Re-examining Greenspan’s Era

NYTimes is leading the charge in re-examining the nature and worth of the  influence Alan Greenspan had on broad US Economic and Financial policy. As long serving chairman of the Federal Reserve Board, Mr. Greenspan set monetary policy as FedCharman from 1987 to 2006 under Republican and Democratic Presidents. As seen in the article Mr. Greenspan garnered top ratings from business and government during his tenure.  But the current Worldwide financial storm has lead to a serious reassessment. Here is why:

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The reason that credit markets have seized up is that a toxic portion of the $54.6 trillion worth of credit default swaps have turned sour. And how sour nobody knows – precisely because the financial markets are not working and simply are not able to value those derivtives.  And the FED is waving a $0.7 trillion sword trying to get the markets working again. The even bigger question is what other derivatives are creaking in this $464 trillion bubble?

But note carefully what is being said. For a sizable chunk of swaps, the markets are not working – and worse, the whole derivative/swaps market has a)a high degree of opaqueness because derivatives are hard to describe let alone understand even for financial advisors, many of whom cannot predict the behavior/value of the derivatives; and b) inherent systemic risk associated with them because they are so new and have not been tested in a broad range of market conditions . In short derivatives are more volatile than their issuers and buyers would care to admit to. This latter fact has been a specific causal factor in the “meltdown” of the markets. In fact credit markets are “freezing up” precisely because various derivative instruments are creating litigatious “heat” and fears of offloading of “frozen” assets and liabilities.

And as Fed Chairman, Alan Greenspan Gave the Green Light to Almost Unlimited Use of Derivatives with Little or No Regulation.
So this is the first strike against the record of Alan Greenspan, Fed Chairman – the allowing of financial markets to spawn huge $-value derivative based markets with no regulation whatsoever. Not only was there no regulation of the new derivative markets but existing bank and investment firms were dereulated. In fact, regulations of financial institutions were loosened such that Investment Banks and other funds were able to access moneys at low costs but also very high debt to equity ratios. So Alan Greenspan put in place two factors that helped feed the current Financial Meltdown – new and complex derivative markets were allowed to explode in size and import without regulation. And deregulation of existing banking and other financial institutions allowed for risks such as huge leveraged lending and dubious “risk transfers” to be made.

The third problem is that under Alan Greenspan the Fed has been acting as the Moral Hazard Insurance Company of record for financial markets. How so? In the Long Term Capital bailout of 1998 the Fed got the Wall Street Banks to pony up and bailout LTC with no Fed money at risk. True, but in 1989, the biggest bailout before the Wall Street 2008, was the Savings and Loan recovery through US Government organized and taxpayer funded Resolution Trust. Alan Greenspan was a board member of Resolution Trust. Resolution Trust cost US Taxpayer $90B. Resolution Trust set the precedence for the Fedral Government being the massive lender of last resort, Moral Hazard Insurance. This Moral Hazard role was adopted in the 2000-2002 Bust when interest rates were lowered to induce spending and quicker recovery from the stock market downturn. In fact, Fed interest rate cuts have been used sevral times in the past 10-15 years like Trickle Down inducers to get stock markets corrected and/or the Economy going again. High debt holdings and low savings Finally, In his recent writings Greenspan has been recommending the same RTC type institution be started to bailout defaulting mortgage holders.In fact, as an early protege of Ayn Rand, Alan Greenspan showed a consistent bias toward financial markets being ultra cometitive and therefore self-regulating
In sum, the Worldwide Financial Capital Freeze and Meltdown 2008 is itself the result of a confluence of ill-behaviors and co-conspirators:
Consumers living too close to margin on debt versus income; Financial institutions believing that a)they are indeed ultra-competitive and therefore self-regulating and b)ultra high leverage and ultra low interest rates were the way to indecent returns indefinitely into the future; and Government and its regulators deceiving themselves that capital markets, when freed from regulation and government control would be perfectly efficient and self regulating enough to bring great and long lasting prosperity at least to their own community if not to the broader economy.

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