October 30th, 2008
As I sit here beginning my very first entry into bloggerville, I have to confess that I'm extraordinarily saddened by some recent events that took place in Washington D.C.
Former Federal Reserve Chairman Alan Greenspan, a man for whom I've had a great deal of respect for many years, said something that I'll never forget. When pressed into some clearly disrespectful anti-free market questioning by Congressman Henry Waxman, who asked: “Do you feel that your ideology pushed you to make decisions that you wish you had not made?” Greenspan replied: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”
I swear there are times when you can physically feel your heart break. The ideology he was referring to is his unwavering respect for deregulation, the free market and laissez faire capitalism in general. He said he was in a state of “shocked disbelief,” over the current banking and credit mess, while The New York Times called his questioning “the harshest grillings of his life.”
Harsh yes. But deserved? No. The House Oversight and Government Reform Committee, of which Henry Waxman has been a part since 1997, had plenty of opportunities for many years to limit the perceived and real risks being taken on by the financial industry. But rather than regulate, they elected to do nothing, which is precisely what Greenspan would have wanted, I assume. Ironically, Waxman also said: “You had the authority to prevent irresponsible lending practices that led to the sub prime mortgage crisis. You were advised to do so by many others.” Pardon me, Mr. Waxman. But you also had the authority. And you were also advised to do so.
In fact, the former Federal Reserve Chairman had warned about derivatives, mortgage backed securities and other perfectly reasonable market-made SPV's. But he disagreed, particularly with the democrats, about what needed to be done. He was right then; and he's still right today. What he said was: “The evidence strongly suggests that without the excess demand from securitizers, sub prime mortgage originations would have been far smaller and defaults accordingly far lower.”
Herein lies Mr. Greenspan's true genius. Civility, humility and the continued ability to point fingers where they deserve to be pointed, and insult those who are clearly guilty, though they still today don't understand they've been insulted.
Q: What do you suppose he meant by “excess demand from securitizers...”?
A: Falsely created demand from a regulated market (Freddie and Fannie) that knows it can't fail, because it's backed up with tax dollars.
Q: What did he mean by “...sub prime mortgage originations would have been far smaller and defaults accordingly far lower.”?
A: Not only did the government create the market and create truly irrational false demand, but without the original government intervention, the incredibly expensive “credit crisis,” and “rescue package” messes we now find ourselves in the midst of, would be much, much smaller.
So in other words, not only did government clearly make this mess, it made it far, far worse than had it simply left the market alone to its own devices. I would like to submit that sans government intervention, the only suffering going on would be in those companies irresponsible enough to overextend themselves in the first place. Their shareholders, of course, would also suffer, but at least without specific bureaucratic intervention from Washington, they would still have the ability sue. Not so for the tax payers now. I personally wonder how many champaign corks were popping at Freddie, Fannie and in certain Wall Street boardrooms when the bailout (not the “rescue package”) was announced.
Greenspan went on: “Whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”
Herein lies Greenspan's lack of genius. Subtlety is wasted on the dense. Bureaucrats need to be beaten over their heads with reality, not politely served econospeak light from a man they no longer fear. He needs to tell them they're hypocrites. He has to tell them outright, “Don't bother creating another oversight committee or subcommittee. From now on the market will voluntarily be more conservative and take less risk than you or anyone else can impose.” He did, after all, tell them quite some time ago that requiring financial institutions to hold a substantial number of these same SPV's would be a good method of getting them to show self restraint. But with the bailout firmly taking the place of restraint, why bother? The losses will be easily absorbed by the biggest, least insightful, most irresponsible lending institutions in the U.S. All of their monies given to them by you, so they can now resume their activities after having been punished less by the government than by the market.
Of course, it does cost them a little. But what a pittance. They give the government some stock in their companies, and they get millions, or in some cases billions, in return. It's just a little government involvement, which is what they wanted anyway.
I've never agreed with everything Greenspan has done, and/or said. But unfortunately for the voters (um, taxpayers), the only thing that truly motivates a government paper pusher is fear. Or at the very least awe from a clearly superior intelligence. I now, however, have a sneaking suspicion that the next episode of “shocked disbelief” will be from the taxpayers when they see how much damage and market distortion this bailout and all of its new regulations will create over the long term. And the next episode of “harshest grillings” will be your fire-sale-seared wallets, as the new Washington elite purge desirable market corrections away in some other industry. As I write this, the insurance industry and the big three automakers are being watched closely by Washington. The insurance industry has already asked for help. And the government has stated publicly that it will back up outstanding loans for the automakers. Feel the pinch yet? No? Don't worry. They'll pinch harder very soon.
Ultimately, Greenspan broke my heart with what he said the other day, because it's so far removed from the man he used to be – a true fighter for laissez faire capitalism. In an essay he wrote in 1961 on anti-trust, Greenspan said:
Americans have always feared the concentration of arbitrary power
in the hands of politicians. Prior to the civil war, few attributed such
power to businessmen. It was recognized that government officials
had the legal power to compel obedience by the use of physical force
– and that businessmen had no such power. A businessman needed
customers. He had to appeal to their self-interest.
The concentration of power about which he was speaking is now more than ever in the hands of politicians. And if there is anyone in the country, maybe in the world, who should be fighting harder than ever to reel in bureaucrats, it should be a man like Greenspan. Maybe he's been an economist for too long. Maybe he's been associating with politicians for too long. But two things are certain. He's not the “radical for capitalism” that he used to be; and government power is growing at an alarming rate.
But some of us are still the radicals for capitalism that he and a few others used to be. We still want to fight for true free markets (which we've never actually had), rather than our current mixed economy.
Let me say that I know where “the flaw” is. I know “how significant” it is. And I know how “permanent” it will be. It started when people like Alan Greenspan gave up, or “conceded.” It started when people like Henry Waxman and the media gleefully celebrated and repeatedly publicized his “concession,” and their perceived coup d'etat over his inability to rectify his personal intellectual difficulties while seated in front of them. The flaw, ultimately, is government. And it's not going away. Unless the people demand it.
Otherwise, we will watch as the ever growing parasite that is government consumes the host who so graciously lets it live. Our economy just might come to a screeching halt with ever more government - a large, statist government, and sadly a public that is apathetic regarding interventions, lazy for government handouts, and ignorant of economics and our history. These last weeks have been hugely significant for anyone paying attention. And these problems are not going away. In fact, they are likely to get much, much worse before the people demand that government gets out, and stays out, of our economy.
As I sit here beginning my very first entry into bloggerville, I have to confess that I'm extraordinarily saddened by some recent events that took place in Washington D.C.
Former Federal Reserve Chairman Alan Greenspan, a man for whom I've had a great deal of respect for many years, said something that I'll never forget. When pressed into some clearly disrespectful anti-free market questioning by Congressman Henry Waxman, who asked: “Do you feel that your ideology pushed you to make decisions that you wish you had not made?” Greenspan replied: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”
I swear there are times when you can physically feel your heart break. The ideology he was referring to is his unwavering respect for deregulation, the free market and laissez faire capitalism in general. He said he was in a state of “shocked disbelief,” over the current banking and credit mess, while The New York Times called his questioning “the harshest grillings of his life.”
Harsh yes. But deserved? No. The House Oversight and Government Reform Committee, of which Henry Waxman has been a part since 1997, had plenty of opportunities for many years to limit the perceived and real risks being taken on by the financial industry. But rather than regulate, they elected to do nothing, which is precisely what Greenspan would have wanted, I assume. Ironically, Waxman also said: “You had the authority to prevent irresponsible lending practices that led to the sub prime mortgage crisis. You were advised to do so by many others.” Pardon me, Mr. Waxman. But you also had the authority. And you were also advised to do so.
In fact, the former Federal Reserve Chairman had warned about derivatives, mortgage backed securities and other perfectly reasonable market-made SPV's. But he disagreed, particularly with the democrats, about what needed to be done. He was right then; and he's still right today. What he said was: “The evidence strongly suggests that without the excess demand from securitizers, sub prime mortgage originations would have been far smaller and defaults accordingly far lower.”
Herein lies Mr. Greenspan's true genius. Civility, humility and the continued ability to point fingers where they deserve to be pointed, and insult those who are clearly guilty, though they still today don't understand they've been insulted.
Q: What do you suppose he meant by “excess demand from securitizers...”?
A: Falsely created demand from a regulated market (Freddie and Fannie) that knows it can't fail, because it's backed up with tax dollars.
Q: What did he mean by “...sub prime mortgage originations would have been far smaller and defaults accordingly far lower.”?
A: Not only did the government create the market and create truly irrational false demand, but without the original government intervention, the incredibly expensive “credit crisis,” and “rescue package” messes we now find ourselves in the midst of, would be much, much smaller.
So in other words, not only did government clearly make this mess, it made it far, far worse than had it simply left the market alone to its own devices. I would like to submit that sans government intervention, the only suffering going on would be in those companies irresponsible enough to overextend themselves in the first place. Their shareholders, of course, would also suffer, but at least without specific bureaucratic intervention from Washington, they would still have the ability sue. Not so for the tax payers now. I personally wonder how many champaign corks were popping at Freddie, Fannie and in certain Wall Street boardrooms when the bailout (not the “rescue package”) was announced.
Greenspan went on: “Whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”
Herein lies Greenspan's lack of genius. Subtlety is wasted on the dense. Bureaucrats need to be beaten over their heads with reality, not politely served econospeak light from a man they no longer fear. He needs to tell them they're hypocrites. He has to tell them outright, “Don't bother creating another oversight committee or subcommittee. From now on the market will voluntarily be more conservative and take less risk than you or anyone else can impose.” He did, after all, tell them quite some time ago that requiring financial institutions to hold a substantial number of these same SPV's would be a good method of getting them to show self restraint. But with the bailout firmly taking the place of restraint, why bother? The losses will be easily absorbed by the biggest, least insightful, most irresponsible lending institutions in the U.S. All of their monies given to them by you, so they can now resume their activities after having been punished less by the government than by the market.
Of course, it does cost them a little. But what a pittance. They give the government some stock in their companies, and they get millions, or in some cases billions, in return. It's just a little government involvement, which is what they wanted anyway.
I've never agreed with everything Greenspan has done, and/or said. But unfortunately for the voters (um, taxpayers), the only thing that truly motivates a government paper pusher is fear. Or at the very least awe from a clearly superior intelligence. I now, however, have a sneaking suspicion that the next episode of “shocked disbelief” will be from the taxpayers when they see how much damage and market distortion this bailout and all of its new regulations will create over the long term. And the next episode of “harshest grillings” will be your fire-sale-seared wallets, as the new Washington elite purge desirable market corrections away in some other industry. As I write this, the insurance industry and the big three automakers are being watched closely by Washington. The insurance industry has already asked for help. And the government has stated publicly that it will back up outstanding loans for the automakers. Feel the pinch yet? No? Don't worry. They'll pinch harder very soon.
Ultimately, Greenspan broke my heart with what he said the other day, because it's so far removed from the man he used to be – a true fighter for laissez faire capitalism. In an essay he wrote in 1961 on anti-trust, Greenspan said:
Americans have always feared the concentration of arbitrary power
in the hands of politicians. Prior to the civil war, few attributed such
power to businessmen. It was recognized that government officials
had the legal power to compel obedience by the use of physical force
– and that businessmen had no such power. A businessman needed
customers. He had to appeal to their self-interest.
The concentration of power about which he was speaking is now more than ever in the hands of politicians. And if there is anyone in the country, maybe in the world, who should be fighting harder than ever to reel in bureaucrats, it should be a man like Greenspan. Maybe he's been an economist for too long. Maybe he's been associating with politicians for too long. But two things are certain. He's not the “radical for capitalism” that he used to be; and government power is growing at an alarming rate.
But some of us are still the radicals for capitalism that he and a few others used to be. We still want to fight for true free markets (which we've never actually had), rather than our current mixed economy.
Let me say that I know where “the flaw” is. I know “how significant” it is. And I know how “permanent” it will be. It started when people like Alan Greenspan gave up, or “conceded.” It started when people like Henry Waxman and the media gleefully celebrated and repeatedly publicized his “concession,” and their perceived coup d'etat over his inability to rectify his personal intellectual difficulties while seated in front of them. The flaw, ultimately, is government. And it's not going away. Unless the people demand it.
Otherwise, we will watch as the ever growing parasite that is government consumes the host who so graciously lets it live. Our economy just might come to a screeching halt with ever more government - a large, statist government, and sadly a public that is apathetic regarding interventions, lazy for government handouts, and ignorant of economics and our history. These last weeks have been hugely significant for anyone paying attention. And these problems are not going away. In fact, they are likely to get much, much worse before the people demand that government gets out, and stays out, of our economy.
