Economics

Alan Shrugged

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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.

More here.

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.

More on that here. 

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).

reason on the bailout, etc. here.

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  1. uh oh… SpaghettiOs

  2. it’s far from clear that financial markets were deregulated in any serious manner.

    I am sick of hearing that line that the markets were deregulated like there was this thing called freedom out there.

  3. It doesn’t matter if it is incompetence or plan. The result is the same….

    Want to know whata AG did with his own money?
    Read about Paulson&co Hedge Fund.

  4. Of course everything was “deregulated,” that’s how the government spent record quantities of money going after shit like internet gambling or tiny, 100%-backed and totally-honest businesses like e-gold & the Liberty Dollar, while totally ignoring huge, politically-connected & hyperleveraged criminals on Wall Street. Seriously, can’t SOMEONE follow the money when questionable claims of “deregulation” are made by big-government types? Bush spent, and spent, and spent, and part of that overspending was spending on regulation.

    And yes, I know I keep saying this same thing, but it’s important to repeatedly-mock such misapplications of resources to prevent a repeat of the criminality. One thing’s for sure: The media did a REALLY shitty job of covering it, so it’s also kinda an “I told you so” to them, as if anyone in the MSM reads this blog…

  5. I think it is now clear which investment bank manages the Bush family fortune. It is sad that a guy who should probably be in jail is in charge of fixing the mess he contributed to. I rather hire Joe the fucking plumber to manage the bailout than Hank the devil Paulson.

  6. it’s far from clear that financial markets were deregulated in any serious manner

    This old dodge again. Look at what they actually said at the hearing:

    Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is “shocked” at the breakdown in U.S. credit markets and said he was “partially” wrong to resist regulation of some securities…

    “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…

    “The reasons why we set up your agencies and gave you budget authority to hire people is so you can see problems developing before they become a crisis,” Committee Chairman Henry Waxman

    They’re talking about choosing not to issue new regulations in response to novel transactions and products and issues. Looking at the federal code and saying “Golly, there sure are a lot of regulations on other stuff” doesn’t cut it. They didn’t issue regulations on MBSs when they were called for; they didn’t issue regulations on CDSs when that was called for

    Regulating innovative financial markets is more like collecting the trash than building bridge; you can finish the bridge, but there will always be more trash to pick up next week and the week after. If you decide to stop picking up trash in June, and the streets are jammed with filth in September, it doesn’t get you off the hook to say you collected trash in March, April, and May.

    This is about resisting regulation, and hiding behind verb tense doesn’t change that.

  7. Personally, the most frightening quote I heard out of Greenspan I heard on the radio yesterday:

    “A critical pillar to market competition and free markets did break down,” Greenspan said. “I still do not fully understand why it happened.”

    He’s the one who was in charge of the Fed in the buildup to this, and he doesn’t understand what happened.

    I don’t have enough booze for November.

    Nephilium

  8. Ah, I get it.

    It wasn’t deregulation that caused the mess, it was lack of regulations that caused it.

    It certainly wasn’t the implicit guarantees by the fed to prop up and bail out the reckless investors. No, not that. It was that these vehicles were allowed in the first place.

  9. “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.

    Isn’t the demand for cash and/or credit effectively infinite? At what point does it become excessive?

  10. joe,

    The CDS market failures are directly attributable to failures of the ratings agencies, which have some sort of special government granted privileges.

    Radley found some nice commentary on that here

    Yes, some level of regulation was possibly necessary. But in my view, the true source of much of this chaos is the ratings agencies, on which there was no conscious absence of regulation.

    I hope S&P and Moodys get Andersened.

  11. Honest question, joe:

    When you say, “They didn’t issue regulations on MBSs when they were called for; they didn’t issue regulations on CDSs when that was called for,” what sorts of regulations do you think would have prevented/lessened this mess?

  12. Waxman’s hearings are an American version of the old Soviet show trials.

    It’s all about placing blame on Republicans and free-markets ideology.

    The fact is that the government was deliberatly trying to engineer specific economic outcomes for a specific sector of the population for political reasons. Fannie Mae and Freddie Mac were the primary enablers of the subprime mortgage mess.

    But we won’t be hearing any of that from Waxman.

  13. If there were tougher regulations, that would have hurt Fannie and Freddie, which are clearly the models of unregulated, free-market, libertarianism.

  14. While I think Greenspan was a fool to give any ammunition to this firing squad, I heard a clip of him on NPR where he at least defended rationality by putting down a question by one of the members of the panel. The question was something about “your ideology,” and Greenspan prefaced his answer with a comment about how an ideology is something everybody has, and uses to explain to themselves what is going on around them and forecast what will happen.

    Where I fault him is that he’s clearly not smart enough to comment that you can’t blame a pure ideology for a hodgepodge’s result. AFAIK, he didn’t even identify one thing that he would have preferred to have been consistent with his ideology that wasn’t. He just sat there and shook his head.

  15. Ravac,

    Why can’t it be both?

    Only one of us is denying anything Greenspan said. It ain’t me, babe.

    MP,

    I agree about the ratings agencies. What’s notable about them is the way changes in the way the financial sector was organized altered their incentive structure, so that they went from being neutral arbiters to being cheerleaders. That, and the falsified belief they had – a faith that seems to have been shared across the spectrum and throughout the industry – in the ability to manage risk.

    TV’s Frank,

    Ask Chairman Greenspan what he meant.

  16. Waxman’s hearings are an American version of the old Soviet show trials.

    In the way that Chinese Restaurants here serve the American version of the old Chinese recipes?

    No, not even that.

  17. I should be sitting pretty right up until the US defaults and the currency fails.Then these SOBs better be wearing barrels on their way to the guillotine.

  18. Seriously, TV’s Frank, this is complicated stuff. You don’t need me coming up with half-baked ideas.

    What we need are people with a high level of expertise and understanding of the specific issues involved to apply that knowledge to the task of creating an appropriate regulatory framework.

    Your town need its zoining revised? I’m your man. The proper regulations to prevent overleveraging on MBSs and the issuance of irresponsible mortgages? Let me stay at a Holidy Inn Express, and see what I can come up with.

  19. Great post title, btw. One of the better ones I’ve seen since “Buy My Cornpile.”

  20. What we need is to get rid of these white executives who are keeping the black man down.

  21. I found it particularly distasteful when the Political Officer, er… I mean representatives were asking whether one of them would support a law to “protect consumers.” He had the temerity to suggest that he’d need to see what it said.

    I would have said,”For me to render an opinion on legislation I haven’t read would be as irresponsible as a representative voting on legislation they hadn’t read. ”

    Oops. Did I say that out loud?

  22. What we need are people with a high level of expertise and understanding of the specific issues involved to apply that knowledge to the task of creating an appropriate regulatory framework.

    Shorter joe: We just need the right people in charge!

  23. Democrats ruining the economy, in their own words.

    http://www.youtube.com/watch?v=exxVZTKq1vA

    Socialism just doesn’t make good fiscal policy.

  24. Shorter joe: We just need the right people in charge!

    I have a good bit about this in my book. The search for a man who can get things get done largely explains how Germany became a state where Jews were the victim of industrialized genocide.

  25. Your town need its zoining revised? I’m your man.

    Zoining?,In Libertopia you are so out of a job, joe.

  26. How I wish Ron Paul could have crossed him for a couple of hours. That would have been the most enlightening conversation to come out of Washington in this whole mess.

  27. I didn’t write a word about “people” sage. But nice cliche.

    But since you bring it up, yes, people who know something about a subject are going to do better formulating policy about that subject than people that don’t. People who believe in the importance of accomoplishing a task can be trusted to do it better than people who do not.

    The vast majority of humanity considers this to be obvious to the point of tautology; but not you.

  28. In Libertopia you are so out of a job, joe.

    Gotta love job security.

  29. Zoining?,In Libertopia you are so out of a job, joe.

    I hate to quibble about these things, but I suspect that statement would be false. It just wouldn’t be the government asking for the zoning, but rather HOAs and the like.

  30. Hey, I win! Godwin!

  31. But since you bring it up, yes, people who know something about a subject are going to do better formulating policy about that subject than people that don’t. People who believe in the importance of accomoplishing a task can be trusted to do it better than people who do not.

    Yes, the first part of this is true – I’m not sure about “trust” in this equation, but the problem we keep running into are huge conflict-of-interest issues. If policy and regulations could be created objectively by the most intelligent people on each subject, yeah I agree that it would be better than our current system – but that’s the issue we keep running into.

  32. I didn’t write a word about “people” sage.

    Yes you did! It was in the first sentence of yours that I quoted! Yes you did!

    Yes you did.

  33. It doesn’t matter how expert a person is, it doesn’t give them a claim to greater power.

  34. What we need are more lawyers to propose and decide on good policy.

  35. I wrote about expertise. You’re making it about people.

    Hugh,

    Government derives its just power from the consent of the governed. If experts are given offices and a mandate by the democratically- and Constititionally-legitimate government, that is what gives them a claim to greater power.

  36. Suddenly, nobody wants to talk about regulation, merely act shocked that regulations are written by people.

    Odd, that. Almost as if people aren’t confident in arguing the anti-regulatory side on this issue now that Randite Greenspan has flipped, and have decided to hide behind ad homenims.

    ZOMG!!!! Lawyers!!!

  37. It’s like arguing with Baghdad Bob, isn’t it?

    “The troops are not in the city! They are committing suicide at the gates!”

  38. Come on, joe. It’s laughable how many congresspeople are lawyers but don’t actually read the laws they’re signing. These are certainly not the experts you were referring to, right?

  39. Hey, I’m just bustin’ joe’s chops. It’s Friday, and I still have a job.

  40. Yes, poor sage, it is.

    I mean, we have the former Chairman of the Federal Reserve – someone who knows a boatload more about this stuff than anyone on this thread, someone who vehemently and frequently argued the anti-regulatory side – saying “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,”

    and people just can’t let go of their wishful thinking. Uh, Econ 101? Uh, you want people – people! – to hold public office? Um, not passing new regulations as practices change and render the old ones irrelevant isn’t technically “deregulation?” Help?

    It is like arguing with Baghdad Bob. “It can’t be. It just can’t be. So I’m going to say it’s not.”

  41. Yes, the first part of this is true – I’m not sure about “trust” in this equation, but the problem we keep running into are huge conflict-of-interest issues.

    Yeah, you keep running into odd things like the iron triangle and agency capture, which have been known for, oh, my entire life. I’ve said it before, and I’ll say it again: the best and brightest minds on Wall Street got us all into this mess. Perhaps we shouldn’t be asking them how to fix the mess they made for us. Perhaps we should find some smart people that didn’t work at Goldman Sachs or Lehman Brothers to take a look at the issues and see if they can find a solution.

  42. What we need are people with a high level of expertise

    I didn’t write a word about “people” sage.

    This is the world where socialism makes sense.

  43. Reinmoose,

    Hell, no! In my formuation here: If experts are given offices and a mandate by the democratically- and Constititionally-legitimate government, that is what gives them a claim to greater power,

    the Congressmen are “the democratically- and Constitutionally-legitimate government,” who give the experts offices and a mandate.

    I certainly don’t want Congressmen coming up with the regulations on their own.

  44. joe @ 9:43: I didn’t write a word about “people” sage.

    joe @ 9:23: What we need are people with a high level of expertise and understanding of the specific issues involved to apply that knowledge to the task of creating an appropriate regulatory framework.

  45. Nobody can event attempt to answer my argument, and I interrupted the mutual admiration society, so I guess I’m going to be seeing people pretending not to understand my rebuttal to sage all day.

    It’s ok, fellas. I’m used to it.

  46. But you have this problem where democracy runs into expertise.
    You can find an “expert” to say just about anything you want to hear. We the people elect representatives based on a comparisson of our ideologies to their ideologies. If the constitutionally legitimately elected government representatives we have in congress are voting based on the combination of their ideology and the ideology of those they represent, how are we going to reach anything other than policy dictated by the masses (who are largely uneducated on any given issue) as opposed to by the smartest minds on the issue?
    The folly here is that when we get the policy we asked for and it goes afowl, we blame the “experts” because that’s what they told us, and always think we need new experts – but then we only look for experts who are STILL telling us what we want to hear – rinse, repeat

  47. It would appear that skipping over the difference between the need for expertise in formualting policy and having “the right people” in charge is some sort of intellectual booby prize for people watching their ideology swirl the drain.

  48. Reinmoose,

    Ironically, by having Congress vote for laws they don’t read.

    How do we make sure that the tactics carried out by military officers reflect sound military judgement and not just those that are “what we want to hear?”

    By designing their mandate to include independent judgement, and putting together a structure that shields them from political intereference.

  49. Success has many fathers, but failure is an orphan.

    Unknown

  50. That’s why it’s such a unique experience when something that looks like a success turns into a failure.

    All the fathers stepped forward to get their pictures taken already.

    Eh, “Maestro?”

  51. joe –
    true, all true.

    We just don’t have a good functioning mechanism for this.
    And who picks the expert?

  52. And just for my libertarian bona fides, there’s only one regulation that needs to be promulgated: Full disclosure of the risks and rewards of whatever financial instrument you’re trying to sell. If you aren’t providing the customer with the exact same information you use to make internal decisions, you’re doing it wrong. After that, caveat emptor, bitches.

  53. They’re talking about choosing not to issue new regulations in response to novel transactions and products and issues.

    This represents a noticeable shift in joe’s position, away from his previous adamant position that deregulation [particularly the Gramm deregulation] caused the current mess.

    The problem with that previous position is that it’s very difficult to put flesh on the basic skeleton of that claim, because it’s hard to see how the specific problems that caused the current crisis are closely related to the specific acts of deregulation that we got. So it’s reasonable – and, I think, correct – for joe to have shifted his argument slightly in this way.

    The problem with his new argument is this: it relies on the notion that some supersmart regulator could have existed that would have issued exactly the right regulation while the bubble was going on. The italicized part may be the most important. It is my position that it is highly probable that even the most empowered regulator would not have chosen the right regulation to enact at the right time, because during the bubble all the data you have at your disposal would be flashing exactly the wrong signals. At its most basic, the “magic bullet regulation” theory requires us to believe that a regulator would have chosen to restrict the extension of credit during a time period of historical lows in default rates. It requires us to believe that a regulator would look at the books of supervised institutions, see loans that were performing, and tell them, “Stop making these loans.” And I just don’t think that’s reasonable to expect.

  54. Unless I’m mistaken, it’s regulations that required banks and investment houses to have “investment grade” securities in their portfolios, securities that turned out to be leveraged as high as 35:1. It’s unclear to me how further regulations are going to pin a value on something that nobody can seem to put a price on, mostly because of fear, most of that fear around that 35:1 number. They’ve played the delta so many times on these things that nobody even knows what they are based on. If that Fed report is correct (and it’s only a working report) then this is contained primarily in the financial industry and mostly confined to commercial paper. If not, well, I prefer government does nothing rather than panic and start throwing good money after bad. Most industries aren’t based on ether like finance – they’ll get through.

  55. I disagree, Reinmoose. The Fed worked wonderfually as a regulatory and stabilizing agency for decades. Remember Paul Volcker? That tight-money policy was incredibly unpopular when the nation went into recession in 1982, enough to cost the GOP the Senate. And yet, we stuck with the policy, and it tamed inflation, and set the stage for decades of growth.

    This was a policy failure, not a systemic failure.

  56. Great post title, btw.

    Not really. The “shrugging” in Atlas Shrugged wasn’t about hopeless uncertainty. BTW, Greenspan’s essays for The Objectivist in the 60s are truly brilliant. Who knew that he would become the man who apparently forced poor people to buy houses they couldn’t afford, and greedy traders to commit financial suicide?

  57. Fluffy,

    This represents a noticeable shift in joe’s position, away from his previous adamant position that deregulation [particularly the Gramm deregulation] caused the current mess.

    What are you talking about? I’ve been making this point for weeks! Is this seriously the first time you’ve seen my bridge/trash analogy?

    The problem with his new argument is this: it relies on the notion that some supersmart regulator could have existed that would have issued exactly the right regulation while the bubble was going on. Let’s go back to Alan Greenspan’s remarks:

    Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is “shocked” at the breakdown in U.S. credit markets and said he was “partially” wrong to resist regulation of some securities…

    Wait, pressure? He was under pressue to issue regulations?

    Why, yes, he was. Congress directed the Fed to issue new regulations on mortgage lending as far back as the 1990s, and he and Bernanke just ignored the law.

  58. What schadenfreude I am taking in watching all this! This Randian former gold-standard advocate is not only trying to absolve the real culprit in this mess (himself and his statist central economic planning), but also to actually blame the free market and a lack of regulation!!

    He knows that long after he is dead and gone – and after the eventual disastrous collapse of the US economy – history will eventually blame him and his ilk for all of it. You might be able to fool everyone for now Alan, but someday you will be remembered for what you are: a sellout statist shill that helped wreck the very capitalism that you and Ayn and the rest of the Randians claimed to hold so dear.

  59. Now that’s some Baghdad Bob right there.

  60. My giant drawing of Ayn Rand is frowning at you, Alan.

  61. But since you bring it up, yes, people who know something about a subject are going to do better formulating policy about that subject than people that don’t.

    Not always. Matt Millen, all pro linebacker and football TV commentator, has a much better gridiron resume than this humble retired fire controlman. Yet I’d bet both of my testicles that in seven years of running a professional football franchise in the NFL I’d turn in at least one season where the team won half of it’s games.

    Other examples abound.

  62. Well, if you’re just referring to the Fed and the military, you could argue it “works.” However, congress has plenty of opportunity in both of those situations to dictate broader policy that the experts just have to deal with, as opposed to the other way around. Greenspan may have preferred that he had more control. So the experts we hire are limited in their control by democratic (little “d”) tinkering with other related issues.
    What about other federal departments? Education policy – who dictates that to us? Who dictates health care policy? Are those all fields that we should set up similar structures for, in your mind?

  63. The Fed worked wonderfually as a regulatory and stabilizing agency for decades.

    A broken clock is right twice a day as well.

  64. What are you talking about? I’ve been making this point for weeks! Is this seriously the first time you’ve seen my bridge/trash analogy?

    joe, in bailout thread after bailout thread you argued that the Gramm bill’s override of certain New Deal era regulations was instrumental in causing the current crisis.

    At some point you stopped arguing this, largely I imagine because there’s nothing there that relates closely enough to our current problems.

    And to me the most notable thing about Greenspan’s comments is the complete absence of any suggestion that maybe, just maybe, he lowered rates too far. Or that maybe, just maybe, he shouldn’t have advocated the Bush tax cuts.

    Greenspan’s statement actually reinforces my point: while inside the bubble, he did not perceive it as a bubble, and saw no need to regulate securities that appeared to pose very limited risk. Basically to make your argument compelling, we’d have to believe that a different Fed chairman appointed by a Democrat President would have made a different decision, and that assumption is extremely problematic.

  65. Congress directed the Fed to issue new regulations on mortgage lending as far back as the 1990s, and he and Bernanke just ignored the law

    Bernanke is understood to be the best qualified person in the universe for Fed chief, and perhaps the greatest scholar regarding the Great Depression. Therefore I assume he created the best regulatory framework, despite pressure from inexpert politicians.

  66. Fucking heretic. Plug your ears class. We will not–I repeat, will not–examine any of our ideological assumptions. Ever! Mr. Greenspan will rot in Hell!

  67. Fluffy,

    joe, in bailout thread after bailout thread you argued that the Gramm bill’s override of certain New Deal era regulations was instrumental in causing the current crisis.

    No, I argued that it played a role, but I’ve been writing about the absence of new regulations in response to changing practices for weeks.

    At some point you stopped arguing this, largely I imagine because there’s nothing there that relates closely enough to our current problems. Actually, there is. By putting loan origninators, bond raters, and securities issuers under the same roof, increased firms’ incentive to issue less-reliable mortgages and securitize them – which wouldn’t have been a problem with adequate regulation.

    Which is to say, the mergers and novel practices abetted by Gramm’s bill are examples of those changing practices I’m always on about – the ones that necessitated the new regulations that Greenspan spent so long resisting.

    Greenspan’s statement actually reinforces my point: while inside the bubble, he did not perceive it as a bubble, and saw no need to regulate securities that appeared to pose very limited risk.

    HE didn’t. Others did, and pressured him to do so, including Congress.

  68. BTW, Fluffy and Jackson, in 2006 – the height of the bubble – Bernanke eventually got around to issuing the regulations that Congress has mandated a decade before.

  69. Therefore I assume he created the best regulatory framework, despite pressure from inexpert politicians.

    No, he IGNORED pressure – in the form of federal law – from inexpect politicians who gave him a mandate.

  70. Actually, there is. By putting loan origninators, bond raters, and securities issuers under the same roof, increased firms’ incentive to issue less-reliable mortgages and securitize them – which wouldn’t have been a problem with adequate regulation.

    But this is precisely what it did not do.

    The bond raters aren’t under anyone else’s roof. There are problems with inherent conflicts of interest in their business, but their ownership structure isn’t one of them and the Gramm bill had no effect on them.

    And non-bank loan originators also existed before the Gramm deregulation. There was nothing in the law preventing, for example, Lehman from owning Aurora prior to Gramm.

    And a firm like Wachovia was undone by products that World Savings and Loan originated for its own portfolio – a practice that was unchanged before and after Gramm.

    It’s easy to contemplate regulatory “shouldas” in hindsight. But in hindsight, I can bet right on every one of last week’s football games, too. The trick is betting right before the games are played, and that’s what I have considerable doubt you can consistently do.

  71. No, he IGNORED pressure – in the form of federal law – from inexpect politicians who gave him a mandate.

    So wait – this system of setting up an expert isolated from political action didn’t work?

  72. Apparently the Grand Poobah of all Money wants you to believe he’s unfamiliar with the concept of “Greed” and how making lots and lots of money in a short period of time has a way of making a man cease to think rationally or worry about long-term planning or whether all the money you’re making rests upon a House fo Cards. This apparently never occured to the man who once worried about “irrational exuberance” or whatever that means.

    So the Grand Poobah of all Money plays dumb because

  73. Fluffy,

    They got it right for seven decades, and only ceased to get it right when the government was taken over by people who agree with you about the efficacty of regulators.

    This means something.

  74. So wait – this system of setting up an expert isolated from political action didn’t work?

    Yes – right when the Republicans captured all three branches of government, as well as the Fed, and your ideology about regulation came to be the dominant one, the system broke down.

    It’s a poor carptenter who blames his tools. Especially when he made the choice not to pick them up.

  75. You mean, after the crest of the bubble. Sure, that’s “the middle”.

  76. If nobody – nobody! – could see that there was a need for regulation, why was there a bill directing the Fed to issue such regulations sitting there?

    One passed by Congress and signed by the President?

  77. Yes – right when the Republicans captured all three branches of government, as well as the Fed, and your ideology about regulation came to be the dominant one, the system broke down.

    I’ve never voted Republican in my life. And I’m aware enough of my ideology.. you know what, you’re right. It’s my fault, and my people’s – like George Bush – fault.

  78. Apparently the Grand Poobah of all Money wants you to believe he’s unfamiliar with the concept of “Greed” and how making lots and lots of money in a short period of time has a way of making a man cease to think rationally or worry about long-term planning or whether all the money you’re making rests upon a House fo Cards. This apparently never occured to the man who once worried about “irrational exuberance” or whatever that means.

    So the Grand Poobah of all Money plays dumb because he does not want to admit he knew exactly what he was doing all along. He made money easy to get for dot com companies and home buyers because he knew that in an age when consumer spending rather making things was the real basis of U.S. wealth, it was important as much money flowed through system as possible to basically repeal the business cycle.

    Well the Grand Poobah failed, and now he’s just plain old Alan with his reputation ruined for creating the mess we’ll be spending years to clean up and it couldn’t have happened to a more wonderful person.

    The moral of the story, never abandon your Randianism.

  79. How about some individual responsibility, libertarians? How about acknowledging that Bernanke and Greenspan made their choices like big boys?

    Greenspan and Bernanke have acknowledged that themselves, about themselves, but you can’t?

  80. It would appear that skipping over the difference between the need for expertise in formualting policy and having “the right people” in charge is some sort of intellectual booby prize for people watching their ideology swirl the drain.

    Not really, joe. Its just that we are skeptical of the argument that it will all work if only the “smart” people are in charge.

  81. What I wrote: your ideology about regulation…

    What Reinmoose replied with: It’s my fault, and my people’s…

    Same dodge, all day.

    Here, let’s run those Alan Greenspan quotea again:

    Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is “shocked” at the breakdown in U.S. credit markets and said he was “partially” wrong to resist regulation of some securities…

    “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…

    You sure as hell are.

  82. joe
    you JUST made an argument for a politics-insulated expert to handle complex policy, and now you’re blaming the politics-insulated expert for not implementing policy that you and the politically powerful at the time supported.

    Hence my argument above about how experts cannot be democracy proof and for that to be an acceptable format

  83. They got it right for seven decades, and only ceased to get it right when the government was taken over by people who agree with you about the efficacty of regulators.

    What about the 8 years of the Clinton administration?

    And the shift in your argument also essentially makes the case for statism unfalsifiable – no matter what level of regulation is in place, and no matter how much government intervention takes place, if anything goes wrong you can always claim that the problem is that there wasn’t enough regulation, or that regulators didn’t “respond quickly enough to novel conditions”.

    And the Fed didn’t always “get it right”. The fact that the extreme Volcker intervention was even necessary implies that Carter-era Fed chiefs had called the macro picture wrong. In any event, if the Fed miscalculating a basic rate-setting decision once [my position] or making the wrong regulatory decision once [your position] leads to worldwide financial collapse, perhaps the model isn’t that great fundamentally, no matter what its previous record may have been.

  84. RC Dean,

    Its just that we are skeptical of the argument that it will all work if only the “smart” people are in charge. Alan Greesnpan, Ben Bernanke, and Phil Gramm are some of the smartest people in Washington. They knew they could issue regulations, they knew what the issues were and what common-sense actions could have been taken, and they made the deliberate choice not to, because of what they believed in.

    Which is what you believe in, so you won’t acknowledge their responsibility and failings.

  85. The Austrians are making the most sense in all this mess.

  86. Reinmoose,

    and now you’re blaming the politics-insulated expert for not implementing policy that you and the politically powerful at the time supported. Actually, by the time the Fed was due to issue those lending regulations, the politically powerful at the time did not support it.

    But you’re (deliberately?) conflating two very different things, as I described above: giving the smart people a mandate to do something (what representative, political government should do) and determining how to accomplish that mandate (what expert, civil servant bodies should do).

    When people who didn’t believe in the necessity of regulation took over the government, they allowed the mandate to lapse, and put no pressure on the civil servants to carry it out. Since the civil servants were themselves ideologues, they didn’t push the ball forward on their own, either.

    This was a policy failure, which had its roots in an intellectual failure. That the system worked well for decades – brilliantly at times, as under Volcker – demonstrates that, no, it is not impossible for it to succeed, or even improbable. The Fed failed this time, because it chose not to do its job, because the people who would have done that job were getting no pressure, internal or external, to do so.

  87. They knew they could issue regulations, they knew what the issues were and what common-sense actions could have been taken, and they made the deliberate choice not to, because of what they believed in.

    This is exactly what I dispute.

    Ideological decisions weren’t being made by the actors directly involved on Wall Street. They actually used a highly positivistic decision-making system: they used the data they had to build models predicting the future performance of securities. The data that made up that model included foreclosure rate data showing steadily dropping foreclosure rates during the same period of time that subprime and Alt-A lending was being transformed. They concluded that they were making the right decisions. This is pretty much an ideology-free decision making process, unless you consider the fact that they wanted to make money inherently ideological.

    And it’s my position that the regulatory machine would have run into the same data.

    This thread is the mirror image of the Barney Frank / FNMA threads. I have not attacked Frank, because I think that the attacks on him are hindsight-based and fail to take into account the difficulty of perceiving the systemic threat we had when the macro picture was fundamentally different.

  88. And the shift in your argument also essentially makes the case for statism unfalsifiable – no matter what level of regulation is in place, and no matter how much government intervention takes place, if anything goes wrong you can always claim that the problem is that there wasn’t enough regulation, or that regulators didn’t “respond quickly enough to novel conditions”.

    Actually, one could only credibly claim that if there actually were novel conditions and practices that arose, and if there really was a conscious decision made not to regulate in response to those.

  89. What about the 8 years of the Clinton administration?

    There were certainly some market-fairy true believers in the Clinton administration, too. Things got worse under Bush, but didn’t begin there.

  90. And it’s my position that the regulatory machine would have run into the same data.

    Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is “shocked” at the breakdown in U.S. credit markets and said he was “partially” wrong to resist regulation of some securities…

    Pressure?

    What pressure?

  91. Wait a minute, joe, the fed worked “perfectly” for seven decades? No overexpansions of credit leading to financial collapse, no severe periods of double-digit inflation?

  92. Given my own elitism, I can see joe’s point about “experts”. However, my libertarianism makes me uneasy about placing massive ocercive power in a small elite known as “experts”, especially when they are appointed by a bunch of pandering sacks of shit.

  93. However, my libertarianism makes me uneasy about placing massive ocercive power in a small elite known as “experts”, especially when they are appointed by a bunch of pandering sacks of shit.

    That’s just what Rand devote Alan Greenspan used to think.

    Used to.

  94. That’s real nice. I predict this years before the fact, and they say I’m the one who’s ignorant of the facts. Screw you guys, I’m going home!

  95. “Used to.”
    Yeah, then he fucked up massively. Good going, Alan.

  96. economist,

    If it ran “perfectly” one wonders why nearly all central banks reformed themselves along the lines that New Zealand’s central bank did in 1984.

  97. What’s that one scientist’s name in Atlas Shrugged? You know, the one who dies while trying to take possession of the death ray?

  98. Seward,
    Please direct all questions along these lines to joe, who has appointed himself expert on all things financial on this thread, owing to the absence of a great sage of finance like Alan Greenspan.

  99. This was said way upthread by Don Mynack but bears repeating:

    “Unless I’m mistaken, it’s regulations that required banks and investment houses to have “investment grade” securities in their portfolios, securities that turned out to be leveraged as high as 35:1.”

    Yes, absolutely correct. And it gets back to my point about the ratings agencies. Guess who gave all these sub-prime tranches investment grade ratings? S&P and Moodys, that’s who.

    This pissing contest about regulations needs to stop. No one should fool themselves into believing that additional regulation would have prevented the current mess. Just as no one should fool themselves into believing that an absence of regulation would have prevented this mess.

  100. Given my own elitism, I can see joe’s point about “experts”. However, my libertarianism makes me uneasy about placing massive ocercive power in a small elite known as “experts”, especially when they are appointed by a bunch of pandering sacks of shit.

    To expand upon this, it’s very easy to find experts who agree with whatever you want them to say. And even if you base things on consensus that isn’t a very good indicator of success. Orthodoxy can be just as poisonous in acedemic circles as it is religous or social ones.

    I don’t know about anyone else but the only way I would ever put my trust in a stock broker, no matter how smart, is if I can fire him. Would you trust your money with a guy you couldn’t fire? Because that’s exactly what your getting with government experts.

  101. Rarely have I seen joe contradict himself so brutally and openly in so short a time.

    First, he’s talking about people, then he’s not.

    Then, he’s talking about regulators insulated from political pressure being the answer, then he’s blaming regulators who ignored political pressure for the problem.

    Then, he picks up on his earlier claim that we didn’t have knowledgable people in charge by claiming that the people wh were in charge are some of the smartest around.

  102. Since we’re quoting Greenspan on regulation, I feel compelled to include the obvious from his 1998 testimony: “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

    Why, it’s almost as if GATA has been right about manipulation of precious metals prices to hide hyperinflation & the media has been willfully-clueless since the late ’90s. Nah, couldn’t be!! The news media would never aid and abet a lie that expands government secretly!! And we’ve never seen a few unpaid bloggers do a better job than the “professional” media, either.

  103. The Austrians are making the most sense in all this mess.

    Indeed.

  104. Joe,

    What law regarding mortgages was it that Congress passed and the president signed around 1996, which the Fed ignored until 2006 when Bernanke finally got around to issuing regulations?

  105. These are good points by Nick Gillespie. Here is a copy of my posting this morning on the Wall Street Journal On-Line site:

    The best regulator is the market. The market “worked” in the sense that some players acted with wisdom and some did not. The entities that acted recklessly, in disregard of shareholders’ interest, should be allowed to fail.

    Surely Mr. Greenspan is aware of the “agency” problem with corporations. Was he really surprised that some managers would act foolishly with shareholders’ money?

    The market has already recognized the need for changes in the creation and sale of the subject financial products. What will almost always fail, and are always suspect, are governmental programs beyond those called for by Adam Smith. Governmental failings, including those related to the management of the money supply and the forced and facilitated issuance of unsound mortgages, are of course major contributors to today’s problems. To think that more government regulation will be helpful is the triumph of hope over experience.

  106. 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.

    I guess I don’t get his communication style. He puts his finger right on the heart of the whole crisis with this statement, then says he doesn’t fully understand what happened. Being a numbers nerd, maybe what he means is literally he doesn’t FULLY understand — i.e. he doesn’t grok every last detail of what went wrong in its fullness.

  107. economist | October 24, 2008, 11:29am | #

    Seward,
    Please direct all questions along these lines to joe, who has appointed himself expert on all things financial on this thread, owing to the absence of a great sage of finance like Alan Greenspan.

    Um…

    joe | October 24, 2008, 9:23am | #

    Seriously, TV’s Frank, this is complicated stuff. You don’t need me coming up with half-baked ideas.

    What we need are people with a high level of expertise and understanding of the specific issues involved to apply that knowledge to the task of creating an appropriate regulatory framework.

    Your town need its zoining revised? I’m your man. The proper regulations to prevent overleveraging on MBSs and the issuance of irresponsible mortgages? Let me stay at a Holidy Inn Express, and see what I can come up with.

    It’s sort of pathetic watching the same cliches recycled over and over like this, in direct refutation of the facts.

    Which, come to think of it, is a pretty good metaphor for a certain issue and a certain group of ideologues.

  108. I think I have a win-win solution to this crisis. Is there any way we could armor our troops in Iraq with a thin, comfortable, shell of libertarianism? Because the ideology seems perfectly resistant to all sorts of attacks from the real world.

    If it can hold fast against Greenspan basically admitting they should have thought about regulating the securities that were becoming much more prevalent and ended up exploding our financial system, it ought to be able to handle mere projectiles without a second thought.

  109. “Unless I’m mistaken, it’s regulations that required banks and investment houses to have “investment grade” securities in their portfolios, securities that turned out to be leveraged as high as 35:1.”

    The regulation didn’t require them to purchase securities that badly leveraged. In fact, the regulation didn’t forbid securities from being that highly leveraged, nor did it forbid such leveraged securities from being counted towards their capitalization requirements, nor did it forbid securities that highly leverages from being issued in the first place.

    Tough to blame regulation for the fact that the securities were so crappy.

  110. Rarely have I seen joe…

  111. Rarely have I seen joe…

    Frequently have I seen R C Dean write such diningenuous paeans to the joys of playing dumb in order to misconstrue things in a way that makes me look bad, in order to make himself feel better about being utterly incapable of offering substantive rebuttal to what I write.

    I’d go so far as to say it’s become an everyday occurance since the failure of his beloved conservatism has been so brutally laid bare.

  112. I’ve written none of the contradictions you attribute to me, RC. You’re playing semantic games to pretend that my nuances arguments about complicated matters are actually contradictory stand-alone statements.

    This is the behavior of someone losing his mind as the ground beheath of feet gives way.

  113. Truly, I’d like to know what law Joe referred to regarding mortgages the Fed ignored for about a decade. I’ve been searching but can’t find anything.

  114. joe accuses OTHER people of “playing semantic games”? joe, you’re a smart guy, but you’ve been tap-dancing like crazy in this thread. First you argue that we need the right people, then you say you didn’t say anything about people, it’s about belief and expertise. When questioned as to how those things exist outside of people implementing them, you accuse everyone of making it an ad hominem issue. You claim that the system “worked fine for decades” (I guess the 1970s don’t exist in your book) until the system was “captured” (BTW, we call those “elections” here) by people who don’t believe in regulations…although somehow those same people who “don’t believe in regulations” also ordered the Fed to create regulations! When it’s pointed out that the Fed did put some regulations in place, you say they weren’t the RIGHT regulations, which I guess takes us back to the whole “expertise” thing. If, however, we disagree with you about anything, you point to what Greenspan just said…apparently he was an idiot until today, when he suddenly got religion.

    Man, that is some impressive hot-stepping there, joe! I take my hat off to you, sir. I have no doubt you will come up with some brilliant way to explain how I am wrong about everything too. I await it eagerly. It is always marvellous to see a master at work.

  115. If it can hold fast against Greenspan basically admitting they should have thought about regulating the securities that were becoming much more prevalent and ended up exploding our financial system

    I’m going to engage in a little psychological guesswork, which is a hazardous thing to do with someone you’ve never met, but I’ve been conscious of Greenspan’s history for about 30 years so I’m going to take a shot:

    Greenspan was in his youth a member of a quite radical movement that held [and holds] extreme views on economic matters.

    He eventually departed from that movement or group and reached a series of personal accomodations with power structures that are particular hobby horses of the idealism he abandoned. [After all, an associate of Rand becoming Chairman of the Federal Reserve is something like a PETA member getting a job running a fur farm.] Those accomodations made him immensely successful and world-famous.

    Now that he has presided over an economic debacle, he can either conclude that his youthful idealism was right, and his series of “sell-outs” has implicated him in a huge disaster, or he can conclude that his behavior was proper overall and he merely made one or two bad decisions on technical matters.

    Which conclusion is the path of least resistance psychologically?

  116. Once again, in the absence of a rebuttal to my arguments, I get missatements of them and accusations of inconsistency.

    Pathetic.

  117. I’ve written none of the contradictions you attribute to me, RC.

    Let’s review the record:

    First, he’s talking about people, then he’s not.

    joe @ 9:43: I didn’t write a word about “people” sage.

    joe @ 9:23: What we need are people with a high level of expertise and understanding of the specific issues involved to apply that knowledge to the task of creating an appropriate regulatory framework.

    Then, he’s talking about regulators insulated from political pressure being the answer, then he’s blaming regulators who ignored political pressure for the problem.

    joe @ 10:07: By designing their mandate to include independent judgement, and putting together a structure that shields them from political intereference.

    joe @ 10:39: No, he IGNORED pressure – in the form of federal law – from inexpect politicians who gave him a mandate.

    Then, he picks up on his earlier claim that we didn’t have knowledgable people in charge by claiming that the people who were in charge are some of the smartest around.

    joe @ 9:23: What we need are people with a high level of expertise and understanding of the specific issues involved to apply that knowledge to the task of creating an appropriate regulatory framework.

    joe @ 10:57: Alan Greesnpan, Ben Bernanke, and Phil Gramm are some of the smartest people in Washington.

    I submit that I have not materially misrepresented a single statemeny by joe, and that he has, in fact, been contradicting himself all over this thread.

  118. Fundamentally, I think joe’s problem is this:

    What he specifies as the solution to our problem (smart guys with lots of expertise. insulated from political pressure, charged with developing a regulatory framework) turns out to be exactly what we had.

    Unfortunately, it didn’t work. Why not? joe offers a range of explanations:

    (1) They ignored political pressure. Unfortunately, being insulated from political pressure is supposed to be part of the formula for success.

    (2) This is the real reason, in joe’s mind – even though they were really smart guys, they were free marketeers. IOW, they had the wrong ideology. What he’s saying here is that it would all work out if we just have the “right people” (meaning, people who agree with joe) in charge, no?

  119. Joe- the point here is that when businesses are engaged in lousy practices, they should fail. But what we’ve done is reward their incompetence, instructed them that future incompetence will be rewarded, and told the American people that they really have no good reason to investigate fully into the investments they make, whether as lenders or as investors.

    Is that the kind of ‘good government’ you’re after?

  120. In addition to what Fluffy said, it was REPUBLICANS trying to regulate the out of control monster as the damage became obvious, while DEMOCRATS remained bought by Fannie & Freddie and resisted regulations, right?? So when Democrats blame “deregulation” despite the record spending I keep pointing out, it’s even MORE ironic and pathetic. Lefties have some good arguments about some things, but this subject is a minefield for them, for good reason, as Joe has inadvertently shown.

  121. Regulating innovative financial markets is more like collecting the trash than building bridge; you can finish the bridge, but there will always be more trash to pick up next week and the week after. If you decide to stop picking up trash in June, and the streets are jammed with filth in September, it doesn’t get you off the hook to say you collected trash in March, April, and May.

    This is about resisting regulation, and hiding behind verb tense doesn’t change that.

    I’m not buyiang any of that bullshit.

    For one, if it’s so innovative, no one knows what is going to happen so there won’t be any intelligence in the regulation. It’ll just be erring on the side of caution instead of on the side of liberty. And of course individuals were free to be as cautious/reckless as they want to be.

    This is NOT about resisting regulation, it’s about resisting the natural mechanisms of the market which comes down pretty fucking hard on innovations that ultimately don’t work.

    All the regulation doesn’t mean jack shit anyway. The government puts itself ever deeper into debt, and has for every adminstration since FDR without exception. Obviously the government is incapable of regulating itself and there should be no surprise when the average citizen merely follows the same economic plan of his own leaders.

  122. See, if you twist yourself into absurd contortions to avoid acknowledging my points, you can take statements out of context to make them appear contradictory.

    First, he’s talking about people, then he’s not.

    So, I point out that I’m talking about governmental structure, not persons, and I’ve allegedly contradicted a statement I’m supposed to have made about persons.

    Then, he’s talking about regulators insulated from political pressure being the answer, then he’s blaming regulators who ignored political pressure for the problem.

    I lay out the difference between giving people a mandate to act independently and issuing orders for them to follow, and I’ve allegedly contradicted myself again.

    Then, he picks up on his earlier claim that we didn’t have knowledgable people in charge by claiming that the people who were in charge are some of the smartest around.

    Then, I point out that my argument was to have experts in charge AND giving them a mandate to regulate, and I allegedly contracted myself by saying that having experts in charge but not giving them a mandate to regulation didn’t work.

    I’ve made actual arguments, RC, and you can’t answer any of them, so you distort what I have to say to make yourself feel better.

    Pathetic hack.

  123. See, if you twist yourself into absurd contortions to avoid acknowledging my points, you can take statements out of context to make them appear contradictory.

    First, he’s talking about people, then he’s not.

    So, I point out that I’m talking about governmental structure, not persons, and I’ve allegedly contradicted a statement I’m supposed to have made about persons.

    Then, he’s talking about regulators insulated from political pressure being the answer, then he’s blaming regulators who ignored political pressure for the problem.

    I lay out the difference between giving people a mandate to act independently and issuing orders for them to follow, and I’ve allegedly contradicted myself again.

    Then, he picks up on his earlier claim that we didn’t have knowledgable people in charge by claiming that the people who were in charge are some of the smartest around.

    Then, I point out that my argument was to have experts in charge AND give them a mandate to regulate, and I allegedly contracted myself by saying that having experts in charge but not giving them a mandate to regulation didn’t work.

    I’ve made actual arguments, RC, and you can’t answer any of them, so you distort what I have to say to make yourself feel better.

    Pathetic hack.

  124. I really enjoy being blamed for stuff, done by parties I never voted for, based on decisions I would never make, most of which was done before I was born.

  125. What he specifies as the solution to our problem (smart guys with lots of expertise. insulated from political pressure, charged with developing a regulatory framework) turns out to be exactly what we had.

    I did you the favor of highlighting exactly where your thinking goes awry.

    They weren’t charged with developing a regulatory framework. That mandate was removed from them, by a Congress and President and Fed Chair that were quite open and loud in professing their fealty to an ideology of keeping them from regulating the industry.

    What, exactly, did you take me oft-repeated “this was a policy failure” statement to mean? That the secretary at the Fed’s Boston office was buying the wrong pastries?

  126. What he’s saying here is that it would all work out if we just have the “right people” (meaning, people who agree with joe) in charge, no?

    No. Let me see if I can get this through your pugnacious lawyer head:

    I’m talking about what they DO. Not what they believe, not who they are, I’m not talking about people at all. I’m talking about actions and policies and structures.

    If a bunch of market fundies were put in at the Fed with the right structure, and the right mandate, they would by necessity take the right actions.

    Because this isn’t an argument about persons, however comforting it might be to turn to that old cliche in lieu of trying to come up with a rebuttal to my point. This is an argument about policy, structure, and most importantly, actions.

  127. *zzzzzzzzzzzzzzzzzz*

    snrxflxtphhhtz!

    *zzzzzzzzzzzzzzzz*

  128. For one, if it’s so innovative, no one knows what is going to happen so there won’t be any intelligence in the regulation.

    Untrue. What’s frustrating is how much of the necessary regulation would have consisted merely of applying the same types of standards that governed older types of institutions and practices to newer ones.

    It’ll just be erring on the side of caution instead of on the side of liberty.

    Precisely. More of that, please. It would take a reall fool to look at this mess and say “Phew! Good thing the government didn’t stop any of those mortgages from being issues, or constrain leveraging, or otherwise interfere with the liberty of the financial sector.”

    A bigger fool than Alan Greenspan, anyway.

  129. No one blames you, Reinmoose.

    Just some ideas you agree with.

  130. What we need are people with a high level of expertise and understanding of the specific issues involved to apply that knowledge to the task of creating an appropriate regulatory framework.

    The free market works just like democracy – you can’t always get what you need but you will always get what you really want.

  131. I suppose if you’re willing to completely sell out your intellectual integrety, you can claim that any observation that someone’s ideas are better than someone else’s is an “if only the right people were in charge” argument, right down to noting that, sigh, if only people like Ron Paul ran Congress, everything would be ok.

    But that would be the sort of thing you’d do to dodge an argument about the merits of two sets of ideas.

  132. Waxman is a lying whore.

  133. What we will need when productivity begins a stark decline in this quarter and continues to plunge onward in the following cycles is more red tape. That will ensure that the largest market players are able to keep those smaller firms from competing on a more level playing field given the small, much more diversified firms, for the most part kept their books sound and have a competitive advantage over their players on Wall Street that did not exist before the current crisis.

    With the expansion of red tape, Wall Street will be able to continue without a threat to the status quo by continuing to hire the most corporate lawyers who will continue to find ingenious ways to bundle product that gets around the regulatory burden and they will be able to do so while their country cousins have to eat it. And that is how it should be.

    Without Goldman Sachs and their ilk we will be at the mercy of decentralized basis of economic power coming from every corner of the United States, and in a global economy it is necessary to maintain our advantage by concentrating our resources into those experts with the most economic and political experience and not those naive mom and pop operations in the sticks like Boston MA.

  134. Isn’t the point of appointing an expert that you don’t then dictate what they do?
    Isn’t a light regulatory framework still a regulatory framework? I don’t think “charged with developing a regulatory framework” is contradicted by not showering people with the “right” regulation.

  135. If a bunch of market fundies were put in at the Fed with the right structure, and the right mandate, they would by necessity take the right actions.

    Magically.

    Because they would magically choose to do the opposite of what the data was telling them to do.

    I’ll leave RC to consider the other contradictions, but this is the basic one.

    I submit that the Federal Reserve and the rest of the federal government did not perceive that we were in a bubble.

    My evidence for this is that the Federal Reserve continued to lower rates, and the federal government applied stimulus when it didn’t have to.

    To fully recognize the potential for a crisis, the Fed would have had to look at the securities in question and say, “These are much more risky than the data about their performance indicates, because the data is skewed by the fact that we’re in a bubble right now.” But that is exactly what they weren’t going to conclude as long as they didn’t accept that they had created a bubble.

    It’s a Catch-22. If they were using their major regulatory power [the ability to set rates] in a way that makes it clear they didn’t know they were in a bubble, it’s not reasonable to expect that they would have employed a minor regulatory power in a completely opposite way.

  136. It wasn’t deregulation that caused the mess, it was lack of regulations that caused it.

    When you debate with people, they sometimes use words incorrectly. Specifically, when debating with people about this financial crisis, yes, they often say “deregulation” when they mean weakened regulation or not creating new regulation.

    You can point that out to them, and maybe they’ll speak more exactly. However, if they still misuse the words but you know what they mean, is it intellectually honest to stubbornly refuse to acknowledge that you are capable of interpreting their words?

  137. “Suddenly, nobody wants to talk about regulation, merely act shocked that regulations are written by people.”

    I will, Joe, just as soon as you finish reading this book (and it’s perpetual sequels):

    http://www.gpoaccess.gov/fr/

  138. I should be sitting pretty right up until the US defaults and the currency fails.

    Are you keeping a lot of your personal wealth sitting around in U.S. dollars? Is that such a good idea?

  139. What we need are people with a high level of expertise and understanding of the specific issues involved to apply that knowledge to the task of creating an appropriate regulatory framework.

    How do we ensure this expert bureaucracy isn’t influenced by their ties to all the folks they are regulating. The ones that have similar expertise, went to the same schools and attended the same classes, belonged to the same fraternities, and go to the same dinner parties. The ones that they used to work with in the private sector, and probably will work for again.

  140. Reinmoose,

    Reinmoose | October 24, 2008, 1:23pm | #

    Isn’t the point of appointing an expert that you don’t then dictate what they do?

    There’s an important distinction here, that I tried to describe before: between giving someone mandate and giving them marching orders.

    Congress declared war on Germany and Japan. They didn’t decide to land at Normandy, or how.

    Isn’t a light regulatory framework still a regulatory framework?

    A light regulatory framework would be a requirement to have a capitalization requirement, but a modest one. The absence of a regulatory framework would be to just never issue regulaitons on capitalization requirements.

  141. Your town need its zoining revised? I’m your man.

    joe, has there ever been a model of growth planning that is not centered around zoning, but instead remains neutral about exactly what a piece of land is used for within a framework of rules about how much traffic the occupant can generate, how much street parking it can use, how much it blocks sight lines, how much sewage it creates, etc?

    In other words, a system that stays neutral about usage but simply regulates the externalities of the property use.

  142. Anybody know what mortgage regulation bill was signed into law around 1996 but which the Fed ignored until Bernanke did something in 2006? Joe refers to it. I thought I’d been following this pretty closely but nowhere can I find what legislation he’s referring to.

  143. Fluffy,

    I submit that the Federal Reserve and the rest of the federal government did not perceive that we were in a bubble.

    The problem isn’t the bubble. We’ve had bubbles come and go before, without doing this damage. We had a stock market bubble that poppsed in 1987 – but because there were regulations in place on stock trading, it didn’t bring the whole economy down.

    Your observation about not knowing there is a bubble is like saying the Building Department can’t issue regulations about installing smoke detectors, because they don’t know when there’s going to be a fire.

  144. Mike Laursen,

    How do we ensure this expert bureaucracy isn’t influenced by their ties to all the folks they are regulating. Through mandating transparency and forbidding conflicts of interest for public officials.

    Which is a lot easier to do than to keep tabs on the personal and professional contacts of private businessmen.

  145. I’m not saying it would always work perfectly, Mike, but “how can we guarantee” is an absurd standard.

  146. Mike L,

    You’re talking about “performance-based zoning.”

    There is also “form-based zoning,” which considers the massing and design of buildings, without regard to their use.

  147. Suddenly, nobody wants to talk about regulation, merely act shocked that regulations are written by people.

    I’ll talk about regulation. I think well-crafted, minimal regulation would be good. Of course, that’s hard to do right.

  148. Not really. The “shrugging” in Atlas Shrugged wasn’t about hopeless uncertainty.

    Yes, different meaning of “shrug”. Thus, why the pun is humorous.

  149. “http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=1&pagewanted=all&oref=slogin”

    I’ll read the NYT when you finish the FR, Joe.

  150. The absence of a regulatory framework would be to just never issue regulaitons on capitalization requirements.

    I agree that there were certain bad decisions made, but really – Greenspan had positively no regulations?(I’m asking this honestly) I thought he was only supposed to be in charge of monetary policy anyway.
    On the other subject, I think some light regulation is needed as well, but only because we’re not functioning in a perfect environment. Like I agree that if you’re the libertarian breed that believes in government funding of roads, that you also have to believe in things like speed limits or some sort of regulation on driving standards. So no, I do not think that we should create a heavily distorted market and then let it run wild.

  151. “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity — myself especially…

    joe, that’s what so odd about Greenspan’s statement. The classic libertarian argument, and Greenspan knows this, is that the self-interest of the investors, i.e. the shareholders, is what is expected to protect their equity. It’s not unexpected in classic libertarian argument that the lending institution itself is trying like hell to rip off the shareholders.

    Furthermore, by the way, from a libertarian viewpoint, the worst thing a government can do is create the illusion that they are regulating the institution, while in fact the institution has set up all of the regulations to benefit themselves. Much worse than having no regulation at all, and making it clear to the investors that they need to do their own due diligence.

  152. “It certainly wasn’t the implicit guarantees by the fed to prop up and bail out the reckless investors. No, not that. It was that these vehicles were allowed in the first place.”

    This may have played a part, but I think it was infinitesimal at best for two reasons:
    1) Many of the CDS’s were hedges on MBS’s. Therefore, entities which purchased MBS’s and purchased CDS’s on them, thought their investments were backed, not by the Govt, but by their counterparties who backed the CDS’s.
    2) The contracts between the loan originators and the Wall Street securitizers had explicit warranties that only held the originator liable if the loan were to default within the first 90 to 180 days of origination. After that, it was Wall Streets problem. Thus the creation/expansion of mortgage products such as the ARM, NINJA loans and no interest loans. The loan originator had no dog in the hunt anymore as long as they could ensure the homebuyer could pay in those first 3 to 6 months, way before the rates would reset.

    “Unless I’m mistaken, it’s regulations that required banks and investment houses to have “investment grade” securities in their portfolios, securities that turned out to be leveraged as high as 35:1.”

    Yes, but the SEC had historically required those firms to have leverage ratios of only 10-15 times their core holdings before 2004. In 2004, the SEC loosened those regulations.

    “And a firm like Wachovia was undone by products that World Savings and Loan originated for its own portfolio – a practice that was unchanged before and after Gramm.”

    True, but one thing that Gramm did do, as I understand it, was allow commercial banks with their depository funding, to encroach upon investment banks’ business lines encouraging the investment banks to take on more risk and leverage to compete.

    “The data that made up that model included foreclosure rate data showing steadily dropping foreclosure rates during the same period of time that subprime and Alt-A lending was being transformed.”

    There was alot of knowledgable people who were warning of the unsustainability and “irrational exuberance” of the real estate markets during its runup. They just weren’t listened to. I’m no risk management expert, but there seemed to me to be lots of data points which indicated that a bubble was being formed. For one, for the 2 decades prior to 2001, the national median home price was 2.9 to 3.1 times the median household income. By 2004, it was 4.0 and by 2006 it was 4.6. Big increases in employment fields (like in real estate), new products which distort historical metrics (like the bevy of new mortgage products) and volume spikes (like in housing) are just a few possible historical indicators of a bubble. Ironically, the low default rates on subprime/Alt A loans, a demographic which, by definition was high-risk (at least higher-risked), was a possible indicator of too easy refinancing/credit. I don’t know if these variables factored in risk managment models, but taken as a whole, they should have been, IMHO.

  153. I saw the housing bubble. It started up big-time when the tech bubble burst. Money had to go somewhere.

    I also saw the tech bubble coming. I remember asking a trader in my office tower back in ’98 when it was gonna pop and he said soon.

    I knew it would pop because I was an adult during the ’70’s and my little sister, ten years my junior was not. In ’98 she was 31. We were eating breakfast at the Roadhouse on Highland in Atlanta and she — an MBA working at BellSouth — was telling me how she and all of her friends were going to retire at 45. I explained to her the folly of that plan citing the Carter years. She didn’t believe me. But she did after the tech bubble burst. And she believed me five years ago when I told her the Housing bubble would burst. That’s why she waited until this year to buy a house. And boy what a deal she got!

    And do you know what’s next? The commodities bubble — especially gold. Oil’s leading the way. So where’s the money going after that? I’m not sure, but I know what to look for. And when to buy. And when to get out.

    So you can argue the pros and cons of and smart people in positions of power regulation all the day long, but you might as well be braying at the moon because that won’t make you rich either.

    Life is good!

  154. The problem isn’t the bubble.

    WTF? Maybe we aren’t talking about the same problem here. The suffering in the current economy is almost completely due to the collapsing of the housing bubble.

    The deleveraging resulting from the collapse has destabilized a number of financial institutions. This destablization is the primary focus of the Treasury.

    But the deleveraging is not, repeat, IS NOT a major factor in the current economic situation. It is only a major factor in the level of the Dow.

    Now, if the deleveraging were to proceed naturally, bankrupting AIG and Merrill and Wachovia and everyone else, THEN you’d see a much more exacerbated cause/effect between our economic situation and the deleveraging mess.

    Unfreezing the credit markets was not about preventing a recession. It was about keeping the recession that is caused by the housing bubble collapse from steamrolling into a major systemic collapse of the financial system.

  155. “He’s the one who was in charge of the Fed in the buildup to this, and he doesn’t understand what happened.”

    From day-one of that appointment, I always wondered what the punch-line was on the Greenspan joke.

    I guess this is it.

  156. Don’t worry.

    In three short months the government will consist of a Dem POTUS, House and Senate. Prosperity is just around the corner. I see light at the end of the tunnel. Just as Jimmy Carter and FDR (with Dem congresses) were so sucessful in ending the depression or economic malaise as applicable, the Obama administration will have the economy humming like a fine tuned Maserati in no time.[/Pollyanna]

    Me, I’m betting that this quarter will be the official beginning of an, at minimum, two year recession. I’m also betting that government spending as a pecentage of GDP will continue to rise.

    Any takers?

  157. If it can hold fast against Greenspan basically admitting…

    Greenspan lost his status as spokesperson for hard-core libertarianism, if he ever had that status, when he took the Fed chair job.

  158. Through mandating transparency and forbidding conflicts of interest for public officials.

    I assume you’re talking about conflicts of interest like Regulator X owns 10% of Company Y. What about conflicts of interest where the regulators very perception of the world is shaped by his life’s experiences, by his social group, etc?

  159. Greenspan’s lack of backbone is the only thing about him that disappoints me. What part of “bubble fueled by irrational exhubirance”

  160. didn’t they understand.

  161. You’re talking about “performance-based zoning.”

    Are there any books, articles, etc. you would recommend on this topic?

  162. It is hilarious that Libertarians can’t see this problem from more than one angle.

    To give in to any notion of regulation means that their entire philosophy is in danger, so they continue discussing a hugely complex subject as if it was as simple as ABC, and that they knew the answer all along.

    They bitch incessantly about dilettantes in other fields, but can’t see that many of them are doing the very same thing about the economic crisis.

    As usual, Joe has to be the primary voice of reason amongst a legion of cocksure tax warriors.

    Listen up ladies, if you want power, then you’re going to have to learn some humility first.

  163. “Greenspan lost his status as spokesperson for hard-core libertarianism, if he ever had that status, when he took the Fed chair job.”

    Which, of course, means that what he said is in no way valuable to the discussion, since, you know, he had his Libertarian card revoked.

    You guys are starting to sound a lot like those who claimed that Communism could work if if it was applied properly, and that the people who tried to institute it really weren’t Communists.

    *Shakes Head*

    Remember that guy who claimed that Libertarians were emotionally immature?

    Well, you shouldn’t add weight to that statement.

  164. “Drink!”

    Or, as I like to call it: “Numbing the nuance.”

  165. …he had his Libertarian card revoked.

    First of all, he can’t have had his Libertarian card revoked because he was never a member of the Libertarian Party. And he can’t have his libertarian card revoked because there is no issuing authority for libertarian cards — obviously. All small-L libertarians are self-professed.

    You just can’t pick some guy and hold him up as a spokesman for all libertarians. Criticize his individual views all you like, but if you go beyond that you are trying to paint a very philosophically diverse group of people with one broad brush.

    And, I don’t believe for one second that you actually are famous!

  166. Or, as I like to call it: “Numbing the nuance.”

    You were being nuanced?!

  167. You just can’t pick some guy and hold him up as a spokesman for all libertarians. Criticize his individual views all you like, but if you go beyond that you are trying to paint a very philosophically diverse group of people with one broad brush.

    Furthermore, I’m just following the rules. When someone whips out their broad brush and tries to use it on we libertarians, it clearly states in the Hit & Run drinking game rules that we are supposed to drink.

  168. Excuse me, he had his Libertarian spokesperson license revoked.

    Again, it’s a perfect example of a lack nuance when attempting to defend Libertarian principles.

    Greenspan has certainly professed Libertarian principles, as he did when admitting that, in retrospect, he’s confused as to how letting the wolves guard the hen house could have helped lead to such a collapse.

    It sounds to me like the are very few acceptable paths in life for a devout Libertarian to take, outside of engaging in arrogant, never-ending arguments online, where the likelihood of getting punched in the face is far removed.

    The inability for so many of you to admit that there are flaws in Libertarian reasoning, shows that as a political movement, you lack the necessary elements to be taken seriously as an alternative party.

    You simply do not have the intellectual honesty to revise your point of view when new data is offered.

    That’s a pretty fucking terrifying group of people to have at any level of power, and we have enough of them already.

    Finally, my comments apply to those who adopts Libertarianism as an ideology, since it is quite easy to generalize about people who adhere to ideologies. Their thoughts can only fall so far outside of the framework before they are no longer considered a true adherent to that philosophy.

    In the end, Greenspan was wrong. Not everyone is bound by an ideology, Some people actually are capable of seeing both sides in an argument before moving forward with action, or restraint.

    It was Greenspan’s free market ideology (however impure it was) that he admits was, in retrospect, questionable.

    Who would it take for you guys to question the premise of your ideology? And if Libertarians ideals haven’t been applied perfectly by anyone, then how the hell can so many of you be cocksure of its effects?

    These are incredibly simple questions that sincere people ask themselves when exploring ideological arguments.

    It’s okay to be a moderate.

    Also, the drinking game is merely a means to sidestep meaningful criticisms that few of you want to address.

    It’s convenient, transparent and tired.

  169. Mortimer, my friend, if you would like to be an influential critic of libertarian thought it would help if you learned the difference in meaning between spelling the word libertarian with an upper-case L and with a lower-case L. It really hurts your credibility if you don’t know the difference.

  170. Famous Mortimer,
    Greenspan lost his libertarian spokesman license years ago. This isn’t really new. Sorry to disappoint you, but Alan Greenspan ceased to be a libertarian when he took charge of one of the most massive travesties of state power ever created. And you would know all about posting on the internet to avoid getting punched in the face, wouldn’t you, you wussy litte prick.

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