Greenspan concedes

There’s been a fair bit of debate about what, if anything, the current crisis means for economic policy and political philosophy more generally. A lot of this has been hung up on issues of terminology, which I will do my best to avoid here and in future.

Coming to substance, quite a few people have argued that the crisis doesn’t really signify very much, and that, once it is resolved, things will return to pretty much the way they were a couple of years ago. I disagree.

This concession of error by Alan Greenspan is, I think, pretty strong evidence against the view that the crisis is not so significant, in policy or ideological terms.

First up, Greenspan gave little or no support to the silly Republican talking point (repeated by quite a few commentators here in Australia) that the crisis was caused by marginal government interventions like Fannie&Freddie and the Community Reinvestment Act. On the contrary, he stated

The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations* (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower

And Greenspan conceded that his faith in deregulation had led him into erroneous policy decisions

“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,� said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?�

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.�

To sum up, Greenspan’s concessions and the big interventions we’ve seen already lead me to believe that this crisis will result in much tighter regulation of financial markets and a much more central and explicit role for governments in the management of financial and economic risks.

How much this matters for bigger questions of what kind of political philosophy will predominate depends very much on the importance you attach to risk management as a central feature of public policy and as ground contested between democratic governments and financial markets. I’ve argued for a long time that risk is crucially important, and therefore see the failure of financial markets to manage it as having fundamental implications for the way in which society will be organised in future.

* Note, BTW, that CRA loans were mostly not subprime and that Fannie&Freddie only entered the subprime business very late in the development of the bubble.

82 thoughts on “Greenspan concedes

  1. You can say what you like Ayn Rands Toy boy, but the one thing he did see coming was the systemic risk posed by Fannie and Freddie.

    Yes securitisation was the gunpowder, but plenty of things carry explosive power, its the IGNITION that matters.

    125% mortgages and sub prime mortgages came about because Banks with the Nod of the politicos (who coined it in as well thru taxes) thought lending did not have to be insured by such trivial things as deposits. By putting down a good deposit the customer takes the risk, the bank takes the house and gets the rest of its money if you go under.

    The simple fact is IF banks were capitalized at twice the amount of the last 10 years, then you would never have heard of securitisation.

    Root cause is our desire to give people money who should not have been given money, or the socialization of lending by private banks and pseudo private banks.

    So then the weight of money kicked in and the seemingly self fulfilling prophecy of higher and higher property prices feed on itself and onto of the Gunpowder of secularization we added TNT in the form a massive market distortion.

  2. Rog

    Im sure I could find no end of quotes of politicians giving themselves a pat on the back for their sound economic policies delivering abundance and happiness, between 1925 and 1928 if I looked.

  3. John, if I may reply Freedom lover by saying who gives a stuff about the free market and competition when those in need of urgent medical treatment are left out in the cold. At least our public hospitals do provide a service to all comers including foreigners like you who might one day be in need of urgent medical treatment for a small fee and if you cannot pay the fee I believe it is waivered.

  4. This crisis will change the way the economy operates permanently, not to many people saw this coming, but lessons will be learnt and it will permanently change the way people look at risk and investment. At least for one generation anyway.

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