A big day for Alan Greenspan. Over at The Wall Street Journal, a small band of monetary mavens gathers to decide whether the housing bubble is his fault or not. The good news, for Greenspan: not completely. David Henderson of the Hoover Institute takes him off the hook -- in fact he seems to want him to return -- but everyone else finds reasons to cuff him around, mostly for his low-interest-rate policy. And these are, in the main, conservative types, who believe that monetary policy plays the dominant role in, well, nearly everything. Lucky for Greenspan, none of them wrestle with his role as a deregulator or the Fed's failures to effectively oversee predatory mortgage lending coming out of Fed-regulated institutions.
Meanwhile, over at the Financial Times, Greenspan himself weighs in as his apologia series continues. Once again he wanders through the blasted battlefield, trying to figure out what went wrong. Little of this is new: Greenspan still praises the risk-management breakthroughs that flowed from Harry Markowitz's University of Chicago work in the 1950s. And he seems to believe everything was swell until August 2007. But Greenspan's often-tortured language is endlessly revealing of his tortured view of accountability. While he does deal with questions of regulation and the control of bubbles (he dealt with monetary matters in his last defense in The Wall Street Journal, March 11), it's as if he was never present, nor responsible, for any of it.
Yes, he admits, Markowitz-derived risk management failed miserably. But so, he admits, did that "second bulwark" of regulation. He then manages to mention the Federal Deposit Insurance Corp. and the U.K.'s "heavily praised" Financial Services Authority, but never gets around to the really key U.S. bank regulator, his own Fed. Then comes one of his patented generalizations that used to bowl Congress over: "New regulatory challenges arise because of the recently proven fact that some financial institutions have become too big to fail as their failure would raise systemic concerns." Recently proven facts? Is he suggesting that no one ever heard of too big to fail before Bear Stearns Cos. went under? What about Continental Illinois? Is he saying that the notion that some of these institutions would pose systemic issues in the event of failure had never entered his lofty mind? Or that he and his Fed played no role in encouraging the steroidal leverage on Wall Street or the consolidation of commercial banking?
This is amazing, both grammatically and substantively -- particularly as he guiltily rushes to the end of that sentence with the "as their failure would raise systemic concerns." But here's more. My favorite is a Greenspanian aside, in which he attempts to toss up an ideological defense on the run. He's trying to make the point that bubbles appear in only successful economies, although that seems a stretch and fatally imprecise to boot. But then he follows with: "I do not recall bubbles emerging in the former Soviet Union."
Well, no. The Soviet Union had no visible markets, no market-driven prices, and narrowly defined bubbles do seem to be market phenomenon. On the other hand, the Soviet Union was absolutely wracked by examples where some assets were driven up well beyond any sense of intrinsic value, often because of decisions made in the Soviet bureaucracy. The entire Soviet economy may resemble a vast bubble if you view it as an exercise where many economic goods simply lost sight of any underlying reality. And of course it collapsed of its own dead weight, just like a financial bubble.
Greenspan then goes on to argue, as he has often in the past, about the regulatory difficulties of bursting a bubble. He has a point here, but he also undermines that point by arguing that back in 2002 he said the housing fever would eventually end. And yet, Greenspan, the most powerful Fed chairman in many decades, never budged to consistently decry the danger or even to use his various powers as a regulator and as a sage to tighten the reins. He wasn't going to rock the boat. But now he can't have it both ways. If he didn't see what was happening -- particularly in housing -- then he was blind. But if he did (and he claims he did, sort of, maybe) then he was a coward. And that's a judgment beyond ideology. - Robert Teitelman
See series from WSJ.com
See Greenspan's column from FT.com
Robert Teitelman is the editor in chief of The Deal.
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