Where was the "moral hazard" factor?

Eliminated by your friendly National State.

Noam, that's a great catch- Greenspan has by now entirely cloaked himself in contradictions. This is a man who once critiqued the 1920s Fed as having 'repeatedly put coins in the fuse box'- an allusion to the lax lending environment and excessive speculation that they fostered let alone failed to inveigh against. One would think someone of that opinion (rather than a head in the clouds Friedmanite whose obtuseness could be expected and in a sense forgiven) would have seen parallels in the conditions under his Chairmanship.

Moreover, given the man's steadfast refusal to even ACKNOWLEDGE the credit creation that occurred in his tenure, one is forced to concede the possibility that this behavior of his is cover-up with intent and not cognitive dissonance, (the most notable example of which is here: www.ft.com/.../81c05200-03f2-11dd-b28b-000077b07658.html, wherein he remarkably cites the growth of a measure of the money supply so narrow it didn't register as consumer lending exploded in the beginning of the decade).

Btw, the Times piece is the very tip of the iceberg of Greenspan's errors of omission and commission. In addition to cheerleading derivatives, the pom poms vigorously waved on the explosive growth of hedge funds, and exotic mortgages (famously advising Americans to save money by taking out the kind of ARMs that are some of the worst offenders in the prime and Alt-A sector of the mortgage markets). As egregiously, if not inconsistently, he sat idly by as mortgage debt ballooned and global imbalances exploded. He was famously against measures to try to prick the tech bubble, notably refusing to target margin lending- just one small form of leveraged speculation, on the grounds that he would be punishing those using it unfairly (?@#!?). Only a few years later, as mentioned, he was unwilling to contemplate the possibility that the explosive growth in teaser rate, no documentation, negative amortization mortgages used by brokers to shoehorn homebuyers and speculators into homes and condos they couldn't afford was evidence of agency issues in the credit apparatus.

That's far from all, of course. One of the most important aspects of Greenspan culpability was the Greenspan Put. This began with the 1987 steps to alleviate the equity market crash at the very beginning of his tenure, and extended through to steps taken during the real estate/savings and loan crisis of 1989 to 91, the bond market/Mexico tequila crisis of 94, the Em/LTCM crisis of 97/98, and the tech bust of 2000, 2001. At each stage, speculators errors were bailed out through aggressive system reliquification, largely carried out by Fannie and Freddie I might add, and all with the full cognizance of Chairman Greenspan. This encouraged the balooning of the speculative community, with concomittant demand for tradable securities, leverage, assets to bubble, financial systems to jeopordize, etc.

Does that make Greenspan the master villain? No- 'irrational exuberance' was his attempt to actually act independently, and he came in for a full scale bollocking for it by an increasingly powerful Wall Street and politicians of all stripes. And he is by far and away not the only person who should have acted or spoken out- the behavior of the SEC this decade, after all the corruption that was exposed after the tech bubble was both shocking and shameless. But if you're looking for the one person who the nation most needed to martyr himself for the common good and who declined the 'honor', this is your man.

PS I wrote a letter to the FT to this effect: www.ft.com/.../810f75aa-0697-11dd-802c-0000779fd2ac.html

....those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”

Well, no kidding -- because pharmacists are part of a regulated market, dispensing controlled substances pursuant to licenses they could lose if they try anything funny. Back when none of this was true, your "pharmacist" might well have been the worst sort of medicine-show huckster.

In other words, Greenspan doesn't seem to understand that regulation doesn't just function transaction-by-transaction; it also creates a larger regime that ultimately leads to a whole professional ethos that wouldn't otherwise exist.

And this guy has spent his whole life thinking about economics? I mean, how stupid is he?

I whacked on Greenspan earlier in another thread.  Noam used a nicer tone and nicer language.

Whacked on Greenspan after reading the same article that is (referring to my first post here).

Isn't maturity, looking for the root cause of the economic fiasco, rather than looking for someone to blame, one person in particular?  Isn't this the height of foolishness to attempt to argue with the positivistic philosophy of Greenspan for the debacle?  Claiming his defense is circular is the same as arguing that he is responsible.

The only way to get through this potential tragedy that may lead to similar instability bringing about the Second WOrld War and the death of millions is to find the root cause and correct it, without blame and accusations.  I'm astonished by how TNR hasn't even mentioned the root cause, proving the failure of the philosophical basis of the magazine's viewpoint.

The root cause if globalization.  The reason the bailout is not effective is that the productive forces of the US are globalized so that the main engine of growth in the world economy, the US, is out of reach of influencing global conditions that would hasten the end of the downturn.  Globalization led to the crisis by keeping interest rates artificially low to continue to feed demand for the products produced in foreign countries, China predominantly.  The crisis can't be solved the way the 87 recession was corrected with liquidity pumped into the economy.  The preceding oil price crisis is the same and its crashing prices are similar to the global nature of the stock market crash.  OPEC kept prices artifically high, blamed on demand in emerging economies, oblivious to the damage to the economy that would eventually be counterproductive.  WIth all the self-interest issues of global players, there is great resistance to a global solution to the crash.  It will be long and prolonged until a unified approach is possible and effective.  What will come out of it hopefully is a realization that global means local, that each economy must be developed seperately, that globalization was based on greed and undermining workers rights and wage demands.  Eventually, capitalism will learn that what is good for each is good for all, that workers are not the enemy of capitalism, that there are no such entitites as consumers and workers, but one and the same.  Stealing from the future to enrich the present leads to moments in history like today, cataclysms of stupidity and inhuman greed.  The irony of the capitalistic system now desperately looking for the value of all the mountain of paper only reveals the immorality of a system that is value neutral and doesn't base itself on human nature.  Greenspans failure was in his belief in human nature in a capitalist system, when no such thing exists.  In the end, unfortunately, capitalism is forced to discover anew how values are the essence of life, in the economic instability that leads to war and the death of millions.  SInce capitalism is war in the marketplace, when it fails it is quickly transformed to real war.  Now Greenspan, fatally naive will witness true human nature, something he was unwilling to see honestly until now.

Blaming "globalization" is in my view about like blaming the weather. Putting aside the fact that it has done more to raise more people out of severe poverty than anything, in fact everything, else, globalization is a reality that's not going to be wished away by hoping for jillions of little "local economies" which somehow manage a "unified approach",  presumably while everyone holds hands and sings The Internationale.

The root cause of the current fiasco is a familiar one--human nature.  Every bubble in history has been driven by pretty much the same dynamics, and this one is no exception. Dynamic Number One is the idea that "this time things are different". It's a new world, so whether it's tulips, shares in the Louisiana Company, internet stock, or mortgage-based derivitives, THIS time the old rules don't apply. Except they always do.

Milton Friedman was right--people are more careful with their own money than they are with other peoples'.  He was talking about government, but it also applies to people dealing in exotic securities and investment schemes with other peoples' money. Moral hazard was removed for people assuming too much debt, for brokers selling the risks down the line, and for the insurance companies and legislators who imagined that housing prices could only go up.

Mr. Powell, liberal cant.  So nobody is to blame, just human nature.  This is the fundamental and fatal flaw of capitalism, trying to change human nature.  As McCain puts it, we came to Washington to change it and it changed us.  Its the system, capitalism that excludes human nature.  Government isn't the correct substitute because it is a correction method, the way Communism was an answer to the intrinsic failures of of Capitalism.  Its a bandaid on a festering wound.  The reason Greenspan can't be blamed is that history is a tidal wave that overcomes individuals, it is the movement that words can't stand against, you can't be heard against the roar of the sea.  It isn't the weather, globalization, it is a fear of female equality that turns men into 3piece suit knights going forth into the world with their labtops and briefcases to slay the dragon and save the fair maiden.  Where does the fear come from that turns an economic crisis into a panic, the fear of women, the fear of castration, the fear of being outmoded and replaced by a new model.  We have to prove we are agile, faster, surer, we have to lie to ourselves in a universal conspiracy that in a value neutral world, we are still worth something.  This can only be done through exploitation, dishonesty, fear, superiority, the best house, car, wife, vacation.  The only solution is creating a system that is in harmony with human nature.  Communism tried changing human nature, capitalism tries to change it.  Who do they attack, those who couldn't afford buying a house, not the CEO with millions in salaries and bonuses, who are blamed only for failing.  Reagan is to blame more than Greenspan or anyone else for institutionalizing the lie that we are better than we are, that it isn't us that limits our success, it is the other, government.  Government provides services and corrects problems, it isn't the enemy.  Reagan is the enemy, those who can't live with reality.  Economists aren't the enemy, politicians are, politicians who despise politics, don't know the meaning of government.  Bush and the patrician class that sees government as something to do away with because it is beneath them to have to dirty their hands with, when they should be making money with their friends.  It is all about values and in that respect Greenspan is correct but it is about living a lie that is capitalism.  Why did Fanny Mae dishonestly try to give housing to poor people, because they thought that while everyone else is stealing from each other, why not them as well, and if were going to privatize everything, at least an institution that helps someone instead of hurting them.  Government was misused with fanny mae but it is because it was privatized and given access to other people's money.  It is about transparency and we are the government, but privatization gives us other peoples money and we don't appreciate when money is used to make money, even if it comes from a 401K, earned over a lifetime.  Why should we care about someone elses money as much as we care about it being our own.  For America to work, like it did in the past, is to have a work ethic, that work is noble, that the sweat of the brow is admirable, that the goal can't just be making money without effort.  America tried to create a country like a eutopia, everyone clean scrubbed and wearing nice new clothes, living in nice houses, not having to work hard to succeed, the stock market would do the work for you.  America tried to create a world without age, without disease, discomfort, effort, everyone with their shiny new car on the open highway.  America stopped believing in itself and began to believe in the Hollywood, advertisement version of reality because American's all wanted to be beautiful people, important people, because they felt differently, felt less-so.  Only work and effort and accomplishment gives one a sense of self-importance and self-confidence and an escape from the herd mentality.

Pain always brings us back to reality like a cold slap in the face.  Reality has a way of coming around and kicking you in the behind, and that is what is happening.  The attempt to escape from pain always leads to more pain for oneself and for others, something we should have noticed by the goings-on in Hollywood.  The derivatives market and hedge funds, Orwellian-speak ideas, are the Tower of Babel put on paper.  It isn't that we never learn, Mr. Powell, it is that we always try to defy God, to be more than we are, to be immortal and omnipotent.  Alas, viagra isn't enough. My e-mail is bombarded with Nigerians with treasures and viagra suppliers.  Says something.