Taking Hard New Look at a Greenspan Legacy

[dtotire]

Taking Hard New Look at a Greenspan Legacy


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By PETER S. GOODMAN
Published: October 8, 2008

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004


George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”





And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”


read the rest:
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=1&hp&oref=slogin

[BeyondGeography]

1. Not to mention the legacy of Bob Rubin, Lawrence Summers and the Clinton Adminstration

Read this, folks, it'll make you sick, but at least you'll have a better understanding why we are where we are. Greenspan is shown to be a pie-in-the-sky, market utopian who was unchecked by the government that employed him.

One excerpt:

In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.

Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.

Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.

“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”

Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.

“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”

Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.

In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”

On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.

Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”

Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.

Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.

In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.

...In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.

“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.

Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.

Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.

“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.

“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”

The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.

[DaveT]

2. You have to read this article K/R

Alan Greenspan says that the problem on Wall Street was not a lack of regulation -- it was an excess of greed. Ayn Rand must have taught him how to come with such exquisite self-contradiction.

Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.

The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”

Mind boggling.

[DaveT]

3. kick

[Doctor_J]

4. Not to worry. Some idiot on NPR yesterday declared "Greenspan is not a conservative"

that's right, the messiah of trickle-down economics, member of the Ayn Rand society, and disciple of Milton Friedman, is actually a liberal, and that's why we can now blame him for the catastrophe

[Elidor]

5. If we're looking at this little con man's legacy, let's not forget Social Security

Dean Baker called him out on this years ago (this piece is from 2004):

Two weeks ago Federal Reserve Board Chairman Alan Greenspan testified before the Senate Budget Committee about the state of the economy. He expressed concern about the budget deficit and suggested that cuttng Social Security might be a good way to reduce the size of the deficit.

It is worth noting that Social Security is currently running a large surplus and is projected to continue to run annual surpluses for more than two decades into the future. The Social Security trustees projections show that the fund's trust will be able to support all scheduled benefit payments for nearly forty years into the future. If Social Security benefits are cut, without any corresponding reduction in the tax rate (which is exactly Mr. Greenspan's recommendation), then this would mean that Social Security taxes are being used to finance the general budget, not Social Security.

This point is especially important in this context since Mr. Greenspan had chaired the 1982 Commission that proposed a set of Social Security tax increases that were designed to build up a large surplus to help defray the costs of the baby boomers' retirement in later years. In other words, Mr. Greenspan's argument was that it was desirable to raise Social Security taxes above the levels needed to support the program in the eighties, nineties, and zeros, so that the tax rate would be somewhat lower than would otherwise be necessary in the twenties and thirties. If benefits are now cut below the levels that had been scheduled, then it breaks the link between Social Security taxes and Social Security benefits. Social Security taxes were simply used to finance the general budget.

The Social Security tax is highly regressive because it only applies to wage income and it is capped at approximately $85,000, so that wage income above this level is not subject to the tax. It is extremely unlikely Congress ever would have approved such a regressive tax to support the general budget. It would have been appropriate to note, in describing Mr. Greenspan's proposal, that the cumulative surplus in the trust fund is now approaching $2 trillion. This should give readers an idea of the extraordinary deception involved in proposing to cut Social Security benefits as a way of reducing the federal budget deficit.

http://hnn.us/articles/3642.html

There are better summaries of his adversarial role toward the Social Security program, but this one was easily found. Greenspan salivates at the thought of senior citizens without food, heat or medicine. In a just world, he'd be scared to show his face in public.

[PA Democrat]

6. What's sad is how so many of our lawmakers were too intimidated to question Greenspan.

I remember that Senator (then Congressman) Bernie Sanders was one of the few who dared to stand up to the little prick. Can you believe that Greenspan was betting that Wall Street would act honorably because they would care about their reputations? Yeah, as if CEOs possess a higher moral calling than the common petty thief.

:eyes:

Thanks for posting this article!