Alan Shrugged
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.
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.
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).