Alan Shrugged
Nick Gillespie | October 24, 2008, 7:26am
In testimony before Congress yesterday, former Federal Reserve chairman and Ayn Rand devotee did his best Claude Rains impersonation when it came to the financial meltdown that is running the show these days:
Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.
"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity—myself especially—are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006....
While Greenspan was once hailed as one of the most accomplished central bankers in U.S. history, the low interest rates during his final years at the Fed have been blamed for fueling the housing bubble and eventual crash that touched off the current financial crisis.
His strong advocacy for limited regulation of financial markets has also been called into question as a result of the crisis.
The former Fed chair said that a securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, was at the heart of the breakdown of credit markets.
"Without the excess demand from securitizers, subprime mortgage originations— undeniably the original source of crisis—would have been far smaller and defaults, accordingly, far fewer," he said.
More here.
There's a lot to be said about this particular panel, which also featured Securities and Exchange head Chris Cox and former Treasury Secretary John Snow, so keep your eyesballs tuned to reason online.
But for right now, consider a couple of things:
First, as Jeffrey Miron pointed out at reason online earlier this week, it's far from clear that financial markets were deregulated in any serious manner. Or, more precisely, it seems the worst of all possible worlds was created, in which money folks could do what they wanted with implicit if not explicit guarantees that various elements in government would back them up in worst-case or even less-dire scenarios.
Second, as economist Arnold Kling has suggested, it's far from clear just what the hell is going on in credit markets, whose distress is the ill we gots to cure right now or else it'll be the second coming of the Great Depression:
For example, many economists breathlessly cited high short-term interest rates in interbank lending markets as an indicator of credit markets "freezing up." However, as some Minneapolis Fed economists point out, the volume of lending does not indicate such a freeze. In fact, very short-term interest rates are a ridiculously melodramatic indicator to use, because even a small increase in default probability can cause the annualized interest rates to soar.
More on that here.
Even before the situation is fully understood, there seems to be a huge interest in symbolic bloodletting, to pay for the sins of a boom market once the economy tanks (this always happens—just ask Martha Stewart).
reason on the bailout, etc. here.
lupan sansei | October 24, 2008, 2:35pm | #
"It certainly wasn't the implicit guarantees by the fed to prop up and bail out the reckless investors. No, not that. It was that these vehicles were allowed in the first place."
This may have played a part, but I think it was infinitesimal at best for two reasons:
1) Many of the CDS's were hedges on MBS's. Therefore, entities which purchased MBS's and purchased CDS's on them, thought their investments were backed, not by the Govt, but by their counterparties who backed the CDS's.
2) The contracts between the loan originators and the Wall Street securitizers had explicit warranties that only held the originator liable if the loan were to default within the first 90 to 180 days of origination. After that, it was Wall Streets problem. Thus the creation/expansion of mortgage products such as the ARM, NINJA loans and no interest loans. The loan originator had no dog in the hunt anymore as long as they could ensure the homebuyer could pay in those first 3 to 6 months, way before the rates would reset.
"Unless I'm mistaken, it's regulations that required banks and investment houses to have "investment grade" securities in their portfolios, securities that turned out to be leveraged as high as 35:1."
Yes, but the SEC had historically required those firms to have leverage ratios of only 10-15 times their core holdings before 2004. In 2004, the SEC loosened those regulations.
"And a firm like Wachovia was undone by products that World Savings and Loan originated for its own portfolio - a practice that was unchanged before and after Gramm."
True, but one thing that Gramm did do, as I understand it, was allow commercial banks with their depository funding, to encroach upon investment banks' business lines encouraging the investment banks to take on more risk and leverage to compete.
"The data that made up that model included foreclosure rate data showing steadily dropping foreclosure rates during the same period of time that subprime and Alt-A lending was being transformed."
There was alot of knowledgable people who were warning of the unsustainability and "irrational exuberance" of the real estate markets during its runup. They just weren't listened to. I'm no risk management expert, but there seemed to me to be lots of data points which indicated that a bubble was being formed. For one, for the 2 decades prior to 2001, the national median home price was 2.9 to 3.1 times the median household income. By 2004, it was 4.0 and by 2006 it was 4.6. Big increases in employment fields (like in real estate), new products which distort historical metrics (like the bevy of new mortgage products) and volume spikes (like in housing) are just a few possible historical indicators of a bubble. Ironically, the low default rates on subprime/Alt A loans, a demographic which, by definition was high-risk (at least higher-risked), was a possible indicator of too easy refinancing/credit. I don't know if these variables factored in risk managment models, but taken as a whole, they should have been, IMHO.
Famous Mortimer | October 25, 2008, 12:01am | #
Excuse me, he had his Libertarian spokesperson license revoked.
Again, it's a perfect example of a lack nuance when attempting to defend Libertarian principles.
Greenspan has certainly professed Libertarian principles, as he did when admitting that, in retrospect, he's confused as to how letting the wolves guard the hen house could have helped lead to such a collapse.
It sounds to me like the are very few acceptable paths in life for a devout Libertarian to take, outside of engaging in arrogant, never-ending arguments online, where the likelihood of getting punched in the face is far removed.
The inability for so many of you to admit that there are flaws in Libertarian reasoning, shows that as a political movement, you lack the necessary elements to be taken seriously as an alternative party.
You simply do not have the intellectual honesty to revise your point of view when new data is offered.
That's a pretty fucking terrifying group of people to have at any level of power, and we have enough of them already.
Finally, my comments apply to those who adopts Libertarianism as an ideology, since it is quite easy to generalize about people who adhere to ideologies. Their thoughts can only fall so far outside of the framework before they are no longer considered a true adherent to that philosophy.
In the end, Greenspan was wrong. Not everyone is bound by an ideology, Some people actually are capable of seeing both sides in an argument before moving forward with action, or restraint.
It was Greenspan's free market ideology (however impure it was) that he admits was, in retrospect, questionable.
Who would it take for you guys to question the premise of your ideology? And if Libertarians ideals haven't been applied perfectly by anyone, then how the hell can so many of you be cocksure of its effects?
These are incredibly simple questions that sincere people ask themselves when exploring ideological arguments.
It's okay to be a moderate.
Also, the drinking game is merely a means to sidestep meaningful criticisms that few of you want to address.
It's convenient, transparent and tired.
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