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Posts Tagged ‘Alan Greenspan’

On MarketWatch, an interesting recap of Alan Greenspan’s testimony regarding the financial crisis:

NEW YORK (MarketWatch) — In one of the most dramatic moments in the global financial crisis, former Federal Reserve Chairman Alan Greenspan testified before Congress in October 2008, just weeks after the collapse of Lehman Brothers spread fear and panic around the world.

Rep. Henry Waxman (D-Calif.) bluntly asked him, “Were you wrong?”

“Partially,” replied the humbled Greenspan, who once sat at the commanding heights of the world’s economy.

Read the rest of the account here.

We were witness to this fateful testimony before and with interesting discussion as well. Just as the exercise of juxtaposing Greenspan’s execution against the tenets of Ayn Rand’s Objectivist philosophy. Hubris is a virtue to Objectivists, arguably the same hubris that brings us ever closer to the brink with every new crisis.

“Sent from my BlackBerry® wireless handheld”

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Alan Greenspan was on C-Span in October testifying before a congressional committee on the root of the financial crisis. In this video, he is interrogated by Congressman Henry Waxman, Chairman of the Oversight and Government Reform Committee.

It is important to note here that Alan Greenspan is a proponent of market deregulation and personally subscribes to the philosophies that espouse individual rights and freedom. What I find interesting is how the market crisis has seemingly shaken Greenspan’s ideas on capitalism and self-interest.

Note at 3:36, when Rep. Waxman asks: Where did you think you made a mistake?

Alan Greenspan’s somber reply:

I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders and their equity in the firms. And it’s been my experience, having worked both as a regulator for eighteen years and similar quantities in the private sector especially ten years at a major international bank, that the loan officers of these institutions knew far more  about the risks involved about the people to whom they lent money than I saw even our best regulators at Fed were capable of doing.

So the problem here is something which looked to be a very solid edifice and indeed a critical pillar to market competition and free markets did break down and I think that, as I said, shocked me I still do not fully understand why it happened and obviously to the extent that I figure out where it happened and why, I will change my views.

The facts change, I will change.

The critical error I get from Greenspan’s admission are that his ideals of individualism and capitalism are based on an assumption of perfect information, especially on the part of bankers. In a way, he took it with some faith that the banking system was best qualified to police itself, and which led to the excesses that led to the bubble and subsequent crash. Greenspan deferred to the authority and credibility of bankers, which he now admits was not entirely accurate.

The latter comments of Rep. Waxman is representative of the backlash against free market ideologies because of the crisis. The caution here is that we are in danger of discrediting ideals (i.e. free-markets, individualism) when we should be criticizing the execution of those ideals (e.g. flawed capitalism). Greenspan’s execution of his ideologies was based on a critical flaw: he presumed the market and its participants sufficiently knew and compensated for the risks. Challenging his premise is the fact that no one expected the crisis to be as long and as deep as it is.

Being constantly critical of deeply held premises is the only defense against false reasoning. Even in face of seeming success, we should never waver in our evaluation of ourselves. Sadly, we only learn of the value of critical self-assessment after the crisis has already struck.

Always check premises. Or get shocked, like Greenspan, when a Black Swan strikes.

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I’ve been wondering for a while where was Alan Greenspan in the midst of the economic crisis, when he suddenly he shows up in a House inquiry. The former Federal reserve chairman was once considered a god among men, with people all over the world trying to read his mind to get a clue on forthcoming economic policy. Now he’s forced to defend himself from allegations that he inadvertently helped create this debacle.

Good that Greenspan admits that there was a weakness in the system he shepherded. But then, no one can foretell the future, and economics is in large part educated guesswork. This inquiry is borne of the public’s need to blame someone–anyone–for this mess. This crisis was primarily caused by people who bought what they couldn’t pay for and by predatory creditors who lent them money anyway.  Can you blame the razor company if customers bought their products so they could slit their own necks?

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