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Greenspan’s ghouls and Kool-Aid drinkers

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Greenspan’s ghouls and Kool-Aid drinkers

Greenspan's Kool-AidCourtesy of Tim Iacono at The Mess That Greenspan Made

Today’s Bloomberg commentary by David Reilly on the subject of the Obama administration’s massive financial overhaul plan has two equally entertaining titles, one on the Bloomberg opinion page which, understandably, has far more appeal to yours truly:

Greenspan’s Ghouls Stalk Obama Financial Plan

And another one on the commentary itself, which has its own particular charm:

Kool-Aid Drinkers Survive Financial Overhaul

The contents of the editorial are as good as the titles, Mr. Reilly joining the chorus of opposition to the many shortcomings of the reform plan focusing on how we got to this juncture and who was most responsible for getting us here.

President Barack Obama doesn’t need to just overhaul financial regulation. He needs to exorcise the ghost of Alan Greenspan.

For far too long, regulators weren’t willing to regulate, inspired by the view of the former Federal Reserve chairman that too much oversight is a greater threat to markets than too little. That turned out to be a bigger cause of the credit crisis than the particular structure of the agencies overseeing the financial system.There does appear to be far too little recognition of how miserable a job the Fed has done over the last ten or fifteen years in its role as a regulator.

Yesterday’s, during Senate hearings on the reform plan, the characterization of the central bank seems to have been spot on, the idea of giving the Fed more authority being likened to "a parent giving his son a bigger, faster car right after he crashed the family station wagon.”

Back to Mr. Reilly…

Donald Kohn, the Fed’s vice chairman, summed up the prevailing regulatory attitude in 2005, saying, “The actions of private parties to protect themselves — what chairman Greenspan has called private regulation — are generally quite effective,” while government regulation risks undermining “financial stability itself.”

Unless Obama can change that mindset, which is entrenched in many of the institutions overseeing banks and markets, the details of his 88-page reform plan won’t matter much.

And while there appears to be a newfound appreciation for government oversight, we can’t be certain yet about the intentions of those shaping the Obama plan. Some of them, after all, were one-time advocates of Greenspan’s views, or at least failed to challenge them.

There’s much more… actually it’s all quite good, so the rest of it is reproduced below…

Greenspan’s Disciples

Treasury Secretary Timothy Geithner, one of the architects of the Obama overhaul, was a big promoter of the kind of so- called financial innovation that ultimately helped bring about the crisis.

During a speech in early 2007, Geithner argued that innovative products such as credit default swaps and collateralized debt obligations “should help make markets both more efficient and more resilient.”

And Geithner, at least back then, echoed Greenspan’s belief that regulators shouldn’t try to stop bubbles from forming. In the same speech, the then-chief executive of the Federal Reserve Bank of New York also said, “We cannot identify the likely sources of future stress to the system and act preemptively to diffuse them.”

Geithner wasn’t alone in espousing Greenspan’s hands-off approach. His co-pilot on the new Obama plan, National Economic Council Director Lawrence Summers, held similar views.

Summers aligned with Greenspan to kill off attempts to regulate derivatives markets when he worked in Bill Clinton’s administration. That deprived regulators of influence over a key and fast-growing market, an area in which risks to financial institutions would fester.

Regulatory Tension

In unveiling his regulatory plan Wednesday, Obama noted that there is always tension between those who favor the market’s “invisible hand” and those who favor “the guiding hand of government.”

He rightly added that such tension isn’t always a bad thing. Yet in recent years, the invisible hand ruled.

Under Greenspan’s laissez-faire approach, markets would police themselves and risk would be spread far and wide. The theory was that losses would be more easily absorbed if a broad base of investors, rather than a few banks, held risk.

Even as cracks began to gape in the financial system in early 2007, Geithner continued to hew to this view. While acknowledging in his speech at the time that problems with subprime mortgages may signal a gathering storm, he said that credit-market innovations should help ease any pain: “If risk is spread more broadly, shocks should be absorbed with less trauma.”…

[continue here.]

The quandary of the headline writer becomes clear after that second-to-last paragraph – perhaps they should have opted for the combined "Greenspan Kool-Aid" angle instead.

Then again, "Greenspan’s Ghouls" is kind of catchy.

 


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