Thursday, October 23, 2008

Greenspan Shocks America

Today, in testimony before Congress, former chairman of the Federal Reserve Alan Greenspan said that he was "shocked" at the breakdown in U.S. credit markets and said he was "partially" wrong to resist regulation of some securities. Economists and others who had been predicting the current credit debacle were even more shocked that Greenspan said he was shocked. They were wondering what he thought would happen when he kept interest rates at 1% for so long.

Greenspan provided even more shocking testimony when he said, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief." It's hard to imagine that someone with his knowledge of history of the way economic markets work could even be mildly surprised that lending institutions failed to protect shareholders equity. Perhaps he had forgotten about the savings-and-loan debacle of the late 1980s and early 1990s. This resulted in the failure of 2412 savings and loan associations. The ultimate cost of the crisis is estimated to have totaled around $560.1 billion, about $324.6 billion of which was directly paid for by the U.S. government—that is, the U.S. taxpayer.

The type of delusional thinking that Greenspan was engaging in was recently termed "market fundamentalism" by George Soros the famed investor and someone who could've provided better guidance for the supervision of the financial institutions than those who were actually in charge. Mr. Soros recently provided a stinging denouncement of the notion that financial and credit markets could be self-monitoring. When children play with money some grown-ups need to monitor them.

If only Greenspan had seen the movie "Wall Street" and heard the character of Gordon Gecko utter the famous words, "Greed is good." What did Greenspan think was going to happen in an environment where executives of financial institutions were rewarded tens of millions of dollars for their successes and had no penalties for their failures? This country needs people in charge of the Federal Reserve and Secretary of the Treasury who have a knowledge of the way people really are in addition to their credentials in finance and economics.

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