The Demise of the Greenspan God

Remember the late 1990s, when Silicon Valley had an audible pulse, and 14-year-olds were making millions with websites? The masses were happily awash in virtual gold spawned by the .com boom. Time were so good, in fact, that people had the time and resources to tar and feather an effeminate president and his hussy intern consort. Then give them book deals.

One infallible face penetrated through the flurry of stock options, morality-based lawsuits, and abalone caviar spoons. It wasn’t a pretty face, but then, they didn’t hire Alan Greenspan for his looks.

The Clinton years were Greenspan’s heyday.
He’d appear on TV, larger than life, professing the power of laissez-faire in a voice raspy with Yoda-like wisdom. Who could argue with him? The economy was doing well. The Greenspan God must be right.

Fast-forward the better part of a decade. Banks are falling like dominoes, and guess who people are blaming now? None other than the Greenspan God.

Newsweek’s Michael Hirsh goes at Greenspan with brass knuckles:

Under the Home Ownership and Equity Protection Act enacted by Congress in 1994, the Fed was given the authority to oversee mortgage loans. But Greenspan kept putting off writing any rules. As late as April 2005, when things were seriously beginning to go wrong, he was saying that subprime lending would work out for the common good—without government interference.

…in a 2007 interview with CBS he admitted: “While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late.”

As investigations continue, the emerging truth is that no matter what kind of fancy new paper Wall Street was inventing, its corporate officers knew, or should have known, that the “collateral” backing up that paper was often bogus, provided by shysters and criminals. The one who should have known most of all was Greenspan.

Hirsh goes on to say that the Fed was presented with evidence of high foreclosure rates
(suggesting predatory lending practices) as early as 2001. Greenspan, opposed to even the smallest of restrictions, refused to put regulations in place.

So much for the oracle effect.
Greenspan looked good during his time, but it’s now clear he was just piggybacking off the market’s success. He correlated himself with the spirit of the bull, but did not cause it.

Now it looks more like he was preparing to eat it for dinner.
People see President Bush as stubborn and unwilling to change his beliefs despite heavy evidence to the contrary. Greenspan was the same way, but he invoked the language around the free market, insisting that the market could heal itself.

“Free market” is a concept near and dear to our collective hearts
, next to “good citizen” and “productive employee.” Because of the concept’s power, and the vagaries naturally associated with any professional economist, I’m not surprised Greenspan is only now being called out for his oversights. It takes a pretty big catastrophe to realize that the preacher man on the free market soapbox was also standing on a pile of kindling the whole time.

Greenspan’s folly demonstrates two things. One, “free market” is the far end of a spectrum. It is not fact. If someone actually treats the US economy like a free market, it’ll freefall like one.

Two, if someone in either campaign or the administration starts preaching a two-phrase economic solution with the jarring precision of a myna bird, I’m going to assume they’re wrong until proven right.

Even if the media gives them deity status.

  • We seem to have forgotten a host of lessons learned during the robber baron era in the early 20th century: the dangers of de-regulated big business, the importance of checks & balances in the exercise of power, the inevitable abuses of megacorporate monopoly power, the recurring sacrifices of the public good for the private good of politically connected special interests, “free market” collusion to circumvent third party oversight, and on & on. In the real estate market, the oversight of real estate appraisers was circumvented by the free market mechanism of allowing mortage brokers & real estate brokers to select those appraisers that would deliver the valuation numbers that they needed to put their deals together – resulting in a relentless upward spiral of housing values. When sound credit practices got in the way of continued sales, the real estate industry played “pass the mortgage” because no one was watching & regulating, and US dollars were piling up off-shore where where suckers could be lured into buying high risk mortages as part of inscrutable CDO financial instruments. George Carlin once said “fortunately for comedians, people learn nothing from history.” Unfortunately, we are all paying for the folly of unwise big business deregulation and growing monopolization by ever larger megamergers rubber stamped by bought & paid for government regulators. But even worse, the greatest national economy in world history was shepherded from the largest creditor nation in the world to the largest debtor nation in barely two generations through the greed & collusion of those entrusted with our economic future. Shame on you all!

  • FED is the enemy

    The article and the comments seem to completely bypass the concept that Greenspan wasn’t the problem, he was just a face of the FED for a while. The FED is the problem along with government backed mortgages and loans of any kind.

    When the Gov. and the FED back a loan the only collateral they can offer is the revenue from the taxpayer so they essential guarantee the loan and indemnify the lender from failure. This leads to lenders feeling no fear of loan failure and focusing completely on the origination and not the value of the loan. When the lending institutions do fail they should be allowed to fail forcing sanity into the lending process. There should never have been a government loan guarantee program in the first place – Fannie and Freddie are the worst forms of socialism.

    The free market is not to blame for the current situation – it is the government programs that attempted to manipulate the free market and the FED which is the direct government manipulation of the free market that are to blame for the failure of the US financial world today.