Friday, December 19, 2008 8:42:36 AM
BullNBear52 (and all) -- (btw the reason I'm sticking with 'real' usernames rather than seasonal variants is because the reason I start a post in which I comment with the username of the one I'm addressing is so I can search my posts for comment posts I've made to the one I was addressing -- if I use the seasonal variants, it screws that up)
the items I linked in my http://investorshub.advfn.com/boards/read_msg.aspx?message_id=34238366 were directly to the point as to how and why Goldman had relatively low exposure to the sub-prime SIVs even as they continued to profit immensely from putting them together and selling them into the market, and those linked items were in no way 'dated' in that respect -- so I saw no need to reply to your http://investorshub.advfn.com/boards/read_msg.aspx?message_id=34238616
further, your assertion in http://investorshub.advfn.com/boards/read_msg.aspx?message_id=34237847 that it was really just the traditional banks, as v the (other) investment banks, who were 'deep into' the subprime 'mess' is false -- utterly flies in the face of the record of what has happened
yes we have argued about Greenspan and his role relative to both the repeal of Glass-Steagall and the entire crisis (and to an extent about the extent of the role of the repeal of Glass-Steagall in the entire crisis) -- and to put it bluntly, you failed to defend your contentions, as amply documented and recorded within the (by now massive) string I continue to keep here on the entire crisis -- ([the many] items linked in) http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32369566 and (the many) preceding and following -- including in particular, in addition to said http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32369566 , (items linked in) http://investorshub.advfn.com/boards/read_msg.aspx?message_id=27661349 and preceding and following
here are a couple more for good measure:
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Taking Hard New Look at a Greenspan Legacy
Alan Greenspan, the Federal Reserve chairman, with Treasury Secretary Robert E. Rubin, left, at a House hearing in 1995.
Stephen Crowley/The New York Times
A LINGERING GLOBAL INFLUENCE - An interview with Alan Greenspan, nicknamed the Oracle, was shown live outside the Bombay Stock Exchange last month.
Punit Paranjpe/Reuters
SOUNDING THE ALARM - Brooksley E. Born starkly warned of risks in not regulating derivatives. Mr. Greenspan, Robert E. Rubin and Lawrence H. Summers, all pictured on Time in 1999, resisted tighter regulation.
Left, Chuck Kennedy for The New York Times; right, Time Inc.
THROUGH FOUR ADMINISTRATIONS - Mr. Greenspan had the ear of Washington from 1987 to 2006. He was sworn in by President Reagan, top, and was kept on by new presidents of both parties.
From top, Barry Thumma/Associated Press; Doug Mills/Associated Press; Mario Tama/Agence France-Press; Win McNamee/Reuters
By PETER S. GOODMAN
Published: October 8, 2008
A version of this article appeared in print on October 9, 2008, on page A1 of the New York edition.
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004
George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”
And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.
Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.
The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”
But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.
“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.
The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.
If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.
Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.
Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.
On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.
Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.
Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.
But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.
Faith in the System
Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is naïve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.
Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.
“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”
In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.
“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”
As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.
A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.
An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.
As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.
Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”
Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.
Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.
“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”
Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.
Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.
“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”
In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.
“There is nothing involved in federal regulation per se which makes it superior to market regulation.”
Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.
But he called that possibility “extremely remote,” adding that “risk is part of life.”
Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.
Resistance to Warnings
In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.
Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.
Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.
“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”
Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.
“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”
Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.
In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”
On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.
Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”
Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.
Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.
In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.
Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”
As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.
“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.
Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.
“He had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”
In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.
“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.
Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.
Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.
“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.
“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”
The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.
Pressing Forward
Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.
“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”
But business continued.
And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.
Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.
The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.
In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.
His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.
“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.
“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”
No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.
“Governments and central banks,” he wrote, “could not have altered the course of the boom.”
Copyright 2008 The New York Times Company (emphasis added)
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html [ http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?pagewanted=all ]
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Throwing Stones At Glass-Steagall
Aaron Knapp
November 29th, 2008
There is so much that all of us can do to make sure another financial crisis of the magnitude we are currrently experiencing (and will continue to experience), does not happen again. The culture of excess, greed, the tyranny of self-interest, and social irresponsibility, are some of the core causes of this mess. Some would argue that these vices are simply human nature. I try to be a bit more sanguine on the issue, but recognize that any change we can make on this front will probably need to be regulated from the top down.
The term “deregulation” was bandied about on the campaign trail, and it seemed to strike a chord with voters. Deregulation is a conservative and “neoliberal” economic strategy. It is is based on the assumption that in order to create economic growth and prosperity for all, markets should be left alone. The government should just stay out of it. Deregulation was part and parcel of the Reagan revolution, stemming from Reagan’s famous pronouncement that government is not the solution to our problems, it IS our problem.
Deregulation can occur on a couple different levels. First, the government can simply not enforce existing regulations. For the most part, George W. Bush has been this kind of deregulator, especially with regard to the financial markets. On the other hand, while you probably won’t hear Barack Obama say it, George W. Bush actually approved the most broad-reaching regulations of corporate America that we’ve seen in decades. They’re called Sarbanes-Oxely.
The other type of deregulation involves actively withdrawing, or refusing to pass, regulatory measures. There are not a whole lot of reported instances in which this has happened in recent past. But there are a few, and they’re big. One that is getting some press as a possible culprit of our financial mess is the repeal of 1933’s Glass-Steagall Act, in 1999 under President Clinton.
Glass-Steagall was enacted under FDR in the wake of the Great Depression. It prohibited commercial banks (i.e., commercial lenders and depository institutions) from underwriting securities as brokers or otherwise, and vice-versa. It basically said that if a bank wants to hold money for consumers in the form of savings and checking accounts, then it must be subject to strict regulations to ensure that the bank does not over-extend itself on loans so as to jeopardize the ability of depositors to withdraw their money. If, on the other hand, an enterprise wanted to gather money from investors and speculators, and invest it in the capital markets, then it could have more freedom of action than a commercial bank. But never shall the two be mixed, said Glass-Steagall.
Beginning in the late 1980s, against the background of the Reagan Revolution, heavy lobbying began to pull back on Glass-Steagall’s restrictions. The Federal Reserve, under the leadership of Alan Greenspan, ceded and, over time, began to eat into Glass-Steagall through Board decisions, first holding that 5% of commercial banks’ revenue could be from investment banking, then 10%, and, by 1996, it was 25%. Greenspan was a deregulator at heart, and the financial industry knew it. So it rolled right over him.
In 1998, in what was at the time the largest merger in this country’s history, Travelers Insurance (which owned the giant investment banking house, Soloman Smith Barney) merged with Citi Corp, to form CitiGroup. The merger was in direct violation of Glass-Steagall. In other words, it was illegal. But over the next year, executives, working with Congress (namely Phil Gramm) and Greenspan, were finally able to get Glass-Steagall completely repealed under the so-called “Financial Services Modernization Act.”
Fast forward 9 years: CitiGroup fails, sending huge ripples throughout the economy. The ripples would not have been as significant had Glass-Steagall still been in place because Citi would not have been so gargantuan.
But Glass-Steagall’s repeal has far-reaching implications not only with respect to CitiGroup:
First, consider the way in which Glass-Steagall was finally reversed. Citi and Travelers did not first obtain the repeal, and then merge, but rather totally disregarded the law (with Greenspan’s blessing) and then used the already-completed merger as a way of bullying legislators into repealing the law. There may be no better example of private corporations literally usurping our government. And it set the tone for the next decade with respect to the regulation of the financial industry. Banks and financial houses believed they could do whatever they wanted. They had the feds wrapped around their little fingers. It was the return of the Wild West.
Second, the repeal of Glass-Steagall created serious transparency issues. The complexity of the megabank operations necessitated a bureaucratization which made it increasingly difficult for the left hand to know what the right hand was doing, let alone for regulators to know.
Third, investment banking houses, like Lehman and Bear Stearns, has to scramble to find ways to stay competitive with the megabanks. The i-banks, emboldened by the government tacit “anything goes” stance, experimented with new and creative financial strategies that were, as we now know, a little too creative.
Finally, the repeal changed the risk analysis at commercial banks. No longer was the borrower’s ability to pay back a loan so paramount. The bank’s brokerage division could pool and repackage the loans, attracting more money from investors, and thereby generating more revenue to offset losses from potential defaults. Or so it was thought.
Our financial crisis has a a complex etiology. The repeal of Glass-Steagall is a big factor, however, not only because of its practical deregulatory effects, but also because of its symbolic effects and the tone it set for the interaction between government and private finance.
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Comment
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JRIEHL said at 10:50 pm on December 1st, 2008:
Read it and weep:
http://banking.senate.gov/prel99/1112gbl.htm
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© Copyright 2008 The Post Partisan (emphasis added)
http://postpartisannews.com/Blog/?p=441
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The Education of Alan Greenspan
Donald Cohen
Posted October 29, 2008 | 10:06 PM (EST)
Greenspan 1963: Writing in Ayn Rand's Objectivist Newsletter, Greenspan declared as myth the idea that businessmen "would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. It is in the self-interest of every businessman to have a reputation for honest dealings and a quality product."
Greenspan 2008: Testifying before the House Committee on Oversight and Government Reform, Greenspan recanted: "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief.... This modern [free market] paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year."
Greenspan's life spanning quotes are the bookends of the dramatic ascendance, dominance and ultimately demise of the radical right's unquestioning faith in unfettered free markets.
Greenspan's pronouncement in 1963 marked an inauspicious beginning of the new Free Market Fundamentalism in the midst of the coming LBJ landslide and Goldwater defeat. But Rick Perlstein's Before the Storm, an account of the roots of the coming conservative movement, detailed how the Goldwater debacle launched a 40-year project to construct a sophisticated conservative movement and create a new American conservative consensus.
For the Free Market Faithful, those early years were dark days of "big government" marked by the Great Society, landmark civil rights legislation, Medicare and Medicaid. Dominant public opinion even drove progressive policy-making well into the Nixon and Carter years with major environmental and workplace legislation and new regulatory agencies.
But the Fundamentalists, with revolutionary zeal, kept their eye on the prize and systematically built the infrastructure for a conservative triumph. Their greatest accomplishment was the shifting of mass public opinion towards a set of agenda-enabling free market beliefs - that the government could do no right, and the market could do no wrong. They posited, successfully, that the laws of markets were as immutable as the laws of nature.
Throughout the period of conservative dominance there were always those who understood the fallibility of unregulated markets. In 1992, the GAO, asked by Democratic Congressman Ed Markey to study the impact of new and complex financial derivatives, concluded presciently that "The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole. In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers."
In 1994, a bi-partisan bill was introduced in Congress to tighten the supervision of the complex and growing derivatives in the banking industry. The bill would have had the regulatory agencies establish standards for capital requirements, disclosure, accounting and examinations and audits. As expected, the banks argued that no new laws were needed. Greenspan sealed the legislation's defeat (as he was able to do with all attempts to establish updated regulation for the financial industry) by testifying that the Fed had the powers it needed and that a taxpayer bailout caused by derivatives was remote.
Greenspan claimed with the resolute faith of a true believer that "risk in financial markets, including derivatives markets, are being regulated by private parties... There is nothing involved in federal regulation per se which makes it superior to market regulation." There were doubters, but Greenspan, in the heady days of free-market mania, was the ultimate silencer of doubt.
In 2003 Greenspan continued to praise derivatives as "extraordinarily useful." As recently as September 2005, in a speech to the National Association for Business Economics, Greenspan proclaimed his continued confidence in derivatives in free, un-regulated capitalism, the inherent ability of unfettered markets to self-correct in times of economic distress and the overwhelming dangers of government intervention.
Greenspan spoke glowingly about the "development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk." He claimed, with remarkable lack of foresight, that "these increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago."
The argument was an old one. The inviolability of the laws of the market would generate the information needed to establish appropriate asset value and risk and self-regulate to prevent excessive speculation. Government regulation would, by definition, get in the way of natural market forces.
He did admit that the Fed, concerned about the irrational exuberance of the Tech Bubble, considered and rejected aggressive action to reign in the speculative excess of the late 1990's. They chose not to "risk recession" and decided to "wait for the eventual exhaustion of the forces of boom." Unfortunately, exhaustion turned into global collapse.
Now, just three years later, the economic crises and its obvious roots in a fanatical aversion to regulation led to Greenspan's striking admission that he and his fellow believers had been wrong.
The dramatic collapse of the banking industry finally exposed several key flaws in the Book of Greenspan. First, the entirely self-evident fact that economics is a behavioral science - that economic conditions are the sum total of human actions, emotions, vice and virtues. Ultimately it was a very human vice - greed - that became the paramount driver of economic growth. Greed, inherently incapable of recognizing excess or limits, inevitably leads to economic distress.
Second, predictions that market signals would cause the necessary corrections turned out to be stunningly false in the face of financial instruments so complex that no one could accurately determine the value of assets or level of risk.
Greenspan's awakening signals a turning point for American capitalism. It's the beginning of the end of the fundamentalist free market epoch, underlined by calls from Democrats and Republicans alike for greater regulation, far more government oversight and even public ownership of private capital.
The rise of the free market zealots is a study of how a movement, driven by the clarity of purpose and a commitment to the long haul, created a narrative of the American economy that clouded the steady erosion of American living standards and the death march to the environmental precipice wrought by global warming. Their fall is a lesson for progressives who, shellshocked and silenced by right wing ideological dominance, couldn't see the way back to a more progressive future.
Progressives have plenty to do to undue the damage and fully untangle America from the sway of the free-market faithful. Still, distrust of government is high, the institutions of government have been hobbled and the right wing message machine is still intact even if on the run. Fortunately, the progressive intellectual infrastructure, more developed and more capable than even just a few years ago, is ready to drive a new New deal, focused on 21st century economic and environmental challenges and reinvigorated with 21 century ideas.
Copyright © 2008 HuffingtonPost.com, Inc.
http://www.huffingtonpost.com/donald-cohen/the-education-of-alan-gre_b_139115.html [with comments]
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see also:
Greenspan Concedes to `Flaw' in His Market Ideology (Update2)
October 23, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_IH5AnCyOm4
Greenspan "shocked" at credit system breakdown
Oct 23, 2008
http://www.reuters.com/article/topNews/idUSTRE49M58W20081023 [ http://www.reuters.com/article/topNews/idUSTRE49M58W20081023?sp=true ]
[includes videos at http://www.reuters.com/news/video?videoId=92672 and http://www.reuters.com/news/video?videoId=92667 ]
Greenspan: I was wrong about banks' ability to police each other
Oct 23rd 2008
http://www.bloggingstocks.com/2008/10/23/greenspan-i-was-wrong-about-banks-ability-to-police-each-other/
Greenspan Says He Was Wrong On Regulation
Lawmakers Blast Former Fed Chairman
October 24, 2008
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/23/AR2008102300193.html
[includes video at http://www.washingtonpost.com/wp-dyn/content/video/2008/10/23/VI2008102301451.html ]
Capitalist Fools
Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.
by Joseph E. Stiglitz
January 2009
http://www.vanityfair.com/magazine/2009/01/stiglitz200901
the items I linked in my http://investorshub.advfn.com/boards/read_msg.aspx?message_id=34238366 were directly to the point as to how and why Goldman had relatively low exposure to the sub-prime SIVs even as they continued to profit immensely from putting them together and selling them into the market, and those linked items were in no way 'dated' in that respect -- so I saw no need to reply to your http://investorshub.advfn.com/boards/read_msg.aspx?message_id=34238616
further, your assertion in http://investorshub.advfn.com/boards/read_msg.aspx?message_id=34237847 that it was really just the traditional banks, as v the (other) investment banks, who were 'deep into' the subprime 'mess' is false -- utterly flies in the face of the record of what has happened
yes we have argued about Greenspan and his role relative to both the repeal of Glass-Steagall and the entire crisis (and to an extent about the extent of the role of the repeal of Glass-Steagall in the entire crisis) -- and to put it bluntly, you failed to defend your contentions, as amply documented and recorded within the (by now massive) string I continue to keep here on the entire crisis -- ([the many] items linked in) http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32369566 and (the many) preceding and following -- including in particular, in addition to said http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32369566 , (items linked in) http://investorshub.advfn.com/boards/read_msg.aspx?message_id=27661349 and preceding and following
here are a couple more for good measure:
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Taking Hard New Look at a Greenspan Legacy
Alan Greenspan, the Federal Reserve chairman, with Treasury Secretary Robert E. Rubin, left, at a House hearing in 1995.
Stephen Crowley/The New York Times
A LINGERING GLOBAL INFLUENCE - An interview with Alan Greenspan, nicknamed the Oracle, was shown live outside the Bombay Stock Exchange last month.
Punit Paranjpe/Reuters
SOUNDING THE ALARM - Brooksley E. Born starkly warned of risks in not regulating derivatives. Mr. Greenspan, Robert E. Rubin and Lawrence H. Summers, all pictured on Time in 1999, resisted tighter regulation.
Left, Chuck Kennedy for The New York Times; right, Time Inc.
THROUGH FOUR ADMINISTRATIONS - Mr. Greenspan had the ear of Washington from 1987 to 2006. He was sworn in by President Reagan, top, and was kept on by new presidents of both parties.
From top, Barry Thumma/Associated Press; Doug Mills/Associated Press; Mario Tama/Agence France-Press; Win McNamee/Reuters
By PETER S. GOODMAN
Published: October 8, 2008
A version of this article appeared in print on October 9, 2008, on page A1 of the New York edition.
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004
George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”
And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.
Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.
The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”
But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.
“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.
The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.
If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.
Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.
Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.
On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.
Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.
Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.
But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.
Faith in the System
Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is naïve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.
Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.
“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”
In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.
“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”
As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.
A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.
An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.
As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.
Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”
Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.
Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.
“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”
Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.
Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.
“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”
In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.
“There is nothing involved in federal regulation per se which makes it superior to market regulation.”
Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.
But he called that possibility “extremely remote,” adding that “risk is part of life.”
Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.
Resistance to Warnings
In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.
Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.
Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.
“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”
Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.
“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”
Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.
In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”
On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.
Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”
Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.
Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.
In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.
Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”
As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.
“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.
Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.
“He had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”
In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.
“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.
Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.
Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.
“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.
“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”
The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.
Pressing Forward
Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.
“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”
But business continued.
And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.
Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.
The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.
In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.
His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.
“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.
“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”
No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.
“Governments and central banks,” he wrote, “could not have altered the course of the boom.”
Copyright 2008 The New York Times Company (emphasis added)
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html [ http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?pagewanted=all ]
==========
Throwing Stones At Glass-Steagall
Aaron Knapp
November 29th, 2008
There is so much that all of us can do to make sure another financial crisis of the magnitude we are currrently experiencing (and will continue to experience), does not happen again. The culture of excess, greed, the tyranny of self-interest, and social irresponsibility, are some of the core causes of this mess. Some would argue that these vices are simply human nature. I try to be a bit more sanguine on the issue, but recognize that any change we can make on this front will probably need to be regulated from the top down.
The term “deregulation” was bandied about on the campaign trail, and it seemed to strike a chord with voters. Deregulation is a conservative and “neoliberal” economic strategy. It is is based on the assumption that in order to create economic growth and prosperity for all, markets should be left alone. The government should just stay out of it. Deregulation was part and parcel of the Reagan revolution, stemming from Reagan’s famous pronouncement that government is not the solution to our problems, it IS our problem.
Deregulation can occur on a couple different levels. First, the government can simply not enforce existing regulations. For the most part, George W. Bush has been this kind of deregulator, especially with regard to the financial markets. On the other hand, while you probably won’t hear Barack Obama say it, George W. Bush actually approved the most broad-reaching regulations of corporate America that we’ve seen in decades. They’re called Sarbanes-Oxely.
The other type of deregulation involves actively withdrawing, or refusing to pass, regulatory measures. There are not a whole lot of reported instances in which this has happened in recent past. But there are a few, and they’re big. One that is getting some press as a possible culprit of our financial mess is the repeal of 1933’s Glass-Steagall Act, in 1999 under President Clinton.
Glass-Steagall was enacted under FDR in the wake of the Great Depression. It prohibited commercial banks (i.e., commercial lenders and depository institutions) from underwriting securities as brokers or otherwise, and vice-versa. It basically said that if a bank wants to hold money for consumers in the form of savings and checking accounts, then it must be subject to strict regulations to ensure that the bank does not over-extend itself on loans so as to jeopardize the ability of depositors to withdraw their money. If, on the other hand, an enterprise wanted to gather money from investors and speculators, and invest it in the capital markets, then it could have more freedom of action than a commercial bank. But never shall the two be mixed, said Glass-Steagall.
Beginning in the late 1980s, against the background of the Reagan Revolution, heavy lobbying began to pull back on Glass-Steagall’s restrictions. The Federal Reserve, under the leadership of Alan Greenspan, ceded and, over time, began to eat into Glass-Steagall through Board decisions, first holding that 5% of commercial banks’ revenue could be from investment banking, then 10%, and, by 1996, it was 25%. Greenspan was a deregulator at heart, and the financial industry knew it. So it rolled right over him.
In 1998, in what was at the time the largest merger in this country’s history, Travelers Insurance (which owned the giant investment banking house, Soloman Smith Barney) merged with Citi Corp, to form CitiGroup. The merger was in direct violation of Glass-Steagall. In other words, it was illegal. But over the next year, executives, working with Congress (namely Phil Gramm) and Greenspan, were finally able to get Glass-Steagall completely repealed under the so-called “Financial Services Modernization Act.”
Fast forward 9 years: CitiGroup fails, sending huge ripples throughout the economy. The ripples would not have been as significant had Glass-Steagall still been in place because Citi would not have been so gargantuan.
But Glass-Steagall’s repeal has far-reaching implications not only with respect to CitiGroup:
First, consider the way in which Glass-Steagall was finally reversed. Citi and Travelers did not first obtain the repeal, and then merge, but rather totally disregarded the law (with Greenspan’s blessing) and then used the already-completed merger as a way of bullying legislators into repealing the law. There may be no better example of private corporations literally usurping our government. And it set the tone for the next decade with respect to the regulation of the financial industry. Banks and financial houses believed they could do whatever they wanted. They had the feds wrapped around their little fingers. It was the return of the Wild West.
Second, the repeal of Glass-Steagall created serious transparency issues. The complexity of the megabank operations necessitated a bureaucratization which made it increasingly difficult for the left hand to know what the right hand was doing, let alone for regulators to know.
Third, investment banking houses, like Lehman and Bear Stearns, has to scramble to find ways to stay competitive with the megabanks. The i-banks, emboldened by the government tacit “anything goes” stance, experimented with new and creative financial strategies that were, as we now know, a little too creative.
Finally, the repeal changed the risk analysis at commercial banks. No longer was the borrower’s ability to pay back a loan so paramount. The bank’s brokerage division could pool and repackage the loans, attracting more money from investors, and thereby generating more revenue to offset losses from potential defaults. Or so it was thought.
Our financial crisis has a a complex etiology. The repeal of Glass-Steagall is a big factor, however, not only because of its practical deregulatory effects, but also because of its symbolic effects and the tone it set for the interaction between government and private finance.
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Comment
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JRIEHL said at 10:50 pm on December 1st, 2008:
Read it and weep:
http://banking.senate.gov/prel99/1112gbl.htm
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© Copyright 2008 The Post Partisan (emphasis added)
http://postpartisannews.com/Blog/?p=441
==========
The Education of Alan Greenspan
Donald Cohen
Posted October 29, 2008 | 10:06 PM (EST)
Greenspan 1963: Writing in Ayn Rand's Objectivist Newsletter, Greenspan declared as myth the idea that businessmen "would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. It is in the self-interest of every businessman to have a reputation for honest dealings and a quality product."
Greenspan 2008: Testifying before the House Committee on Oversight and Government Reform, Greenspan recanted: "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief.... This modern [free market] paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year."
Greenspan's life spanning quotes are the bookends of the dramatic ascendance, dominance and ultimately demise of the radical right's unquestioning faith in unfettered free markets.
Greenspan's pronouncement in 1963 marked an inauspicious beginning of the new Free Market Fundamentalism in the midst of the coming LBJ landslide and Goldwater defeat. But Rick Perlstein's Before the Storm, an account of the roots of the coming conservative movement, detailed how the Goldwater debacle launched a 40-year project to construct a sophisticated conservative movement and create a new American conservative consensus.
For the Free Market Faithful, those early years were dark days of "big government" marked by the Great Society, landmark civil rights legislation, Medicare and Medicaid. Dominant public opinion even drove progressive policy-making well into the Nixon and Carter years with major environmental and workplace legislation and new regulatory agencies.
But the Fundamentalists, with revolutionary zeal, kept their eye on the prize and systematically built the infrastructure for a conservative triumph. Their greatest accomplishment was the shifting of mass public opinion towards a set of agenda-enabling free market beliefs - that the government could do no right, and the market could do no wrong. They posited, successfully, that the laws of markets were as immutable as the laws of nature.
Throughout the period of conservative dominance there were always those who understood the fallibility of unregulated markets. In 1992, the GAO, asked by Democratic Congressman Ed Markey to study the impact of new and complex financial derivatives, concluded presciently that "The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole. In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers."
In 1994, a bi-partisan bill was introduced in Congress to tighten the supervision of the complex and growing derivatives in the banking industry. The bill would have had the regulatory agencies establish standards for capital requirements, disclosure, accounting and examinations and audits. As expected, the banks argued that no new laws were needed. Greenspan sealed the legislation's defeat (as he was able to do with all attempts to establish updated regulation for the financial industry) by testifying that the Fed had the powers it needed and that a taxpayer bailout caused by derivatives was remote.
Greenspan claimed with the resolute faith of a true believer that "risk in financial markets, including derivatives markets, are being regulated by private parties... There is nothing involved in federal regulation per se which makes it superior to market regulation." There were doubters, but Greenspan, in the heady days of free-market mania, was the ultimate silencer of doubt.
In 2003 Greenspan continued to praise derivatives as "extraordinarily useful." As recently as September 2005, in a speech to the National Association for Business Economics, Greenspan proclaimed his continued confidence in derivatives in free, un-regulated capitalism, the inherent ability of unfettered markets to self-correct in times of economic distress and the overwhelming dangers of government intervention.
Greenspan spoke glowingly about the "development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk." He claimed, with remarkable lack of foresight, that "these increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago."
The argument was an old one. The inviolability of the laws of the market would generate the information needed to establish appropriate asset value and risk and self-regulate to prevent excessive speculation. Government regulation would, by definition, get in the way of natural market forces.
He did admit that the Fed, concerned about the irrational exuberance of the Tech Bubble, considered and rejected aggressive action to reign in the speculative excess of the late 1990's. They chose not to "risk recession" and decided to "wait for the eventual exhaustion of the forces of boom." Unfortunately, exhaustion turned into global collapse.
Now, just three years later, the economic crises and its obvious roots in a fanatical aversion to regulation led to Greenspan's striking admission that he and his fellow believers had been wrong.
The dramatic collapse of the banking industry finally exposed several key flaws in the Book of Greenspan. First, the entirely self-evident fact that economics is a behavioral science - that economic conditions are the sum total of human actions, emotions, vice and virtues. Ultimately it was a very human vice - greed - that became the paramount driver of economic growth. Greed, inherently incapable of recognizing excess or limits, inevitably leads to economic distress.
Second, predictions that market signals would cause the necessary corrections turned out to be stunningly false in the face of financial instruments so complex that no one could accurately determine the value of assets or level of risk.
Greenspan's awakening signals a turning point for American capitalism. It's the beginning of the end of the fundamentalist free market epoch, underlined by calls from Democrats and Republicans alike for greater regulation, far more government oversight and even public ownership of private capital.
The rise of the free market zealots is a study of how a movement, driven by the clarity of purpose and a commitment to the long haul, created a narrative of the American economy that clouded the steady erosion of American living standards and the death march to the environmental precipice wrought by global warming. Their fall is a lesson for progressives who, shellshocked and silenced by right wing ideological dominance, couldn't see the way back to a more progressive future.
Progressives have plenty to do to undue the damage and fully untangle America from the sway of the free-market faithful. Still, distrust of government is high, the institutions of government have been hobbled and the right wing message machine is still intact even if on the run. Fortunately, the progressive intellectual infrastructure, more developed and more capable than even just a few years ago, is ready to drive a new New deal, focused on 21st century economic and environmental challenges and reinvigorated with 21 century ideas.
Copyright © 2008 HuffingtonPost.com, Inc.
http://www.huffingtonpost.com/donald-cohen/the-education-of-alan-gre_b_139115.html [with comments]
==========
see also:
Greenspan Concedes to `Flaw' in His Market Ideology (Update2)
October 23, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_IH5AnCyOm4
Greenspan "shocked" at credit system breakdown
Oct 23, 2008
http://www.reuters.com/article/topNews/idUSTRE49M58W20081023 [ http://www.reuters.com/article/topNews/idUSTRE49M58W20081023?sp=true ]
[includes videos at http://www.reuters.com/news/video?videoId=92672 and http://www.reuters.com/news/video?videoId=92667 ]
Greenspan: I was wrong about banks' ability to police each other
Oct 23rd 2008
http://www.bloggingstocks.com/2008/10/23/greenspan-i-was-wrong-about-banks-ability-to-police-each-other/
Greenspan Says He Was Wrong On Regulation
Lawmakers Blast Former Fed Chairman
October 24, 2008
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/23/AR2008102300193.html
[includes video at http://www.washingtonpost.com/wp-dyn/content/video/2008/10/23/VI2008102301451.html ]
Capitalist Fools
Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.
by Joseph E. Stiglitz
January 2009
http://www.vanityfair.com/magazine/2009/01/stiglitz200901
Greensburg, KS - 5/4/07
"Eternal vigilance is the price of Liberty."
from John Philpot Curran, Speech
upon the Right of Election, 1790
F6
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