Mr. Greenspan, please shut up

This guest post is from: Constantine von Hoffman, a veteran business journalist who writes the blog CollateralDamage.biz, a humorous look at marketing, business and his dog. If you’d like to submit a guest post drop me an email.

From his lips…

“There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go,” Alan Greenspan said last Sunday. This sentence can be applied equally to both the sub-prime/credit-crunch/what-have-you mess and the destruction of Greenspan’s reputation as a financial genius.

Each passing bankruptcy makes it clearer that Mr. Irrational Exuberance is responsible for the two things at the heart of this entire thing: Easy credit and minimal oversight.

His constant refusal to raise interest rates meant that more money was always available for any thing ““ whether or not that thing was actually economically sustainable. At the time most said this was “finessing” the problem. Now it is clear to all of us ““ just as it was to some at the time ““ that finesse is another word for delay. And with each delay, the size of the problem compounded.

To make it worse, Greenspan and the Fed did nothing to see if these loans were actually any good.

As Michael Hirsh writes in Newsweek:

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.

As a result the US mortgage industry came to resemble a Ponzi scheme. Mortgage brokers made bad loans because they made money whether or not those loans were paid off. They just passed the risk along to the next company. That company made its little slice of the revenue stream by bundling up a bunch of those bad loans and selling them (and any risk) to the next step in the chain and so on and so on. As long as you weren’t last in the chain it was exactly like gambling with someone else’s money.
Greenspan said as much to the UK’s Monetary Policy Committee. David Blake, an asset management company exec, writes in the Financial Times:

[Greenspan told the MPC] the US financial system had been resilient amid the bursting of the internet bubble. Share prices had halved and there had been massive bond defaults, but no big bank collapses. Mr. Greenspan lauded the fact that risk had been spread, using complex derivative instruments.

Risk was indeed spread. It was spread away from the people and companies who should have understood what a bad idea this was to ““ basically ““ all of us. Traditionally, “all of us” rely on the government to serve as our proxy/watchdog in situations like this. For example, the danger to all of us posed by bad drivers is managed by requiring certain competencies for driving and enforcing those competencies. Can you imagine what the roads would be like without that government regulation? It would look a lot like the financial industry does today.

If Greenspan won’t take responsibility and apologize perhaps he could do something else for all of us:

Shut up.

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