and two Congressional "enablers" in Fannie Mae and Freddie Mac, created a system that was not unfettered, nor was it free.

Prosecute the guilty, I'm sure there is a sufficient number to fill up a prison. Pray that we can actually reach back to a time when our banking system wasn't partially nationalized. I hope so.

Bret October 23, 2008 at 7:15 pm

"Alan Greenspan thought that banks would never put themselves in a position where they might go bankrupt."

Never is a long time.

Indeed, it doesn't make sense to put oneself in a position where you never go bankrupt. First, never going bankrupt is impossible anyway, but the Net Present Value of a company that reduces risk enough to only go bankrupt every 10,000 years is probably substantially below the NPV of a company that could expect to go bankrupt every 100 years.

In the long run, we're all dead.

Methinks October 23, 2008 at 7:52 pm

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

The alternative?

There is no alternative. Just because they are the best and most capable doesn't mean they always will. Shareholders and creditors take that risk and know they're taking that risk. Both the rewards and the consequences should go to them.

Even in the case of credit default swaps, the buyers were all savvy institutions and they all knew that the counterparty may not have enough capital to pay on the swap if the hedged instrument defaulted. Buying a CDS was essentially going a long the counterparty's credit rating without Alan Greenspan. In an effort to protect his legacy, he's flailing around and backpedaling. Drives me insane.

This is only a big deal because when government makes its daily list of huge mistakes, it never has to answer for them. When private business makes mistakes, the government seizes the opportunity to destroy private business and expand government.

Dr. T October 23, 2008 at 7:54 pm

I too am surprised at how imprudent they were.

How can anyone who knows about the thousands of bank failures and dozens of investment firm failures over the past thirty years be surprised about imprudent management? I sure as hell wasn't surprised by the hundreds of hospital closures in the 1980s and 1990s.

Most of the hospital and business CEOs I've met weren't bright. Many important business decisions are made by restating and acting on stupid business school maxims such as "If you're not growing, you're dying" or "Failure is not an option." Thoughtful analysis does not get much play in the executive conference rooms of many firms.

Methinks October 23, 2008 at 7:56 pm

" without Alan Greenspan."

should read:

"and they all knew this without Alan Greenspan's help".

Acton. October 23, 2008 at 8:03 pm

I don't really understand why whenever something bad happens in our regulation-fetish economy, people always whine about "free, unregulated" markets.

So is the glass half full or half empty?

Martin Brock October 23, 2008 at 8:19 pm

Or perhaps, this whole incentive thing that is at the root of capitalism, the profit and loss system that incentivizes firms is overrated. People are impulsive and make systematic errors

What makes you think that anyone acted against his own interests? Because some "firms" ended up on the brink of failure? So what?

Make me an offer. Give me ten million bucks, free and clear, and I'll wreck any firm you name. I'll wreck any number of firms. I'll wreck every firm in the world, and all I want personally is ten million bucks, not a hundred million, not a billion, only ten million measly bucks.

And let's not say "wreck", because that wouldn't be nice. Let's say "leverage". And we're doing the shareholders a favor. Everyone wins. Let's say that too.

Guess what? 98% of the population would take this offer, and another one and a half percent are lying. The rest already have ten million bucks.

Mesa Econoguy October 23, 2008 at 8:43 pm

Thanks for pointing this out, Russ.

I was not a Greenspan fan then, but I’m forced to defend him (somewhat) now, because he’s nearly incapable of doing so himself, largely because he lacks the part of the brain which processes and recognizes political horsecrap when it sees/smells it/steps in it. He was and is a naïve bureaucrat at heart.

What little I saw was disgusting. Henry Waxman, the Most Ignorant Man on the Planet:

Committee Chairman Henry Waxman, a California Democrat, said today that Greenspan had “the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis.''

`Paying the Price'

“You were advised to do so by many others,'' he told the man hailed in the 1990s as the “Maestro'' of the global financial system and awarded a knighthood in 2002. “And now our whole economy is paying the price.''

Congressman, how bout you shut your insipid fat bald yap, march into your colleague Barney Fwank's office down the hall, and fire that accusation at him, while you're staring in the mirror? You and Fatass Fwank are (Fweddie & Fannie) had just as much capacity to reign in the unsound lending at FRE & FNM, but you were too busy protecting them as careerpaths and repositories for Democrat power brokers.

Mr. Waxman, you are a fraud, an incompetent liar, and Jupiter-sized hypocrite.

And, lest we forget,

If that bill [2005 Senate Banking FRE & FNM reform bill] had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

How the Democrats Created the Financial Crisis

Waxman, you make me sick.

Mesa Econoguy October 23, 2008 at 8:49 pm

[closing tags]

I dislike the new typepad mask almost as much as Henry Waxman.

Here’s some more fun reading:

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.

Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy — in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few — and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.

Blame Fannie Mae and Congress For the Credit Mess

Blackadder October 23, 2008 at 8:53 pm

I thought the heresy of Greenspan's youth was his support for the Gold Standard. Seems to me he got over that one a long time ago.

Anyway, I don't find it too terribly surprising that Greenspan would say what he did about regulation and the markets. The alternative, to answer Russ's question, would be to admit that he had actually caused the crisis by keeping interest rates artificially low.

LowcountryJoe October 23, 2008 at 10:44 pm

Greenspan from a 2004 testimony making sense. Maybe Alan's current lack of spine has something to do with his satchel being in Andrea's purse. Greenspan called it correctly back in 2004. Why he could not deliever this time around is beyond me. Perhaps Mitchell didn't want hubby to say anything disruptive on the short path to a full-blown, two-branch Marxist federal government. And the High Court is dangerously close to joing the oether two.

Sanjiv October 23, 2008 at 11:25 pm

"Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said."

I happened to see "The Crucible" a few days ago. Waxman reminds me of the witch-hunter in that movie.
Confessing to witchcraft is the only way to save your life. Waxman got his confession and Greenspan can now avoid the rope (or so he thinks).

Adam Cohen October 24, 2008 at 12:14 am

Did he really write this?
http://www.usagold.com/gildedopinion/greenspan.html

Greenspan is going to make some lucky graduate student a fascinating public choice theory case study. Is it really so shocking that the same person who wrote a powerful intellectual defense of the gold standard and then spent approximately two decades in charge of the Federal Reserve would now publicly imply that capitalism is a flawed theory?

Capitalism is a profit AND LOSS system, right? It's absurd to conclude from specific bank failures that the theory of capitalism is somehow flawed. And clearly there are data to substantiate that government intervention played a huge role in the current mess.

Professional politicians, Greenspan included, sicken me.

Tim October 24, 2008 at 12:17 am

"I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Unlike Greenspan, I do not believe free markets keep people from making mistakes; rather, they keep people from systematically repeating them. In Greenspan's 40 years, he has seen one instance where a deregulated section of the financial industry suffered enough of a setback to influence the macroeconomy. (For reasons that have much to do with regulations of GSEs and other financial segments, no less). Can you imagine how wonderful life would be if government and regulation had that kind of success? The FDA, USPS, Medicare, Social Security, Fed, Fannie/Freddie, FEMA… Imagine if we only saw one big failure of all these institutions every four decades. And imagine that such failures were not encouraged through government action to recur. What a wonderful dreamworld.

Juan C. de Cardenas October 24, 2008 at 1:12 am

I too am surprised at how imprudent they were. Did they miscalculate? Trust the ratings agencies too much? Misread the systemic risk if other firms failed? Did they fail to appreciate the bite of mark-to-market accounting rules that the government required? Or perhaps, this whole incentive thing that is at the root of capitalism, the profit and loss system that incentivizes firms is overrated. People are impulsive and make systematic errors.
Russ

Russ, I am not surprised at all. What I am surprised is about the widespread belief that if we find the "right" system things are going to be flawless, or at least that nothing major will ever happen. Regardless of the incentives people are going to make mistakes, many things will go under the radar and then explode all of a sudden because even the collective, unarticulated wisdom as expressed on the free market cannot account and put together all the information necessary for the myriad of individuals and institutions to make the right decisions all the time, not to mentioned biases, the herd mentality, et cetera, and yes too many people are impulsive and irrational but even the rational make bad judgements about risks and many times the bad judgements feed on each other. Many books have been written about the flaws in our thinking and the limitations of reason and logic. Not that in this case there weren't many bad incentives and government meddling.
Enemies of freedom will always use the inevitable problems and even inevitable "crisis" in a more or less free market to conclude that it "failed" because they believe the market, rather than to eventually expose and correct the failures of market participant's free decisions, is to act as some sort of "plan" that must anticipate all problems. In other words, they are projecting their own fantasy that they can design a system that can deal flawlessly with the complexities of the world on the market and then find it wanting.
So the answer is not that in the free market there won't be failures and crisis but that in trying to implement the really dangerous utopia that we can design a system in which nothing ever fail and everybody will be forever happy we will give away freedom, innovation and the capacity to improve out lot that comes with it. In the end we will end up in one totalitarian hell that are the very definition of failure, where anybody still alive will be very unhappy and poor.
We are living very dangerous times indeed and back to Alan Greenspan, what a disgusting, intellectually dishonest, morally bankrupt and coward person he is. He could have admitted his real mistakes and lack of courage and intellectual integrity back when he was chairman of the Fed and then call Congress on its own hypocrisy and corruption. He is not naive, he is just a despicable creature.

muirgeo October 24, 2008 at 1:17 am

Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.

“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Wow! This is right up there with the fall of the Berlin Wall. But I give Greenspan credit. At 82 it takes a special person to recognize his ideological failings. On the other hand did he think he was gonna fool the committee by blaming this on regulation. That gig is so over he knew it was a battle he couldn't win.

muirgeo October 24, 2008 at 1:42 am

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

The alternative?

There is no alternative.
Posted by: Methinks

Wow and you thought I was stupid!!! The incentives for CEO's and their rewards are so unrelated to the good of society, their customers interest, the shareholders interest, the companies interest or even its quarterly profits in some cases that your inability to see an alternative is moronic.

Here's one alternative;

Since corporations are government creations and you hate the government lets get rid of corporations.

Bottom line if you wanna be a corporation you're gonna follow the rules we make for you.. GOT IT! Don't like the rules then don't incorporate.

Or this idea; no more allowing the company to count stock proxies that are not returned as votes in support of management’s position.

Oil Shock October 24, 2008 at 1:52 am

Drop that bottle of Cheap Whisky, Muirgeo. Now, Go make love to your imaginary girl friend.

muirgeo October 24, 2008 at 2:05 am

If that bill [2005 Senate Banking FRE & FNM reform bill] had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

How the Democrats Created the Financial Crisis

Waxman, you make me sick.
Posted by: Mesa Econoguy

Wow you are wrong on so many counts. Not easy propping up a dead ideology. First of all the bill did pass the house. So Franks vote son it were irrelevant. Second the bill was to require greater regulation not less… I thought you were all for less regulation. Third the bill died in a Republican controlled committee. Oh and forth Fanny and Freddie had nothing to do with Stock jobbers filling up on unregulated OTC derivatives and CDS's.

Juan C. de Cardenas October 24, 2008 at 2:41 am

Bottom line if you wanna be a corporation you're gonna follow the rules we make for you.. GOT IT! Don't like the rules then don't incorporate.
muirgeo

So you already have a position offered in the Commissariat of Finances, you nasty little wannabe dictator. You'd better get one and pray for your luck to last forever. You might end up in a gulag in Alaska after one of the periodic purges the regime needs after each string of failures.

Hans Luftner October 24, 2008 at 4:18 am

"I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

He continues: "Then I was put in charge of the money supply & it all went to pot. What could have gone wrong? I guess it must have been some undiscovered flaw in the free market…"

Yes. What a brave man to admit to Henry Waxman that it was all capitalism's fault all along. I'm humbled by his integrity.

Tim October 24, 2008 at 5:05 am

In 1966 Alan Greenspan had this to say:

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves."

I think Greenspan 1966 is due for a comeback.

LowcountryJoe October 24, 2008 at 5:27 am

Or this idea; no more allowing the company to count stock proxies that are not returned as votes in support of management’s position.

Even in a one elligible person, one equally-counted vote system that U.S. voters use to elect asshats, does the vote turnout go beyond 50% from all candidates combined? Imagine requiring greater than 50% of all elligible voters to vote for a dumbass politician in order for one to get ellected? I wonder if shares (not neccessary all individuals holding shares) are voted on with greater frequency than political elections use elligible ballots?

I'm sure muirgeo would have the work around solution — compulsory voting, with jail time for not exercising one's right to vote. To find enemies of freedom, Juan de Cardenas, one need not look futher than a post by muirgeo, Seth storm, or Charlie.

Randy October 24, 2008 at 11:01 am

Methinks,

"Shareholders and creditors take that risk and know they're taking that risk. Both the rewards and the consequences should go to them."

Generally, I agree. Specifically, there is a problem in that government involvement in the markets led to a situation in which many participants, especially small players like mutual fund owners, had no idea of the magnitude of the risk they were taking. I agree that these folks should nonetheless be allowed to deal with the consequences. Trusting the government is a mistake – a huge mistake – and people need to understand and learn from their mistakes. So let them deal with it and press on. My recommendation for the future is that the government should remove itself entirely from the markets so as not to encourage people to make the same mistake again. Leave investing to the true investors – and make clear to the gamblers that they are in fact gambling.

Chares October 24, 2008 at 11:43 am

Hi,

"Or perhaps, this whole incentive thing that is at the root of capitalism, the profit and loss system that incentivizes firms is overrated."

While I wouldn't say it's overrated, I think it's poorly understood. I analyzed capital markets using game theory and came to conclusions that do a pretty good job of explaining what can go wrong and why.

http://derivativedribble.wordpress.com/2008/10/10/the-not-so-efficient-market-proof-hypothesis/

ps October 24, 2008 at 12:21 pm

"Or perhaps, this whole incentive thing that is at the root of capitalism, the profit and loss system that incentivizes firms is overrated."

Incentives work and may have been at the heart of the problem. Within the next quote can be seen Greenspan's failure of understanding.

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

He failed to recognize that the "self-interests of organizations, specifically banks and others" that failed to protect shareholders were the self-interests of the organizations' management. In understanding large publicly held corporations it is critical to differentiate between management and shareholders. Incentives put in place by Boards have driven a wedge between the interests of management and shareholders. By the time the black swan wipes out the shareholders, the managers have pocketed their cash. Shareholders need to become more proactive in their oversight of management through Boards. Failure to do so has now begun to allow the government to step in and lead us down the road to serfdom.

Remember when investment banks were partnerships? Did they take similar risks when it was their own capital?

Martin Brock October 24, 2008 at 1:18 pm

Firms don't have incentives. People have incentives. Firms are legalistic abstractions that people with incentives manipulate for their own purposes.

Jeff October 24, 2008 at 1:27 pm

Sad and creepy. Like in 1984 when they force the political prisoners to falsely confess to crimes and conspiracies against the state and broadcast it for all to see. Does Greenspan really believe this or is he simply trying to avoid being considered the Hoover of the 2008 crisis?

ps October 24, 2008 at 5:01 pm

"Firms don't have incentives. People have incentives. Firms are legalistic abstractions that people with incentives manipulate for their own purposes."

Agreed but shareholders as people (although there may be several degrees of removal until you reach people) are ultimately the ones who are incentivized to act in the interest of the long term value of the corporation. The phrase "divide and conquer" comes to mind when reflecting on how management can subvert the interests of the shareholders.

Paul Roscelli October 24, 2008 at 5:40 pm

I liked the part of Greenspan's comments that were reported as (paraphrasing) "he was wrong to have trusted the free markets, BUT he wasn't sure what had caused these problems." Ok, so let me get this straight, even though he is unsure what caused the problem he is sure that free markets didn't help and probably hurt. Am I the only one that finds this kind of logic troubling? If you don't know what caused the problem how can you presume to cause blame? Not he best moment.

Mesa Econoguy October 24, 2008 at 6:49 pm

Wow you are wrong on so many counts.
Posted by: muirgeo | Oct 24, 2008 2:05:46 AM

No, I’m not, fool. You have no idea what this is about, again.

First of all the bill did pass the house. So Franks vote son it were irrelevant.

So what? This was a Republican-controlled Congress, and Frank/Democrats did absolutely nothing to reign in Freddie and Fannie, EVEN THOUGH GREENSPAN HIMSELF WARNED CONGRESS MULTIPLE TIMES:

If Fannie and Freddie “continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. “We are placing the total financial system of the future at a substantial risk.''

Republicans tried, and were defeated on a committee party-line vote. And House Democrats don’t interact/influence Senate Democrats? That's idiotic on its face.

Second the bill was to require greater regulation not less… I thought you were all for less regulation.

I am. I thought you Democrats were for more regulation, not less.

Third the bill died in a Republican controlled committee.

Because it was killed on a party-line vote by Democrats on the Senate Banking Committee. See above, idiot.

Oh and forth [sic.] Fanny and Freddie had nothing to do with Stock jobbers filling up on unregulated OTC derivatives and CDS's.

Oh, and neither does much of what is currently transpiring in the financial markets, jackass. Freddie & Fannie were a root cause of the questionable assets that became the toxic paper traded & held by a lot of funds & houses, and they were and are staffed and protected by Democrats.

Most equities shops didn't go near CDS or anything remotely related to them, fool.

But since you don't know jack shit about structured pool tranches, asset-backed securities, rate swaps, interbank forwards, trading, and the financial system in general, you wouldn't know that. Plus, you're genuinely stupid.

Muirgeo, you make me sick.

muirgeo October 24, 2008 at 8:24 pm

Muirgeo, you make me sick.
Posted by: Mesa Econoguy

Well that's good because knowing that actually makes ME feel better.

muirgeo October 24, 2008 at 8:38 pm

Mesa,

DO NOT READ THIS! IT MIGHT MAKE YOU SICKER.

Everyone else go ahead and read it so you can see where Mesa's head is.

From The Big Picture;

These facts don't stop the pundits; nor does an apparent lack of understanding of the actual causes of the housing boom/bust and the credit crisis. Their cognitive dissonance has also prevented them from acknowledging the role deregulation had in these events.

Some people actually look at the data, while others foolishly parrot talking points. Consider this Federal Reserve Board data, compiled by McClathcy. It shows that:

More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.
Private firms made nearly 83% of the subprime loans to low- and moderate-income borrowers that year.
Only one of the top 25 subprime lenders in 2006 was directly subject to the CRA;
Only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.
Mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

muirgeo October 24, 2008 at 8:41 pm

More gaaaccckkk for Mesa,

Alan Greenspan: as seen on CSPAN's House Oversight Hearing on the Role of Federal Regulators beginning about minute 20:00 on 10/23/2008

" What went wrong……. The breakdown has been most apparent in the securitization of home mortgages. The evidence STRONGLY suggest that without the excess demand from securitizers, sub-prime mortgage originations,undeniably the original source of the crisis, would have been smaller and defaults according fewer."

Mesa Econoguy October 24, 2008 at 9:06 pm

And who drove sub-prime, muirgeo? Who drove them, George, you stupid prick?

Hint: Freddie & Fannie, you tool.

Why did they drive them? Because ignorant liberals like you wanted to feel good and help the less fortunate, so you gave them free money. Nice job George.

You caused this problem.

Mesa Econoguy October 24, 2008 at 9:12 pm

And those foolish “Conservative Republicans playing with Libertarian ideas” attempted this in 2005:

Regulating Fannie Mae and Freddie Mac

Some people read & actually understand market & economic history.

Mesa Econoguy October 24, 2008 at 9:21 pm

And while we’re at it, let’s look at the top contributions to Congress by FNM & FRE:

Dodd, Christopher S CT D $165,400
Obama, Barack S IL D $126,349

Winner: Barack

Did I mention that Jim Johnson, one of Obama’s VP vetters, was head of Fannie Mae?

Gee, I wonder why?

Mesa Econoguy October 24, 2008 at 9:34 pm

That was a trap.

Those were total contributions over time.

Years in service:

Chris Dodd: 27

Barack Obama: 2.5 (kind of)

Michael D October 24, 2008 at 9:46 pm

Alan has a point but he should not be shocked. The limited liability corporation is run by professional managers whose incentives may not be sufficiently aligned with the long term interests of the shareholders. Attempts have been made to use bonuses, stock options and restricted stock to align the incentives of these managers, but these incentives may lead to risk taking rather than more cautious behavior since the time frame for gain is still fairly short.

Since the modern limited liability corporation is a creature of the state, failure of these firms is by definition a government and regulatory failure. It may be worthwhile project to determine how to better align shareholder value and management incentives.

jose October 24, 2008 at 9:46 pm

As Russ often points out in the podcast: organizations do not have self-interest, the people within them do, and these are not necessarily aligned with what is best for the organization.

The mortgage salesman wants to make a commission in the short term even if it means his bank might go under in 5 year (he won't lose a penny from his paycheck).

We are mortal, we have a short horizon. A lot of Economic theory assumes a selfish desire for long-term profits or survival. That is a wrong assumption. When Economists start modeling the individuals within the corporations instead of assuming the corporation as a rational atomic entity then situations like this one will be easily predictable.

Right now, the individuals in the various organization are panicking, well beyond what is rational, this is reflected in the market.

Fear and greed, that is all it is.

Michael D October 24, 2008 at 9:53 pm

Alan has a point but he should not be shocked. The limited liability corporation is run by professional managers whose incentives may not be sufficiently aligned with the long term interests of the shareholders. Attempts have been made to use bonuses, stock options and restricted stock to align the incentives of these managers, but these incentives may lead to risk taking rather than more cautious behavior since the time frame for gain is still fairly short.

Since the modern limited liability corporation is a creature of the state, failure of these firms is by definition a government and regulatory failure. It may be worthwhile project to determine how to better align shareholder value and management incentives.

Mesa Econoguy October 24, 2008 at 9:59 pm

Right now, the individuals in the various organization are panicking, well beyond what is rational, this is reflected in the market.
Fear and greed, that is all it is.
Posted by: jose | Oct 24, 2008 9:46:54 PM

Yep. There are some screaming deals out there now. Empire, legacy-builders…..

Mesa Econoguy October 24, 2008 at 10:18 pm

Oh, muirgeo, just in case you didn’t see the legislation defeated by you first-hand, here it is:

S.190

You vacuous turd.

Sam Grove October 24, 2008 at 11:47 pm

Muirgeo,

It's way to easy to assert "deregulation".

Can we have some specifics?
What regulations were repealed or overturned?

Is there any evidence of "deregulation" other than assertions repeated in the echo chamber?

Come on, I want some hard evidence.

Less Antman October 25, 2008 at 12:22 am

The limited liability status of corporations isn't necessarily significant here, even if one takes the position that shareholders would bear unlimited tort liability in a free market. The reason is that these losses arose from contracts, where limits on the liability of the parties to the contract could still have been negotiated, and probably would have been.

I doubt that entities which required shareholders to accept unlimited contractual liability would be able to obtain capital nearly as readily as those that limited it, so buyers of credit default swaps might well have had no provider option other than limited liability insurers, an identical scenario to the present situation.

The difference I see in a free market is that the absence of regulatory barriers would have permitted standardized and exchange traded credit default swaps to exist, so that individual investors could have participated (directly or through funds) in the offering of these swaps, instead of the business being dominated by a small number of insurers. For each investor, it would only be a small part of a diversified investment portfolio, and counterparty failure risk would have been much lower than in the present circumstances.

Of course, absent GSE special privileges and SEC-granted monopoly status for credit rating services and FDIC insurance and government-based carrots and sticks for sub-prime lending, massive defaults would have been far less likely in the first place, so even existing insurance companies might not have failed. But I think there would at least have been a greater chance that insurance wouldn't have been limited to large companies with the agency problems of large companies (management interests different from shareholder interests), and these vehicles would have been more transparent to investors trading as standardized derivative contracts on exchanges.

Michael D October 25, 2008 at 12:51 am

Less:

But we don't have a free market in insurance and banking. The agency problem does exist for our major corporations. Economist need to deal in the world as it is. We have systems in which, as Arnold Kling states, the suits don't have the knowledge but do have the power. Can rules be established that mitigate the agency problem or is this a fools errand without pure free markets?

Superheater October 25, 2008 at 1:15 am

What a show trial. was this confession real or was it just done so Mrs. Andrea Mitchell can show up in the new Obamanation dinner parties.

The sad reality is it's a giant "misstatement". Banks are routinely examined for solvency and the layers of regulation were never peeled away, they were consistently added to-with most large banks now subject to not one but two internal conrol assessments. One is done to comply with FDICIA (enacted to prevent another S&L type failure,oops) and the second to comply wih Sarbanes Oxley.

It seems to me that Mr. Greenspan is losing it.

Mesa Econoguy October 25, 2008 at 2:33 am

I can’t wait until Presimedentialnt Obamasness!

This is going to be enormousnessmentialitationishment@

TM

Mesa Econoguy October 25, 2008 at 4:21 am

What a fraud this pseudodoctor monkey muirgeo is.

State License Information
Licensed in California

Well, considering you’re licensed in the Bay area, and I’m licensed in all 50 states, I’d say you’re on the losing end there, pretend “doctor” shitbag….

[I edited the real info - you really are that stupid to put your real ID on line…..moron muirgeo]

I know exactly why you are so pissed at “Stock jobbers,” George.

You lost a shitload of $$$$ trying to learn medicine, which you didn’t, and took your meager startup earnings and blew them on cheap booze and penny stocks to try to pay off your sizeable med school loans and failed horribly.

Like most doctors do with money. Doctors are flaming monetary idiots. You’re well beyond that, George. You’re a tool. A deep Deaver tool.

Now if you want to be smart, Georgie, you might want to be long some Dec SPU Puts. Ask me what that is, and what that means, George, and why. Because you have no clue, you will eventually have to ask.

And, if karma serves, you will have to be bailed out of your crappy Porsche Cayman lease.

There are 2 sides to every trade………

Previous post:

Next post: