Greenspan: Love Him, Hate Him

By James Kwak

Alan Greenspan is just as maddening in his retirement as he was during his nineteen-year reign over the global economy. Today in his appearance before the Financial Crisis Inquiry Commission (extensive coverage by Shahien Nasiripour and Ryan McCarthy here), Greenspan seems primarily concerned with passing the buck and preserving the remaining shreds of his legacy, a pathetic quest epitomized in his “I was right 70 percent of the time” remark. At the same time, however, he does make some very blunt statements about the financial industry and financial regulation that policymakers should ignore at their peril. (I’m not saying that because Greenspan was wrong before, he must be right now; I’m saying that when the most ardent defender of free financial markets reverses course, that should increase your skepticism toward free financial markets.)

Greenspan’s prepared testimony begins with a massive attempt to pass the buck. The first two pages of his account of the financial crisis have to do with rapid economic development overseas and the accumulation of the fabled global glut of savings. But he reaches even farther back to . . . the fall of the Berlin Wall and the discrediting of communism.

Greenspan also repeats the tired old argument that Fannie and Freddie were to blame (pages 3-4), focusing on their purchases of private mortgage-backed securities. This is something that, following Alyssa Katz, we also criticized Fannie and Freddie (and the government behind them) for. But tellingly, Greenspan’s data only go up to 2003-2004 — because from this point the GSEs’ share of the subprime market declined, as they were pushed out of the way by private sector players.

But the more interesting part of the testimony begins on page 7, where Greenspan discusses the challenges of regulating the modern financial system. The problems he points to include:

  • systematic underestimation of risk
  • “the virtually indecipherable complexity of a broad spectrum of financial products and markets”
  • a failure of the regulatory system

With this in mind, Greenspan favors rules that “would kick in automatically, without relying on the ability of a fallible human regulator to predict a coming crisis,” including increases in capital and collateral requirements. This runs largely counter to the Obama administration’s preference for leaving specific limits to regulators.*

Here, though, I think Greenspan is still too optimistic. “I presume, for example,” he says, “that with 15% tangible equity capital, neither Bear Sterns nor Lehman Brothers would have been in trouble.” That is a huge increase over the current requirement of 4% (8% Tier 1 capital, but only half of that has to be tangible equity). But still, is it enough? As Steve Randy Waldman pointed out, Lehman turned out to be worth between $50 and $160 billion less than its books said it was worth just before its collapse. At about $640 billion in assets, that’s a “mistake” of 8 to 25 percentage points. If, as Greenspan acknowledges, the products themselves are extremely complex and we can’t count on anyone to evaluate them, how do we know that 15% capital is enough?

When it comes to “too big to fail,” Greenspan makes the same point, in similar terms, that we do in 13 Bankers: “The productive employment of the nation’s scarce saving is being threatened by financial firms at the edge of failure,  supported with taxpayer funds, designated as systemically important institutions,” and “The existence of systemically threatening institutions is among the major regulatory problems for which there are no good solutions.” But then Greenspan proposes solutions: namely, contingent capital (an idea I’ve criticized here, citing Gillian Tett) and resolution authority. He proposes breaking up TBTF institutions . . . but only after they fail.

Nasiripour and McCarthy have additional statements by Greenspan from his responses to questions. One key point he was making was that regulators simply cannot keep up with the megabanks.

Regulators can’t keep up with today’s megabanks, he said. They’re too complex. Regulators, in short, don’t have a chance.

Greenspan, appearing before the panel convened to investigate the roots of the financial crisis, said that the “ideal way” to supervise banks would be to go through its individual loan documents — the way supervisors used to police banks and financial firms before they grew so large.

But unfortunately, he lamented, that’s no longer possible because firms are so complex.

“We are reaching far beyond our capacities,” Greenspan told the Financial Crisis Inquiry Commission. “It’s not a simple issue of ‘Let’s regulate better,'” he said. “It’s a different world.”

“The complexity is awesome,” he noted.

It’s nice that, in his retirement, Greenspan has finally become humble about the prospects for regulation. I wish the current batch of government officials would share the same humility. Not because I’m against regulation — I’m definitely in the more/stricter/better camp when it comes to regulation. But because I think you have to be prepared for it to fail. So either we need to change banking so that it is simple enough to regulate again (which isn’t going to happen). Or we need to reduce the size of banks so that when they do fail, they don’t take the financial system with them.

* In their defense, the administration might argue that those limits should be set by regulators but should then kick in automatically — although I’m not sure that’s what they are saying.

47 thoughts on “Greenspan: Love Him, Hate Him

  1. James, neither you nor Greenspan could find a free market with both hands and a flashlight.

  2. I still wonder where a firm like LTCM would come out in all of this. Not a bank but apparently caused great consternation and problems.

  3. The trouble with the concept of mark to market accounting is that statements like “turned out to be worth between $50 and $160 billion less than its books said it was worth” don’t mean much in a mark to market environment because “turned out” depends on the point in time at which you measure.

    Unfortunately, Greenspan is probably onto a political reality about breaking up financial institutions – the point at which that is most likely to be feasible is that when the institution has failed. Unfortunately, we missed the most recent opportunity (and erred in the opposite direction).

    As for whether banks can be made small enough so that when they fail they don’t take the system with them, that is certainly the more realistic goal. But the the heard behavior of wall street will still be an obstacle. Lehman could easily have been three separate firms that had all made the same bets.

  4. I hate it when Greenspan’s view is described as that of an “ardent defender of free financial markets” (or equivalent). Since when is artificially cheap money, created by the central bank and encouraged by government objectives, all driven by the notion of “running the economy,” part of a free market approach? So annoying.

  5. Why does anyone even ask him to testify? Who is interested in his latest obfuscation? Even Ayn Rand would disown him at this point.

  6. Maybe he is worth listening to once in a while if it’s he who has disowned Rand.

  7. All the gnashing of the teeth about “The Maestro” will go on for years. Ravi Batra exposed Greenspan in his 2005 book written in 2004 titled ” Greenspan’s Fraud”. One could hardly pick a more rancid title. It took a lot of courage five years ago to out this fraud. I was surprised he even found a sufficiently brave publisher. In this case St Martin’s Press.

  8. James Kwak wrote:

    Greenspan: Love Him, Hate Him – excerpt

    “Alan Greenspan is just as maddening in his retirement as he was during his nineteen-year reign over the global economy. Today in his appearance before the Financial Crisis Inquiry Commission (extensive coverage by Shahien Nasiripour and Ryan McCarthy here), Greenspan seems primarily concerned with passing the buck and preserving the remaining shreds of his legacy, a pathetic quest epitomized in his “I was right 70 percent of the time” remark.”

    Greenspan: Fallible’ regulators were right to allow subprime loans

    APRIL 7, 2010 – MCT NEWS SERVICE – excerpt

    “The concepts of ‘unfairness,’ ‘deception,’ and ‘abusiveness’ are not defined in the statute, and I do not believe there was any prevailing sentiment within the Federal Reserve — and it was certainly not my view — that entire categories of loan products should be prohibited as ‘unfair’ or ‘abusive,’ ” Greenspan told the Financial Crisis Inquiry Commission in just his second appearance on Capitol Hill since the collapse of financial markets in 2008.”

  9. “I guess I should warn you, if I turn out to be particularly clear , you’ve probably misunderstood what I’ve said.”

    Alan Greenspan

  10. Just out of curiosity, do you ever have thoughts of your own, or do you only spew tangential quotes?

  11. AJ wrote”

    “Just out of curiosity, do you ever have thoughts of your own, or do you only spew tangential quotes?”

    I like to stand on the shoulders of giants, their perspective is better than my own. :-)

  12. No statute could define “unfair” or “abusive” without being grossly incomplete and validating as much abusiveness and unfairness as would be prohibited.

    I have noticed this though about all the hoopla about financial products. You almost never hear the guru’s call these financial products what they are … incompetent. These products have failed from just about any perspective you care to measure them from if competence is delivering a reasonable result for investors. Might it just be that the professional class in finance exhibits far more traits of professional incompetence in product development than competence?. Might it really be mostly a case of mass financial group think where the professional could not think independently?

  13. I wouldn’t consider the prospect of a simplified banking structure as so remote. Presumably you consider the political will to be lacking. This can shift; especially if banks continue to conspicuously obstruct reform regulation, also if they maintain practices that call their financial/economic function into question. A more fundamental problem than the big banks’ complexity, and risk taking is that they are not adequately performing the basic purpose of banking. Let’s not confuse tools, technology and devises with what banks have been doing since Venice, Amsterdam and London starting 600 years ago. If a man can steer the entire world financial system off course, why can’t another one be just as influential in setting the ship straight. Volcker’s dealt effectively with a fiscal situation considered at the time as dire and unresolvable as the current one. I am glad he is back where his words are listened to. His recommendations have been quite simple: re-divide banking. The rest you know.

  14. “In testimony before the Financial Crisis Inquiry Commission, former Federal Reserve Chairman Alan Greenspan defended his record during questions by Chairman Phil Angelides by saying he was “right 70 percent” and “wrong 30 percent” of the time.

    When asked whether the financial crisis was one of the times he got it wrong he answered, “I don’t know.”

    If there is a photo in the dictionary next to the word “clueless” it should look like Alan Greenspan. Imagine if airline pilots only landed 70 percent of airplanes, crossing guards only protected 70 percent of students or if your bank only honored 70 percent of your checks. It would be a public scandal. There would be indictments; prosecutions and surely the perpetrators would face consequences. We need the same expectation of safety for our banks that we have for airplanes flying America’s skies–that they won’t crash.”

  15. I have always found the bathroom mirror to be the single best answer to who’s to blame.

    Blame Nixon for ending Breton Woods and taking us off the gold standard. How ’bout old LBJ for debasing the currency? Can’t forget Jimmy Carter for waking up the radical Christian right. How ’bout corporate America for using a Corporate/Christian coalition to advance free trade and deregulation? Greenspan, Clinton, Rubin, Summers, Bush, Bernanke, Obama are all fresh in your memory.

    Is there one person or group among the aforementioned that you did not at one time support? Just as I thought, the mirror will always show you who’s to blame.

  16. Is there one person or group among the aforementioned that you did not at one time support?

    No. Keep going. “Consumerism” too.

  17. You’re right. We should go back to a “natural money” approach, where you only get “naturally cheap money” whenever nature yields a major gold strike.

    Oh, wait, that might be nature’s gold, but gold mining is artificial. Dang. OK, scratch that idea.

    Let’s go back to the beaver pelt trade economy. That would be “natural”, right?

    Oh, wait, except that, if you use something artificial, like a spear, to kill the beaver, it’s no longer natural.

    Well, whatever the solution is, it mustn’t involve government. So artificial. Where do you ever find government in nature? I mean, if you look at, say, a baboon troop, there’s no clear top-down leadershi– uh …. hm, there is. I wonder: Did they learn that by imitating human beings?

  18. Just because you admit your own complicity, don’t try to make things easier on yourself by slandering others with the lie that “everyone wants this”.

    Nobody can ever just accept responsibility. There’s always some kind of slimy caveat, like the fraudulent, “everyone’s guilty.”

    Like I said, it’s not my system, not my consumerism, not my globalization, not my financialization, not my Bailout, and not my war. Although incomprehensible to a conformist like you, there are some of us out there.

    By your own testimony, those all belong to you. So at least have the spine to own them without further self-exculpatory lies.

  19. Correct. I want to say roughly ’87 after Volcker had done the tough part of killing inflation. Reagan did “his part” to kill inflation and forever enseal himself as Republican demigod by killing off unions.

  20. James Kwak. This far into the discussions anyone with some professional respect for himself would have studied a bit more about the current regulations before speaking out. Clearly you have not!

    You keep on talking about current capital requirements of 4 to 8 percent, completely ignoring that for instance in the case of triple-A rated assets, because they were risk-weighted at 20%, those capital requirements were in fact .8 to 1.6 percent.

    Also, it is lack of understanding what keeps you bothering with questions such as if 15% of capital requirement would have been enough ex-post, because with a 15% capital requirement the too big to fail would ex-ante never have become too-big-to-fail!

    Why are you too-stubborn-to-understand? Don´t you get it? The principal reason why the too-big-to-fail became too-big-to-fail was that the regulators allowed especially low capital requirements for the typical operations of the too-big-to-fail.

    And please, have a little bit more of self-respect! To keep talking about a Greenspan being “the most ardent defender of free financial markets” is plainly ridiculous. A defender of free financial markets would never ever imposed on the markets, the way it was done in the regulations, the opinions of some few credit rating agencies.

    Wake up! I can understand a Simon Johnson keepinh mum on this because he cannot explain why he kept mum on this while at the IMF… but you James, you are young and don´t need to do that.

  21. James, I love you. Don’t change a thing.

    You are going to tell to me to read 13 Bankers, and I might, but after reading A Monetary History of the US (the chapter on the “Great Contraction” three times–it’s still hard to follow); The Great Crash; Manias, Panics, and Crashes; The World in Depression; Lessons from the Great Depression; Did Monetary Forces Cause the Great Depression; Essays on the Great Depression; I feel my next book shoud be Eichengreen’s Golden Fetters. You won’t be hurt if I put off 13 Bankers?

    My point is Greenspan is right looking back, though he doesn’t go far enough. The come apart began when the world went off Bretten-Woods and the flexible gold standard. Now I’m a fiat money kind of guy, and if you study the 1920s carefully, you have to conclude basing the international monetary system on gold was not only stupid, but close to evil in the amount of despair created during the Great Depression. Well, what do we have today? Eichengreen writes tellingly of the dollar as the international reserve currency. The dollar is better than gold, or at least the US management of the dollar during 2008 and 2009 was better than what central banks did during the 1930s, but a dollar based international monetary system is not stable.

    I agree with you and Simon 99% of finance is pure rent: a tax on the real economy to fund nefarious gluttons. I agree with your specific analysis, but I think you should look at the fundamental instability of a system based on the dollar. If you study the Flow of Funds, you see debt in the US as a perecent of GDP began its long climb when the world went to a dollar based fiat system. Too much debt, in the end, as always through the ages, is what caused the collapse.

    Write about a dollar based fiat international monetary system. You say read 13 bankers. Golden Fetters first.

    Keep up the good work

  22. As I hear it Greenspan has not given up on either Ayn Rand or free-market economics. He has only suddenly realized that there is a cadre of scoundrels, schemers, opportunists and downright crooks attracted to a regulation-free culture, and that the market system, ironically, is not too big to fail. I agree that there has to be some kind of unfettered system at the most basic level of establishing value, price and willingness to barter. But that is not what his practices promoted. No, Alan, you should have taken off the rose-colored glasses a long time ago.

  23. I think Greenspan makes these TBTF comments to undermine the Obama administration. When he talks, he speaks against what Obama is doing; instead, he should be encouraging Obama to go one direction. But by not commenting on Obama’s policies one way or another, he makes them look like another bad guy or another bad gov’t person who wants to screw with the free market.
    He is playing politics, not helping to fix things. He’s a bad man who should be in prison with bubba, with NO soap on a rope.

  24. Give me a break!

    Greenspan – our, ostensibly, top Regulator – was so confident in the ‘invisible hand’ that he openly condoned FRAUD – asserting the market (!) would solve all ills, and thus Regulators and Regulation had no rightful role in the marketplace.

    His death penalty to Brooksley Born was only one case example in this glorious free market ethic of his.

    … and guess what happened?

    We got massive fraud in the ‘deregulated’ system he created, and it brought the global financial markets to their knees.

    Regulators can’t keep up?! Then the banks should be broken-up and their businesses separated, simplified and re-regulated.

    Sounds more to me like HE couldn’t keep up with the complexity once he let the genie out of the bottle.

    Which should be no surprise to anyone given that his ‘free market’ zeal starved the Regulators of funds, stripped them of their mandates, and the possibility of civil prosecutions that would scare the pants off any banker.

    Now he wishes us to believe that everyone else – from Fannie/Freddie to the Regulators were the problem – when HE was the one who brutally enforced an ‘anything goes’ ethic together with his cronies Summers, Geithner, et. al.

    Get real Greenspan!

  25. I’m surprised that no one has commented with righteous indignation over his statement “I was right 70% of the time”. I expect quite a bit better performance from my Federal Reserve Chairman.

  26. Are you saying that manipulated cost of money, risks obscured by depository insurance, and an implicit guarantee of bailing out large institutions are hallmarks of a “free market”? Because I think if you read my comment, I’m certainly not suggesting we consider establishing a baboon economy (although I must applaud your creative interpretation) — I’m only noting that calling Greenspan an “ardent supporter of free financial markets,” or, more to the point, suggesting our financial system is anything close to a free market, is absurd on its face.

    The assumption that what we currently have is a free market is damaging. It lends credibility to the idea that we don’t need regulation or any other intervention to fix the financial system because we’d be engaging in “socialist” actions, undermining our meritocratic, capitalist markets. If we don’t accept from the start that the financial markets aren’t currently “free,” but in fact already subject to much intervention (intervention that contributed mightily to the crisis), then these arguments, however specious, gain more traction.

  27. James

    Good summary of a lot of otherwise inchoate rage about Greenspan. I’d recommend to your readers Yves Smith’s book Econned, if they’ve not read it already. A really good deconstruction of the drivers of this mess.

    Thanks for your hard work on this blog!

  28. Right, much more than destroying the myth of the rational markets this crisis should have destroyed the myth of the rational regulator, and that is why many carrying an agenda do not really hear about what really happened.

  29. “These products have failed from just about any perspective…”

    But succeeded if you take the perspective of the companies who bet billions, lost, got bailed out by TARP, didn’t get fired because they held America hostage (“we’re the only ones who can understand these instruments”) then congratulated themselves to millions in bonuses.

    Perhaps competence in the financial sector should be measured not in usefulness or finding a need and filling it, but in enrichment the professionals.

  30. Go back to first year law school you holy man wannabe.

    1. Slander is spoken, not written.

    2. Alan Greenspan is an old man who’s entire life’s work and belief system has been proven wrong. Where’s your compassion holy man wannabe?

    3. Testimony? Exculpatory? Wrong venue junior. You’re on an internet site that welcomes opinion.

  31. Having read every word posted above I see the new bosses would be the same as the old bosses.

  32. When Greenspan was chair of the Fed, he made it his job to be purposely obscure and difficult to understand. He was so afraid of moving the markets with his statements that he said nothing coherent to non-economists.

    And now he’s back claiming that he warned us all. Really? How and when?

    Although it’s nice to see that he really does know how to speak in coherent sentences, “it wasn’t my fault” means he’s got to work on his honesty.

  33. Lucy Honeychurch wrote:

    “His death penalty to Brooksley Born was only one case example in this glorious free market ethic of his.

    … and guess what happened?

    We got massive fraud in the ‘deregulated’ system he created, and it brought the global financial markets to their knees.”


  34. Chairman Ben S. Bernanke

    At the 43rd Annual Alexander Hamilton Awards Dinner, Center for the Study of the Presidency and Congress, Washington, D.C.

    April 8, 2010 – excerpt

    Economic Policy: Lessons from History

    “I’ll conclude with the cautionary fourth lesson–history is never a perfect guide. It is a principle acknowledged by the words etched on the wall of the Center’s conference room, attributed to Mark Twain, “History does not repeat itself, but it can rhyme.”

  35. Lucy Honeychurch wrote:

    “Which should be no surprise to anyone given that his ‘free market’ zeal starved the Regulators of funds, stripped them of their mandates, and the possibility of civil prosecutions that would scare the pants off any banker.”

    Spot On!

    Age is a factor too in Greenspan’s inability to keep up with the complexities once the genie was out of the bottle. Vigorous young men & women a third of his age and twice his IQ couldn’t decipher the toxic brew created by the modern day alchemists quaintly called Quants. Never underestimate the rigidity and brittleness the aging process inflicts on one’s mental capacities. Were the consequences of this man’s hubris not so horrendous to so many innocent hard working people’s financial wellbeing he would be worthy of pity. However, unlike Mr. Greenspan, I believe in accountability of one’s actions and so must dispassionately sentence him to the dust bin of history. Look in the bin labeled Tragic Heroes.

  36. I was reacting (satirically) to the idea of “artificially cheap money”. Money is a technology. It’s already artificial. One might as well talk about “artificially fast microprocessors.”

  37. Nice reading comprehension. I never said a word about Greenspan. I was talking to you, “Brad Thrasher”. You.

    I said if you blame yourself for complicity in these crimes, good, you should.

    But as for who’s trying to be a holy man, I started out here rejecting your fraudulent, self-serving slander that everyone is as guilty as you. I called you a liar in your specious “we’re-all-sinners” sham holiness.

  38. I’m reading Ravi Batra’s book now. As Batra notes Greenspan’s Fraud begins with the Greenspan-Reagan tax cuts of 1981, that supply-side stuff. So Greenspan was at it for 25 years. My impression of Greenspan is that he is NOT an economist and never was. He is a businessman. All of his actions in those 25 years were geared toward improving the lot of businessmen.

    I don’t know why this committee even asked him to testify. He does not seem to be giving any information about the causes, such as his doing what he could to prevent the regulation of credit default swaps

  39. Greenspan was part of Reagan’s Whitehouse staff starting in 1981 and was the primary author of the 1981 “supply-side” tax cut that caused deficits to ballon by 1983. He was also part of Ford’s economic staff in 1974-1976. He goes back a long way. His first job in government was 1968 (Nixon).

  40. Wrong! Greenspan’s role was not to be a quant expert but to be a wise voice.

    I who have never been a regulator in my life, knew with absolute certainty, already back in 2000, that empowering the value of the credit ratings as much as the Basel Committee did, doomed the financial system to sooner or later massively follow some wrong ratings over a cliff, Greenspan should have known it, and done something about it.

    In fact Greenspan was aware of it as you can for instance read in a speech of 2003 where he describes exactly what was going later to happen to AIG saying: “the outsized growth of derivatives markets has resulted in ever-larger counterparty exposures. Market participants have increasingly responded by entering into collateral agreements to further mitigate counterparty credit risks. … Collateral agreements are a very effective means of limiting counterparty credit risks. At the same time, they increase market participants’ exposures to other types of risk, especially funding-liquidity risks. Collateral demands arising from rating downgrades may be especially costly to meet because a downgrade would reduce the availability of funding and increase its costs at the same time.”

    And in a speech of 2005 Greenspan admits: “Partly because of the proposed Basel II capital requirements, the sophisticated risk-management approaches that derivatives have facilitated are being employed more widely and systematically in the banking and financial services industries.”
    And in the same speech of 2005, amazingly, Greenspan also says: “a study conducted last year by the Joint Forum (2004), Credit Risk Transfer (Basel: Bank for International Settlements)… does shed some light…. The study did note that understanding the credit risk profile of CDO tranches poses challenges to even the most-sophisticated market participants….The report cautioned investors in CDO tranches not to rely solely on rating-agency assessments of credit risk, in part because a CDO rating cannot possibly reflect all the dimensions of the risk of these complex products.”

    Now why did not Greenspan do anything about it? Much for the same reasons a Simon Johnson kept mum when he was in the IMF.

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