TNR BLOGS

May 09, 2008 | 9:33 AM
May 08, 2008 | 8:55 PM
May 08, 2008 | 6:06 PM

May 09, 2008 | 12:12 AM
May 08, 2008 | 5:13 PM
May 08, 2008 | 1:57 PM

May 05, 2008 | 1:35 PM
May 02, 2008 | 5:26 PM
May 02, 2008 | 2:40 PM

May 08, 2008 | 9:12 PM
May 08, 2008 | 3:26 PM
May 08, 2008 | 2:38 PM
COLUMNISTS
TODAY'S STORIES
25.03.2008
Hillary's Dubious Praise for Greenspan

Via Avi Zenilman at The Politico, I see Hillary has recommended that Alan Greenspan serve on a "high-level working group" on the mortgage crisis. She made the recommendation during an interview with the Phildelphia Daily News editorial board (yesterday, I think). Here's how one of paper's bloggers recounted it:

So the Daily News asked, why Greenspan, that wasn't he off-base on the housing bubble, and here was her response:

"Not only that, but the Fed didn't act while he was there. But he has a calming influence still to this day on Wall Street -- don't ask me why because I never understand what he's saying -- but nevertheless people respond to that Delphic oracle approach. I think it would be wise to include him. And recently he's come out and vert smartly so that we have to deal with housing and maybe we need to have some kind of buyout mechanism for mortgages. So he's moved on his understanding and depth of the problem -- but you know you could pick three others. You just have to have some demonstrable involvement of presidential leadership...* [emphasis in original]

Of course Clinton's right that Greenspan seems to have a calming influence on financial markets. (For reasons that aren't clear to me either.) And it's good to hear that she thinks Greenspan really whiffed when he had a chance to tighten regulation of the housing market. But, given that, I don't quite understand the rationale for appointing him to such a working group. If anything, his recent comments on the financial crisis have been pretty disconcerting to anyone who thinks the lack of regulation was a problem. In fact, he's basically argued that over-regulation was a cause of the recent turmoil, and that further regulation would be a mistake. Unlike Clinton, I don't think he's moved much on his understanding of these things at all.

*It would be nice to see the full transcript here--I couldn't find it--but this seems to be the gist.

Update: I don't think that Greenspan op-ed in the Financial Times (from the Plank item I linked to above) is still free online. Here are the relevant passages:

The crisis will leave many casualties. Particularly hard hit will be much of today's financial risk-valuation system, significant parts of which failed under stress. Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief. But I hope that one of the casualties will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance.

The problems, at least in the early stages of this crisis, were most pronounced among banks whose regulatory oversight has been elaborate for years. To be sure, the systems of setting bank capital requirements, both economic and regulatory, which have developed over the past two decades will be overhauled substantially in light of recent experience. Indeed, private investors are already demanding larger capital buffers and collateral, and the mavens convened under the auspices of the Bank for International Settlements will surely amend the newly minted Basel II international regulatory accord. ...

In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.

--Noam Scheiber

Posted: Tuesday, March 25, 2008 11:51 AM with 12 comment(s)

Comments

You must be logged-in to comment.

Not a subscriber? Click here to get a digital or print and digital subscription to The New Republic!

shamharrison said:

I wonder how Professor Krugman feels about this ...

March 25, 2008 12:13 PM

drdannyu said:

More than that, is this not an admission that she doesn't really understand the workings of the economy?  I know that she's trying to be glib, but WTF?!?

March 25, 2008 12:13 PM

tnmats said:

I heard on NPR this morning about this working group not long after my clock radio had awoken me.  I was half asleep when the story was on; what woke me up was her suggestion of Greenspan for this commission/panel/whatever.  My yelling "HE'S the one that got us in this mess!" sure did startle my half-asleep wife and kids.

Nothing coming out of the 'oracle' is believable and at least HRC admits this somewhat.  So why put a him anywhere near the mess he helped create?  He'll only make matters worse.

March 25, 2008 12:24 PM

bcbaird said:

I've always thought that the current financial crisis was a compelling argument to keep Alan Greenspan and anyone who agrees with him FAR away from the financial markets.  At this point, I don't think he's qualified to run the bank in a Monopoly game.

March 25, 2008 1:07 PM

teplukhin2you said:

Greenspan didn't "get us into this mess". He enabled it, but the underlying causes are multiple and complex, including an explosion of financial innovation, electronic and information processing platforms, globalization, and not least, an implicit political consensus in this country that everyone-- firms, consumers, governments-- needs to take on much higher debt levels than our grandparents (or parents) ever considered prudent.

That last insight came not from Greenspan but from Miller and Modigliani. It's caused a sea change in our political economy, away from higher and higher wages (and prices) with high levels of savings (and taxation) toward flat real wages, lower and lower consumer prices, and low taxation. THe debate we need isn't about Greenspan's culpability but about whether, and how, we can get back to an ethos of higher savings built on higher wages without tanking the consumer economy that now accounts for >70% of US GDP.

In other words, how to move beyond the bread-and-circus economy of sh*t wages and sh*t products imported from China paid for with excessively available, artificially cheap credit.

March 25, 2008 1:36 PM

mmathog said:

I'm really surprised how few people know what's going on here, it seems so obvious to me. Rubin, Summers were key central architects (it's called 'rubinomics' after all, Reich was on the other side). Greenspan, although 'independent,' was clearly on board with the plan.

HRC can no more separate herself from Rubinomics (which includes Greenspan, and by the way, Krugman) than Obama can from Reverand Wright.

My explanation (although I'm an Obama supporter, in no way do I mean the following to demean HRC in any way):

The 90s Clinton economic plan was predicated on the following:

-lower barriers to trade

-less separation between commercial and investment banks, less regulation

-lower interest rates

-low deficits or 'fiscal responsibility

The low barriers to goods would keep goods cheap, staving off potential the inflationary effects of the low interest rates. Also, the dollar would be supported by countries impress with our 'fiscal soundness' in spite of the relatively low return.

This architecture obviously had a lot of success (and at least some failure).

Today, that architecture is coming apart. Why? Well, we can argue about that. Did Bush tax cuts undermine the 'low deficits' lynchpin? ('deficits don't matter,' dick cheney)? Did financing the war cause too heavy an inflationary effect? Did the lack of regulation get out of hand in the face of all that cheap money?

Whatever you think, Clinton can't separate herself from these guys, she's been running on that record for 15 months.

March 25, 2008 3:50 PM

teplukhin2you said:

It came apart because of a U-turn in the markets' perception of Wall Street's soundness. The real estate mess isn't that big of a deal, and we've seen other Fed-backed liquidity bubbles rise and burst (dotcom, S&L). No big deal. Boom, bust-- been there done that.

What's different this time around is that financial institutions stopped lending to each other because their risk models have blown up. It's the same effect that you would see on, say, the stock market if everyone's standard discounted cash flow models for valuation proved to have nothing to do with companies' real earnings prospects. Investment would halt until a new valuation methodology took hold and allowed everyone to reliably mark to market their holdings.

Again, that isn't really Greenspan's or the Rubinomists' fault. I don't know how they're going to recalibrate those risk models and restore confidence to the system, but it's not a matter of bringing in a different team in Washington.

March 25, 2008 4:18 PM

mmathog said:

You're basically totally wrong about Greenspan Tep, and partially wrong about Rubin.

Unlike Rubin (or Summers), Greenspan still held a key policy position after the Clinton's left. If one of the lynchpins of success of this framework is 'fiscal soundness,' than Greenspan's encouraging of Bush's tax cuts undercut a key structural element.

Even worse, Greenspan not only encouraged 'easy money' by continuing low interest rates, he actually didn't warn early enough nor sufficiently enough about housing lending.

I find your analysis of the current 'recession' (only 1/4th of the problem as you begin to indicate) to be rather lacking as well. Unlike most 'goods recessions' (network equipment, tulips, etc...), this one is in housing/construction. This industry, building suburbia, has replaced manufacturing in America.

How long until that sorts out? It will be quite painful.

Also, they're all responsible for ripping down the 'wall' between investment and commercial banks and helping create an unregulated mess where shenanigans around all this easy capital could occur.

I've heard Rubin recently, and he makes me fucking sick, what an asshole. His whole condescending 'oh whatever' and 'who me?' attitude and 'people have different theories' makes me want to beat the shit out of him. I'd be happy to hold him down while Robert Reich does the job.

March 25, 2008 4:28 PM

mmathog said:

"It came apart because of a U-turn in the markets' perception of Wall Street's soundness."

That's because it was based on bullshit. Perception finally = reality.

"The real estate mess isn't that big of a deal, and we've seen other Fed-backed liquidity bubbles rise and burst (dotcom, S&L). No big deal. Boom, bust-- been there done that."

It is a big deal. This is 4 simultaenous events, in those other cases, only 1 or 2 things were happening.

We're a lot poorer than we thought we were, and foreign nations are more decoupled than recent history so their willingness to bail us out will be limited.

March 25, 2008 4:31 PM

teplukhin2you said:

Well, I hear you, you make good points, need to chew on those. Agree totally that we have deliberately made construction into the core manufacturing industry in this country, which magnifies, as you say, the impact of the real estate recession.

Nothing better shows how far off track this country-- again, not the Boosh Administration or any particular admin but our political economy generally-- has come than the absurd situation you have when nearly ALL post-9/11 private sector employment growth comes from the real estate sector, ie from encouraging ordinary people with few skills decide to make their living by flipping houses to each other.

Yes, we are poorer than we thought we were, but I think that revelation is actually a very benign, even wonderful development for this country. Maybe we'll get back to the ethos that used to be associated with America, ie the yankee virtues of thrift, ingenuity, provision for the future etc.

We're a smart country with millions of hard-working, entrepreneurial and savvy people. We used to know how to save and provide for each other, and can learn how to do so again. We'll get through this.

March 25, 2008 5:00 PM

mmathog said:

"We're a smart country with millions of hard-working, entrepreneurial and savvy people."

Yes, I agree, lots of human capital and great infrastructure.

March 25, 2008 5:29 PM

The Stump said:

Per that item I wrote yesterday about Hillary appointing Alan Greenspan to a "high-level working

March 26, 2008 11:47 AM

Double click this space to insert your ad.