Alan Greenspan’s Mea Culpa

10 01 2010

On October 23, 2008, Alan Greenspan admits to Congress that his belief in free markets was mistaken.

Rep. HENRY WAXMAN (D), California: [October 23, 2008] You have been a staunch advocate for letting markets regulate themselves. And my question for you is simple. Were you wrong?

ALAN GREENSPAN: Yes. I found a flaw, but I’ve been very distressed by that fact.

Rep. HENRY WAXMAN: You found a flaw in the reality.

ALAN GREENSPAN: Flaw flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

Rep. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right.

ALAN GREENSPAN: Precisely. No, that’s precisely the reason I was shocked because I’ve been going for 40 years or more with very considerable evidence that it was working exceptionally well.

RON SUSKIND: You see Greenspan at the hearing table after the collapse, and you see a crushed man, really.

ROGER LOWENSTEIN: He said that the premise that you could trust the markets to regulate themselves was misplaced.

JOSEPH STIGLITZ: After almost two decades of public service, he realizes that the economic philosophy that he had pushed so hard, resisting regulation of derivatives he realized that there were some fundamental flaws in that whole philosophy.

JOE NOCERA: It was a pretty incredible moment that after a lifetime of faith in a certain way the world worked, that Greenspan would say, “I was wrong.”

ROGER LOWENSTEIN: It struck me as someone admitting that the core belief that had animated, you know, basically, a 20-year, 18-year career as Fed chief was wrong. It’s stunning, but it doesn’t undo the damage.

BARNEY FRANK:  That was a very important moment … comparable I think to [Secretary of Defense under Kennedy and Johnson] Robert McNamara’s confession of error with regard to the Vietnam War, because what Greenspan was saying was not simply that “I called that one wrong; this one I was off by X,” or “I miscalculated.” He was saying: “My fundamental approach was wrong. I thought that the market would be self-correcting. In my view, what happened was not supposed to be able to happen.” And that is very important, very profound, and will have a big effect, because as we go forward for the rest of this year, we are going to be adopting regulation now, which people like Alan Greenspan used to resist. Greenspan’s acknowledgement that the market is not as self-correcting as he thought is now going to be a very important piece of that argument. …

From the PBS Frontline documentary, The Warning:

TRANSCRIPT http://www.pbs.org/wgbh/pages/frontline/warning/etc/script.html

VIDEO HERE http://www.pbs.org/wgbh/pages/frontline/warning/cron/





Simon Johnson’s Clarion Call

27 03 2009

Just like IMF interventions in Russia, Thailand & Indonesia a decade ago, genuine financial reform in the USA requires standing down the oligarchs.

While there has been much good critique of the bank bailout by leading American economists (see this recent Financial Times article for a summary of Krugman, Stiglitz, Sachs and Reich), I’ve been following Simon Johnson, an economist at MIT and formerly Chief Economist at the IMF. He has a wonderful blog on the bail out.  And just now he has pre-released a full article on his prognosis that will appear in Atlantic Magazine. The article is long, but if you want one of the better insights into what we are up against, read this: http://www.theatlantic.com/doc/print/200905/imf-advice 

Here is a veteran economist with real experience in being lender of last resort to governments and central banks. He has had experience standing down Russian, Thai, Indonesian governments and their private-sector cronies who’ve gotten over their heads with financial excess.

Johnson lays out not only the technical issues of what needs to be done here in the US (including an FDIC-style reorganization and a break up so that no institution ever gets ‘too big to fail’). But he also addresses the bigger more difficult issue of dealing with the oligarchs who are in bed with the government regulators and in the end pose the biggest challenge to genuine reform. Wall Street and Washington have grown into a cliquish, club of elites. If this doesn’t get cleaned out, we are in deep do do.

Both of his two possible scenarios for how the crisis resolves, spelled out in the last couple of paragraphs, are dismal and sad. Either we muddle along making ineffective deal-by-deal reforms as we’ve been doing, and like Japan, go into prolonged stagnation where the US treasury/American taxpayer gets looted by the oligarchs. Or, we have a global collapse that’s worse than the Depression, and the US economy falls on both knees, rest of the world destitute.

Johnson prefers that latter scenario as he believes this will concentrate minds and force people to make the right, albeit, difficult decisions that ultimately will clean up the mess.

Not pretty, but real, even if depressing and depressed.