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Blaming Greenspan

The WSJ is polling readers on the question ‘How much is Greenspan to blame, if at all, for the financial crisis?’  Polling to date suggests that around 25% of readers think ‘He is more to blame than anyone else,’ while 40% maintain ‘He has significant blame.’  Only 10% say ‘he is not to blame.’

The majority view implicitly places an enormous burden on monetary policy to manage, not just inflation outcomes, but a whole range of other policy issues as well, from housing to the regulation of financial markets.  The notion that monetary policy could somehow effectively deal with the multiple regulatory failures implicated in the credit crisis is absurd and goes against everything we have learned about how monetary policy should be conducted in recent decades.  Unfortunately, because monetary policy is seen to have a pervasive influence over the economy, Greenspan makes for an easy target and a simple monocausal narrative for all that went wrong.

It is particularly irksome to see Greenspan having to defend himself against the blame-shifting behaviour of the US Congress.  Afterall, the Federal Reserve operates under a Congressional mandate and is subject to Congressional oversight.  If there were problems at the Fed, then the buck stops with Congress. 

This point about accountability goes well beyond the area of monetary policy.  Politicians and regulators write the rules of the game and are at least notionally accountable for the outcomes under these rules.  The ferocity of attacks by politicians on corporate executives, financial markets and capitalism in general is a transparent attempt to divert attention from their own failings and avoid accountability for their policies.

posted on 24 October 2008 by skirchner in Economics, Financial Markets

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This is the funniest thing I’ve read in a long time:
The Libertarians’ Lament

A source of mild entertainment amid the financial carnage has been watching libertarians scurry to explain how the financial crisis is the result of too much government intervention, not too little. One line of argument casts as villain the Community Reinvestment Act, which prevents banks from “redlining” minority neighborhoods as not creditworthy. Another theory blames Fannie Mae and Freddie Mac for subsidizing and securitizing mortgages with an implicit government guarantee. An alternate thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue. But libertarian apologists fall wildly short of providing any convincing explanation for what went wrong. Like all true ideologues, they interpret mounting evidence of error as proof that they were right all along.

Sorry guys, but no-one’s gonna be listening to your loopy ideas for at least another decade, when doubtless, a new decade of cowboys will inflate another “bubble” ... ooops, sorry, bubbles don’t exist do they!

Posted by .(JavaScript must be enabled to view this email address)  on  10/26  at  08:13 AM


US conservatives and libertarians were highlighting these problems for many years prior to the crisis, and so can’t be accused of after the fact analysis. 

Just a few of many possible examples:

http://www.mercatus.org/PublicationDetails.aspx?id=21118

http://www.aei.org/books/filter.all,bookID.794/book_detail.asp

Posted by skirchner  on  10/26  at  09:34 PM


Ummmm yeah ... and I can point to a dozen finacial doomers (Faber, Roubini, Keen…) who predicted this crisis (or something like it) every year for the past 20 years.

They were right ... eventually.

The problem for you laissez faire types is your philosophy has been the economic orthodoxy for the past 20 years (or at least that’s the perception of the average punter) so your opinions have been totally discredited in the eyes of just about everybody.

Whether you agree that unfettered markets were the cause of this crisis or not, what is absolutely undeniable, is that laissez faire economics is copping most of the blame.

Posted by .(JavaScript must be enabled to view this email address)  on  10/27  at  02:36 AM


The number of people who think in terms of laissez-faire economics has always been very small.  Even surveys of academic economists in the US show very few have what could be termed libertarian beliefs.  So it does not surprise me that free markets are being blamed, since most people never put much faith in them to begin with. 

I think you will find that most people who hold to libertarian views are entirely comfortable being in a minority.  We get lots of practice, even in the best of times.

Posted by skirchner  on  10/27  at  03:08 AM


Oh please!  The dominant economic trend over the past 30 years has been deregulation, privatisation and the freeing up of markets.  Libertarians may not have got everything they wanted, but the trend has been decidely in your direction.  Greenspan himself identifies as a libertarian.  You can hardly say libertarian views have not had a huge influence on economic policy in recent years.

Now its all blown up in your face, and whether you like it or not, joe public thinks unrestrained capitalism is to blame.

Posted by .(JavaScript must be enabled to view this email address)  on  10/27  at  10:45 PM


It seems the U.S. will soon be nationalising the auto industry as well as the banking and insurance sectors:
GM, Chrysler Asks for $10 Billion to Aid Merger

Lets hope new CEO B.Obama can get GM-Chrysler building some fuel efficient cars instead of those monster trucks.

Oh BTW, after Friday’s GDP numbers come out I think we can make the score: Stiglitz 1, Kirchner 1.  Joe said it was going to be a “long and deep” recession months ago.  He’s looking more right every day.

Posted by .(JavaScript must be enabled to view this email address)  on  10/28  at  07:12 AM


GM is already heavily committed to the Chevy Volt.

The market is expecting -0.5% for US Q3 GDP.

Posted by skirchner  on  10/28  at  11:12 AM


Davidm,

Greenspan may have been a libertarian once. If he really believed in libertarian principles, he would have lobbied to have the Fed shut down.

Anyway, what specific deregulations, privatisations or free market initiatives do you have in mind that were responsible for the current financial crisis?

Posted by .(JavaScript must be enabled to view this email address)  on  10/31  at  05:05 AM


Anyway, what specific deregulations, privatisations or free market initiatives do you have in mind that were responsible for the current financial crisis?

It was the reluctance to regulate new financial creations such as CDO’s, CDS’s, and sub-prime lending that was the root cause of this crisis.  Everytime someone suggested more regulation and more transparency, Greenspan and other free-market idealogues pushed back and insisted that the market should be left alone to regulate itself.

This is exposed to devastating effect here: Alan Shrugged.

I’m sorry guys, its over.  By the time this crisis is over (and its going to get a lot worse) laissez faire economics will be hopelessly discredited.

Posted by .(JavaScript must be enabled to view this email address)  on  11/01  at  12:01 AM


‘laissez faire economics will be hopelessly discredited.’

In favour of what?

Posted by skirchner  on  11/01  at  01:30 AM


Steve,

Some people think the answer to your question is: fascism. Indeed, some believe the US is already a quasi-fascist state.

Lew Rockwell interviews Bruce Fein who articulates a convincing case for the impeachment of George W Bush.

http://www.lewrockwell.com/podcast/download.php?filename=2008-10-28_056_theres_still_time_to_impeach_bush.mp3

David,

Apart from CDOs and CDSs can you give an example of de-regulation or privatisation that caused this crisis?

Now, there is no doubt that CDOs/CDSs contributed to the current situation.  But why did these products arise?  One theory is that they were based on an assumption that house prices would never fall, an assumption promoted by the FED, aka the ‘Greenspan/Bernanke put.’ A second theory is that due to the Govt forcing lenders to give mortgages to low-income people, lenders needed a mechanism for managing the higher level of risk, thus sub-prime mortgages were bundled with other lower risk mortgages and on-sold as securities.

There was also a failure to regulate Fannie Mae and Freddie Mac, which became the major purchasers of sub-prime mortgages, thanks to implicit government backing, if not explicit direction.

What is truly astounding is that the Fed, Treasury and Congress are still pushing the banks to lend, though thankfully they are refusing. It seems that the Fed still believes (though the market is telling them otherwise) that prices must never fall.

This highlights one of the virtues of markets. When they make mistakes, they self-correct.  In contrast, govts seem to never learn. The other lesson is that government interventions in the market lead to perverse consequences.

Posted by .(JavaScript must be enabled to view this email address)  on  11/02  at  09:51 AM


In favour of what?

A more regulated economy.  In future, when there are calls to regulate exotic financial instruments, they will be regulated.  The likes of Greenspan, Gramm, O’Neill, Cox et al will be ignored if they insist that markets are best left to regulate themselves ... well, at least for a decade or so, until we all forget about 2008, complacency returns, and we make the same miskates again.

Apart from CDOs and CDSs can you give an example of de-regulation or privatisation that caused this crisis?

Lack of regulation in mortgage lending, and incentives in the financial industry that encouraged unacceptable risk.  In future, the institution that sells the loan, must have some accountability if the debt turns bad.

Posted by .(JavaScript must be enabled to view this email address)  on  11/02  at  09:34 PM


Davidm,

Lack of regulation is not the same as de-regulation or privatisation. Can you give examples of the latter?

Anyhow, there is no lack of regulation in the US mortgage market, indeed many economists argue that this crisis was partly (if not totally) a consequence of the perverse incentives created by existing government regulations.

For example, some State laws require loans to be non-recourse, i.e. if you can’t pay off the mortgage, you can simply walk away.  Another example is tax deductibility of mortgages payments. There are other examples, but probably the most significant government regulator is the Federal Reserve which controls interest rates. Few would dispute that it contributed to the crisis by significantly lowering interest rates in 2003-04.

Government regulations are not the panacea you seem to think. Closer to home, witness Kevin Rudd’s botched attempt to introduce stability in the financial markets, only to backfire and create greater instability.

Posted by .(JavaScript must be enabled to view this email address)  on  11/03  at  11:29 AM


Anyhow, there is no lack of regulation in the US mortgage market, indeed many economists argue that this crisis was partly (if not totally) a consequence of the perverse incentives created by existing government regulations.

The only “economists” who have seriously suggested the CRA was responsible for the sub-prime crisis were, you guessed it, laissez faire types and market fundamentalists.  Its a desperate, and rather pathetic, attempt to deflect blame away from their beloved free market, which as we know, can do no wrong.

According to this paper from the BIS [url=“http://www.bis.org/publ/work259.pdf”]The housing meltdown: Why did it happen in the
United States?[/url]
Contrary to some media commentary, there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust. This Act only applies to depositories, and did not cover most of the important subprime lenders. Depositories showed a lesser tendency to write subprime loans than lenders not subject to the Act (Yellen 2008).

This is the same BIS the foresaw much of the current crisis back in June:
Central bank body warns of Great Depression.

No-one here was screaming “Global Financial Meltdown Ahead!” back in June, you were still talking that consenting adults nonsense.

Oh, regarding Rudd’s guarantee.  Yes it was rushed and patched together, but on the weekend of October 11-12th a total meltdown of the financial system seemed entirely possible.  If Rudd had waited, a run on the banks was a real possibility, an outcome considerably worse than a few frozen mortgage funds.

Posted by .(JavaScript must be enabled to view this email address)  on  11/03  at  09:24 PM


I notice you still haven’t answered my question.  In case you missed it: Can you give examples of de-regulations or privatisations that caused the crisis?

You:
The only “economists” who have seriously suggested the CRA was responsible for the sub-prime crisis were, you guessed it, laissez faire types and market fundamentalists.  Its a desperate, and rather pathetic, attempt to deflect blame away from their beloved free market, which as we know, can do no wrong.

Me:
Where did I mention the CRA?

You:
Oh, regarding Rudd’s guarantee.  Yes it was rushed and patched together, but on the weekend of October 11-12th a total meltdown of the financial system seemed entirely possible.  If Rudd had waited, a run on the banks was a real possibility, an outcome considerably worse than a few frozen mortgage funds.

Me
I doubt there was likely to be a run on the banks.  The RBA had released a report on the financial system earlier which showed that not only was the Australian system in good shape, but was in better shape than most other countries.  Therefore, there was no reason for the average Australian to withdraw their bank deposits.

Rudd’s decision was based on politics, not economics.

Posted by .(JavaScript must be enabled to view this email address)  on  11/03  at  11:39 PM


Can you give examples of de-regulations or privatisations that caused the crisis?

To quote the article I linked to at the top of this thread:

Neglecting to prevent the Crash of ‘08 was a sin of omission—less the result of deregulation, per se, than of disbelief in financial regulation as a legitimate mechanism. At any point from 1998 on, Bill Clinton, George W. Bush, their administrations or congressional leaders with oversight authority might have stood up and said, “Hey, I think we’re in danger and need some additional rules here.” Had the advocates of prudent regulation been more effective, there’s an excellent chance that the subprime debacle would not have turned into a raging financial inferno

Where did I mention the CRA?

It was a pre-emptive strike :)

there was no reason for the average Australian to withdraw their bank deposits.

Runs on banks are (obviously) a crisis of confidence and have nothing to do with rational behaviour.  I have no doubt that the Australian banks were always in good shape, but on Friday Oct 10th the world stood at the edge of a precipice with Australia’s markets due to open first on the Monday.  Decisive action was required to restore confidence, and it worked.

Posted by .(JavaScript must be enabled to view this email address)  on  11/04  at  12:12 AM


So your argument is that the crisis was not caused by de-regulations or privatisations, but rather by an unwillingness to impose additional regulations? Given that existing regulations contributed to this crisis, I am skeptical that heaping on more would work.

I don’t share your belief that a bank run in Australia was imminent and since we will never know for sure, it would be unwise to pronounce that the intervention “worked.”

But even if there was a run on the banks, wasn’t there already a $20,000 deposit guarantee in place?  If so, most people would have no reason to withdraw their funds.  And depositors with over $20,000 could have spread it among a range of banks.  Furthermore, faced with a run, the banks could have placed a temporary ban on large fund withdrawals. In other words, markets are capable of adjusting to external shocks if given the freedom to do so.

To repeat, the Rudd intervention was driven by politics (to trump Turnbull’s proposed $100,000 deposit guarantee) not economics.  I would dispute your assertion that it restored confidence. In fact, the government intervention seemed to reduce it. Up to that point, there was a substantial increase in funds flowing into the major banks.

Frankly, what you saw as “decisive action” looked suspiciously like “panic” to me.

Finally, this economic crisis has strengthened my faith in free markets. It has amply demonstrated that government interventions are bad for the economy.

Posted by .(JavaScript must be enabled to view this email address)  on  11/04  at  07:19 AM


Given that existing regulations contributed to this crisis…

But its only market fundamentalists that believe such nonsense.  I’m afraid the rest of the world believes otherwise.

Posted by .(JavaScript must be enabled to view this email address)  on  11/04  at  07:28 AM


US financial corporations do not operate in a free market, it is highly regulated. Therefore, this financial crisis cannot possibly be attributed solely to free markets.

Posted by .(JavaScript must be enabled to view this email address)  on  11/04  at  12:20 PM


To quote the Weisberg piece again:

But libertarian apologists fall wildly short of providing any convincing explanation for what went wrong. Like all true ideologues, they interpret mounting evidence of error as proof that they were right all along.

You guys are hopeless ideologues.  To you the market is an end, not a means.  The free market is not a tool to achieve desirable ends, but an end in itself.  A perfectly free market is perfection itself.  Libertarianism has all the characteristics of a religion.

Besides, whatever you believe, no-one is listening anymore and won’t for many years.  This will be abundantly clear when today’s election results start rolling in.

Posted by .(JavaScript must be enabled to view this email address)  on  11/04  at  10:42 PM


The finance industry is a heavily regulated industry. So it doesn’t make sense to blame the free market when, in fact, there is none. Weisberg is the ideologue, blaming the crisis on something that does not exist.

“To you the market is an end, not a means. The free market is not a tool to achieve desirable ends, but an end in itself.  A perfectly free market is perfection itself.  Libertarianism has all the characteristics of a religion.”

Let me paraphrase a saying: the road to hell is paved with “desirable ends.”

I’m not sure why you think libertarianism is a religion. Most religions have specific rules dictating human behaviour.  But libertarians believe that people should be free to do whatever they like, provided they don’t violate the freedom of others.

“Besides, whatever you believe, no-one is listening anymore and won’t for many years.  This will be abundantly clear when today’s election results start rolling in.”

I wasn’t aware that anyone was listening in the first place.  The new president will not substantially change anything, the current trend towards more government and less freedom will continue.

Posted by .(JavaScript must be enabled to view this email address)  on  11/05  at  10:26 AM



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