Greenspan claims to be a laissez-faire free marketeer, but propping up industries, inflationary policies, manipulating interest rates and what's been termed the Greenspan Put isn't the "let it be" free market practices.

Why does this issue sound familiar ... oh, right: same discussion over here, same problems, same "solutions", same people.

Now, I apologize in advance if I got some facts wrong. It's hard enough to keep track of things over here, I only losely follow the situation in the US every now and then out of curiosity.

Social security in the US is still running a vast surplus (projected at $70-$80 billion in 2010), so there's no immediate need to "fix" things. The fact that benefits exceed payrol tax income by some $41 billion is a warning sign that the economy is seriously in the shitter. Still, people use the current status to extrapolate the situation in years to come. One recent projection said that by 2037, social security won't be able to pay more than 75% of scheduled benefits. And as a solution, they suggest the increase of the entry age to 70 years - which is supposedly equal to a 15% cut, I haven't double-checked it.

So, in order to avoid a possible 25% cut based on flawed data (no changes to current situation), they suggest a 15% cut, just in case. The same logic they use over here. Wasn't social security "doomed" in 1982 before the Greenspan Commission secured its finances for some 50 years (aka 2030+)? So why the ruckus? Governments don't do shit until shit absolutely needs to be done - which in this case is still a decade or two away.

If they insist on better financing now, how about this: raise the fucking wage base. Or you might as well lift the bloody cap alltogether and lower the rate in return. $106,800 this year is a joke - just like the cap in our social security system.

@quantumushroom, Alan Greenspan now says all the Bush tax cuts should be allowed to expire.

*politics
*money

Bush/Greenspan and Obama/Bernanke. It's all the same, really. And, yes, maybe you're right, @volumptuous; I think I misspoke. The recession is endemic of a larger monetary failure dating as far back as 1913. Maybe what I should've said was that the recession was quickened by 9/11.

"you could lump in the recession as a result of 9/11 as well,"

Yeah, if you're ignorant about Bush/Greenspan monetary policy and both the current domestic/international fiscal crises.

uggh

@blankfist, I'm kinda surprised at you. Perhaps you fell for the title, but here are some of the things Bill Black says:

1. Yes, [the bill's provision for running derivatives through a government-run exchange] is a good idea. You shouldn't be doing non-exchange traded derivatives, and this bill encourages exchange-traded derivatives. But it has loopholes that allow people to evade it, so it's probably not going to be terribly effective.
   
   Which is to say, the new regulations on derivatives are good, but they are too easy to circumvent.
   
   
2. What else do we know created perverse incentives? Professional compensation.
   
   
3. We know that the Goldmans of the world deliberately put the rating agencies in competition with each other in what in economics we call a "competition in laxity". In other words, whoever is willing to give the most absurdly inflated rating is who will get my business.
   
   Note: rating agencies are privately owned, for-profit companies.
   
   
4. So when we say the rating agencies screwed up, we don't mean that they took something that, you know, should've been a single-A and they call it a triple-A. No, we're talking about something that should have been 25 levels lower, and they called it AAA. If they're willing to do that, then they're going to be willing to bless the next insane thing, as long as the competition and laxity is allowed to exist.
   
   
5. Americans don't know that over 10 percent of all appraisers in America have signed a petition calling for the government to step in and regulate and enforce because of this Gresham's dynamic. A Gresham's dynamic is where cheaters and the least moral people prosper, and they drive the honest, moral people out of the marketplace. And that's what the appraisal industry was telling us. And the regulators refused to any do anything. And now, after a crisis measured in trillions of dollars of losses—and a trillion dollars is a thousand billion—we have, supposedly, the greatest reform bill since the Great Depression, and it completely ignores this causality.
   
   
6. The consumer bill was the other thing you asked me about. That is a good thing. But you can tell somebody has a really malicious sense of humor, because they put the new consumer agency into the Federal Reserve—the leading opponent of protecting consumers. This is the agency that under the HOEPA law [Home Ownership and Equity Protection Act], which goes way back to the '90s, had unique authority to protect us from otherwise unregulated mortgage bankers and anyone else who made mortgage loans. And even board members at the Federal Reserve went to Alan Greenspan and asked him to take action against these enormous abuses in the liar's loans and subprime, and Greenspan refused to act.
   
   This probably got your juices flowing, since it places some blame on the Fed. Unfortunately, it places blame on the Fed for refusing to regulate. Oh, and it was Republicans who insisted that the consumer protection agency be housed at the Fed.
   
   
7. So [in the subprime lending market] we had the exact opposite of what economics predicts: both parties to the transaction were made worse off. Well, why? Because the agents were made better off. Who were the winners? The rating agencies, the senior officers who walked away rich, the least moral appraisers, the least moral of the outside auditors at the big accounting firms. They were all the winners. They got rich by betraying their responsibilities. And so if you had had an Elizabeth Warren and if she had banned this nonprime product to protect consumers, now, that would enormously reduce this financial crisis.
   

In all, he's making all the usual liberal criticisms of the bill, which is that the bill's new regulations aren't nearly tough enough; which itself is based on the premise that unchecked greed and dishonesty was the root cause of the crisis.

Oh, and @marinara it doesn't "ensure Wall Street Scams keep running", a fair representation of his comments would be "doesn't crack down on Wall Street Scams."

>> ^blankfist:

It can't be the fault of the banks AND the bad policies of the Federal Government and the Federal Reserve? Then, you sir, lose. Good day.


Sure it can, it just wasn't any of the specific things you listed, which is why "nobody" is talking about them.

Mostly the problem was that the SEC and the FRB weren't enforcing the regulations they were tasked with regulating, because the highly-ideological political appointees at the top of both believed that the invisible hand of the market would lead banks to regulate themselves.

Alan Greenspan admitted later that he was wrong to think that.

Beck is easy fodder and this segment seems to be implying that gold's price is a result of illegitimate fear and not actual currency debasement worldwide. Not even Beck's massive ego can affect the price of gold. Gold began going up years ago when Greenspan lowered interest rates to 1% and blew up the real estate bubble.

http://www.kitco.com/charts/popup/au3650nyb.html

The Fed's continued policy of inflation, the arbitrary creation of dollar units at no labor or material cost, is what is making dollars less scarce relative to gold. Yes, the real estate bubble was allowed to collapse about halfway, but gold continues to rise in anticipation of the banks eventually loaning all that bailout money they received. It can't just sit on the sidelines forever, either it's retracted and we pay the piper, or it's loaned out. The problem with loaning it out is that we may lose key buyers of our debt. A bond is a promise to pay future dollars, and if we are rapidly decreasing their scarcity relative to goods, it becomes a losing proposition to buy bonds at such a low interest rate. Some of the largest purchasers of gold are foreign central banks, which are currently VASTLY underinvested in gold. China has only 1% of its reserves in gold, the rest is paper. India recently bought 200 metric tons.

I will start believing in the gold bubble crowd when I stop seeing those infomercials getting highly indebted Americans to SELL their gold for paper. You talk to the typical person the street, and they're still oblivious to what gold represents, and those that do are not buying, but selling. This is just the beginning of a huge bull run, and it's kind of hilarious to see some people calling the top over and over again. Peter Schiff wrote a funny article in 2006 about what a gold bubble would actually look like.

http://www.kitco.com/ind/Schiff/apr252006.html

Uhhh...wasn't it Greenspan that hit the iceberg ?

He is right and wrong, this looks at actions after and not actions before that lead to a crisis like this.

Hudson claims fault with the government bailouts, yes a bailout by the US government is always a bad idea, but one must understand the root cause of why such an action took place, CDOs and subprime exposures were intertwined in complex financial instruments that exposed all the banks, Lehman had so much debt that no one wanted to touch it neither the US nor the UK government, Barclay's walked on buying it because no government wanted to under write it. After Lehman collapsed it spiraled confidence downwards in all sectors of the financial market. Government money and bailout was then needed to reignite confidence and loosen money and start allow interbank loaning to take place. If this didn't happen we would have been in a far worse position, is there problems with other incentives the government took? yes but one must understand the pressure induced by both the populace and economic interests to take all and any action, most of which was to shore up confidence in the financial sector.

How did this come about? the financial sector and believers like Alan Greenspan always believed that the financial market could always self regulate themselves to not taken actions that would lead to their own demise, CDOS and subprime packages actually evolved from greed and abnormal profits. This lead to a whole slew of deregulated financial instruments like NINJA loans, which allowed firms to give loans to people no have No Income No Job or Assets. Who would have prevented this? the SEC and Fed which were both pushed into taking more lenient positions with regards to financial markets (same thing happened before with junk bonds and derivatives).

But great sift indeed, I totally agree with his views on dissuading borrowing and creation of more debt. Financial markets do not produce wealth. They only transfer it. Old school investment doesn't occur, as its multinational and money doesn't have incentive to invest in the US then say China.

Let me clarify what I meant by "Great Depression style." I was mostly meaning a general recession that coincides with a series of bank runs, along with liquidity issues.

I'd be interested to see some hard economic data that went back to the 1600's. Personally, I think pre-industrial revolution economic data is not terribly relevant to the modern economy, but certainly economic crises did happen before there was a United States too (tulipmania being a favorite example).

I'm not sure what baseline you would use to call the growth of the economy between the 1940's and 1970's bad, certainly in the US it was a period of unprecedented growth and prosperity, and we didn't have a destroyed industrial base to rebuild.

After the 1970's, and in particular, post-Carter, America took a huge right turn on its policies across the board. Lots of things changed about the economy, and the philosophy driving economic policy. I'd argue that in essence, it was a massive push to return things to the way they were before the Great Depression and all the economic and political reform that it had spurred.

What did we get as a result? A new Gilded Age, and a new Great Depression.

But that's almost a tangent. If you're going to declare that the housing bubble is in some way primarily caused by (or made dangerous by) the Fed's expansionary monetary policy in the early 2000's, what is it that Greenspan should have done differently? Contract the money supply before a recovery began? Never cut rates in response to the crisis? It seems to me that monetary policy is the wrong tool for the job if what you really want is for people to properly price risk.

Maybe making money tight would indeed have slowed both bubbles, but it's a bit like chemotherapy; you're fighting the cancer by killing off all your body's fast-growing cells. It helps with the cancer, but it does lots of collateral damage in healthy areas too. Without more targeted treatment, it can be a bad idea.

In my view, the more targeted treatment would have been regulation. The market managed to make a system of trusts and obligations so complex that no one was able to accurately judge risk, and built itself a naturally-occurring ponzi scheme. Government could have kept things more transparent by regulating CDOs and CDSs, but it didn't because the people whose job it was to regulate the industry were all people who'd been chosen specifically for their disdain of regulating anything.

To me the instability we're seeing in recent decades has more to do with deregulation, and a cultural predisposition for searching for fast, easy money instead of trying to really create value, not some sort of issue with monetary policy.

The wage conversation is a bit of a tangent, but from my point of view the right answer is to expand unemployment benefits and welfare, rather than reduce the minimum wage. I might be convinced that yes, people in certain situations should be able to work for less, but I'd rather the market just adjust to knowing that projects that rely on cheaper labor can't be done here.

As for your assertion that the entire housing asset bubble was caused by Fannie and Freddie and the 1977 Community Reinvestment Act...I'm disappointed. I'd thought you were more well-read than to believe that story.

Here's the most basic, simplistic response -- if it was all Fannie and Freddie's fault (two formerly privately-owned and operated companies, BTW), why are other banks in trouble? Why is AIG in trouble?

I agree that the problem here was moral hazard, but I disagree that it was government that created that situation. It seems that the market's own mechanisms for accurately gauging risk failed utterly.

>> ^gtjwkq:
Money spent by govt is, in principle, rarely spent as wisely as money spent by people, because people work to earn and therefore value their money, they usually have to be productive to earn it (which isn't easy), while govt is just politicians and bureaucrats deciding over money they easily appropriate from productive people. I don't know how I can put this in simpler terms.

I hear this a lot from Austro-libertarians. If this were true, banks should never work right, either. The people making the investment choices, and choices about loans are not the people who own the banks. The most risk they have to bear is getting fired, and often they get lavish severance packages even when they are fired, and are almost immediately rehired by another bank.

I agree that having some skin in the game helps motivate people to be more wise with their money, but I don't think there are any people in government who're casually disinterested in how taxpayer money is spent -- on the contrary, I think they're highly interested in either spending it on altruistic things (like unemployment, healthcare, green technology incentives) or spending it on selfish things (tax cuts/subsidies for industries that donated to you, aid in skewing regulation to benefit donors). I like to vote for the former, and call for the latter to be jailed (though it seems they're all guilty of both in varying ratios).

I also think government spending is best directed at things that are unlikely to turn a direct profit, but are useful for humanitarian purposes, or a general positive impact on the economy (e.g. infrastructure).

I would like to see less military spending, but I think that will be politically difficult when there are two wars going on, and a recession. I like the way Obama/Gates have shuffled the military budget in terms of reallocating money between different military projects, but I'm annoyed that the budget did still get an increase for next year.

As for the bank bailouts, I feel like they were a necessary evil. I would rather they'd asked more in the way of concessions from the bank in return, but I do think letting them fail would have just made things worse.

When I give you money, the money is now yours, what you do with it is your own business. But when I'm the govt, and I give you money, I'm giving you money that IS NOT MINE and that I SHOULDN'T BE GIVING TO YOU (at least that's what I'm arguing, a keynesian might think differently). So there lies the root of the problem: govt is to blame for handing out free money, not what people did with it, because it's expected that people will be careless about money that is freely handed to them, as opposed to money that is earned.
People with guns don't inevitably commit murder. About the bus driver, it's expected that he'll drive poorly and crash when drunk (maybe not though if he's lucky), even though I said he was force-fed the alcohol, which is not accurate since I'm not sure investment banks were legally obligated to accept govt money, but it's easy to imagine how a bank might be strongly influenced to accept money if it has no strings attached and it's also offered to its competitors.

This, I think is a crucial part of our disagreement. Say you're a well-known investor who's made ridiculous profits through shrewdly investing in successful business. I walk up to you, give you a million dollars, no strings attached. Are you going to necessarily be reckless and wasteful with that money, simply because it was a gift? What if the money had come from some investment that simply performed better than your expectations? Does that make you unwise?

Would it make any difference how I got the money I gave you? Even if I conned it out of a bunch of nice old ladies, wouldn't you still invest it correctly? That's why I think the Austrian theory doesn't make sense, especially on this topic.

It would make sense if the government, before the economy went haywire, said "do whatever ya like, we'll absorb all your losses" -- but it didn't do that, implicitly or explicitly.

All that said, I disagree with your characterization of there being a qualitative difference between money given to companies being theirs, but that money given to government to pay taxes still somehow remains yours. It's this whole idea that government is operating as a giant racketeering organization (which seems utterly incorrect). It's like the managing corporation of a condominium. By living here, you agree to a contract with the government, and you have to abide by the obligations in the contract, like obeying the laws, and paying taxes.

Regardless of how you think government got the money to give away, I don't see why money government gives to banks somehow will automatically be frittered away, especially if they say "this is yours, no strings attached".

Even though I think Ben Bernanke is an idiot, he's smart enough to be the current chairman of the Fed and even he thinks the Fed helped cause the Great Depression. The conclusions one can take about what happened in the 20's and 30's are not as clear cut as you'd think. What is important to understand are the motivations behind those that acted and those who interpret what happened.

I think you should perhaps read that speech of his more carefully -- I find what Bernanke says about the Great Depression persuasive. He's mostly talking about how much he loves Milton Friedman, but the key paragraph is:

Friedman's emphasis on avoiding monetary disruptions arose, like many of his other ideas, from his study of U.S. monetary history. He had observed that, in many episodes, the actions of the monetary authorities, despite possibly good intentions, actively destabilized the economy. The leading case, of course, was the Great Depression, or as Friedman and Schwartz called it, the Great Contraction, in which the Fed's tightening in the late 1920s and (most importantly) its failure to prevent the bank failures of the early 1930s were a major cause of the massive decline in money, prices, and output. It is likely that Friedman's study of the Depression led him to look for means, such as his proposal for constant money growth, to ensure that the monetary machine did not get out of order. I hope, though of course I cannot be certain, that two decades of relative monetary stability have not led contemporary central bankers to forget the basic Hippocratic principle.

He doesn't go into why the Fed thought what it was doing was the right idea here, but it should sound refreshingly Austrian -- they were worried about deviating from the gold standard too much, and weren't concerned about bank failures because they figured, as you do now, that banks failing is a blessing in disguise: ownership just moves from incompetent managers to competent ones, no muss, no fuss (liquidationism, it's called these days).

What Bernanke believes is that the Fed should have known better and reacted by massively expanding the money supply to stave off deflation, and rescuing the failing banks. What it actually did was contract the monetary supply and let them fail, and that was pouring gasoline on the fire (or as one economist said of Austrian advice at the time, it was "to cry, 'Fire! Fire!' in Noah's flood.")

I don't contest that the Fed has a lot of power, and that if wielded incorrectly it can cause a lot of damage. But I think the period of time between the Great Depression and now is a testament to the stability a central bank can create. There were recessions, but no Depressions, or Panics. There's already a debate about whether Greenspan could have prevented this one, but so far that debate is leaning towards the relaxation of banking regulation being at fault, rather than a FRB monetary policy error.

I don't really think debate on the history of the Great Depression is over; Keynesians and Monetarists are still fighting about aspects of it. But Austrian economics fell out of the mainstream in the aftermath of the Great Depression, largely because their policy prescriptions were carried out, to disastrous results. Present-day Austrians don't even deny that a contractionary monetary policy in the late 20's was a bad idea, they just deny it was their idea, even though it's what people like Hayek and Schumpeter were calling for at the time, and what they're calling for now.

That's why I can be perhaps a bit over the top when trying to quash Austrians as quacks; in my opinion their policies caused both Depressions.

Just want to say I think the traffic lights analogy is the best I've heard. I would only add that Greenspan thought everyone would just give way to each other because getting into a traffic accident isn't in your self interest, yet in every country where they have weakly defined traffic rules, they drive like maniacs.

>> ^StukaFox:
"He came in with a recession" -- WHAT?!?!?!


Clinton's entire term was a dot-com stock market bubble whose inevitable and proportionate bust began to occur in 2000 when Bush took office. Greenspan was very loose with money as Fed chairman under both Clinton and Bush, and Bernanke is even worse. Not wanting the painful withdrawal to happen under his watch, Bush did what was politically expedient and shot up the veins with record deficit spending and artificially low lending rates. Greenspan price fixed interest rates down to a record low 1% rate in the middle of a recession and held them there for a year. That transformed the speculative misallocations from stocks to real estate, got consumers borrowing and spending instead of saving to produce, and the day of reckoning was effectively postponed and enlarged until Obama's term. Obama is essentially choosing the same reinflationary path, and it's really only a matter of time before our creditors become net sellers of our bonds and turn the game into a hyperinflationary nightmare.

It also helped that Clinton repealed Glass-Steagall, which allowed much higher leverage and the securitization of mortgages. Ideally, we'd just get rid of the spiker and stop trying to regulate the drunken behavior, but Republicrats don't seem to think in those terms, they're quite party-whipped. I talk to Democrats who think Clinton decreased the national debt, social security is a success, Vietnam was a Republican war, banks don't create money, the dollar is still backed by gold, trade deficits are good. It's quite sad, just two socialist parties who spend all day trying to figure out who's more to blame while libertarians sit back and watch the country go to hell.

That's right. Now we have to let the free market run its course instead of getting our paws into it too much.

>> ^Farhad2000:
Too much regulation?
Sub-prime markets and derivatives were fully deregulated due to Greenspan's belief that banks would self regulate.