The Deaf and Blind

Alan Greenspan is out with a new book, so he is out on the public-appearance tour in order to peddle the book.  The book is entitled "The Map and the Territory," and in it he argues…

…that traditional economic forecasting is no match for the irrational risk-taking that can inflate catastrophic price bubbles in assets like homes or tech stocks.

Duh.

Of course, he has reason to suggest exactly this.

For 18½ years as Federal Reserve chairman, he was celebrated for helping drive a robust U.S. economy.

He came in after Volker, at a time when interest rates were coming down from the high double digits.  He had the good fortune of sitting in the chair during one of the longest stretches of continually declining interest rates in central bank history.  Swimming along with such a current doesn’t make Greenspan a genius.  Just lucky.

Yet in the years after he stepped down in 2006, he was engulfed by accusations that he helped cause the 2008 financial crisis—the worst since the 1930s.

He was the chief bubble-blower, the bar-tender-in-chief at the irrational exuberance party of a lifetime. 

Now, Alan Greenspan has struck back at any notion that he—or anyone—could have known how or when to defuse the threats that triggered the crisis.

What else could he say besides no one could see it coming?

Well, of course, some did see it coming.  Adherents to one particular school of economics saw it coming.  And we all know that Peter Schiff was right.  At this point, one would have to be deaf and blind not to know this.

In search of his iPhone, he twice asked a staffer where it might be.

Well, there you have it. 

But back to the economics, from the interview of Greenspan:

Q: You write that you were shaken by the 2008 financial crisis because of the failure of one of the pillars of a stable financial market—"rational financial risk management." What did you discover in your research for the book about this issue?

A: Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.

Fear hits…a contagion….critical phenomenon…things fall apart.

Is this a virus he is describing?  Somehow, all businessmen everywhere come to the exact same conclusion about market prospects such that all decide at the same time to shut it down?  This is the best he has to offer?

You would think that someone in his position, who readily admits that the best and brightest economists and econometricians all failed in seeing the boom and the bust, might decide it is time to look elsewhere for answers, perhaps in non-mainstream sources:

Q: On a more personal level, what books are you reading that you would recommend?

A: "Lords of Finance" is a very excellent book. He (Liaquat Ahamed, author of the Pulitzer Prize-winning history of central bankers) is going to be my moderator here next Tuesday. That book is an extraordinary book.

"The Battle of Bretton Woods" (Benn Steil's history of the 1944 international conference in New Hampshire that helped shape modern global finance) is a book I read recently, which is excellent. What those three books have in common is they provide a type of detail which I was never aware of. I know a great deal about history, but I was quite surprised.

Liaquat Ahamed: “Ahamed has worked at the World Bank in Washington D.C. … He is a member of Board of Trustees at the Brookings Institution and is involved with the New America Foundation.”

Benn Steil: “Dr. Benn Steil is senior fellow and director of international economics at the Council on Foreign Relations in New York.”

Not exactly outside-the-mainstream thinking.  Perhaps Greenspan could read something by economists from the school that actually has an answer to his unanswerable dilemma.  He knew Murray Rothbard personally, for goodness’ sakes.

However, if he is too busy to dive into an entirely new school of thought, I might suggest he reads one short paper – one that he knows quite well, given that he is the one who wrote it.  This would be as good a starting point as any.  While the paper addresses the benefits of a gold standard, Greenspan also writes of Federal Reserve policies in the 1920s:

The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom.

Back to the interview: In the best Greenspanian tradition of using a lot of words to say absolutely nothing of meaning:

Q: With the knowledge you gained from the financial crisis, has it changed your own assessment of how well you performed as Fed chairman?

A: The real question is, should I have done something different? And the answer to that question is no. Did we make mistakes? You bet we made mistakes.

He admits to making mistakes but he wouldn’t do anything different.  I don’t even have a witty line to add to this one.

Q: A lot of criticism centers around the failure of the Fed and other regulators to deal with the explosion of subprime mortgages, which were packaged into securities that then turned bad and were at the center of the troubles. Should the Fed have handled subprime mortgage regulation differently?

A: The problem is that we didn't know about it. It was a big surprise to me how big the subprime market had gotten by 2005.

Well, not only did many outside of the Fed know about the bubble in sub-prime lending in 2005, it turns out many inside the Fed knew about it as well.  From this March 2005 paper entitled “The Delinquency of Subprime Mortgages”:

Subprime lending in the mortgage market has seen dramatic growth since the early 1990s. The share of total originations that is subprime has risen from 1.4 percent in 1994 to 18.7 percent in 2002. Lenders include both mono-line lenders (subprime only) and larger institutions that provide subprime loans as part of a continuum of alternatives. The securitized market for subprime loans has also been growing, with the securitization rate of subprime home mortgages rising from 31.6 percent in 1994 to 62.5 percent in 2002.

In fact, here is a speech by some guy named Alan Greenspan, from April 2005.  I think he was also at the Fed:

Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.

I guess Alan Greenspan must have missed this speech by…Alan Greenspan.  This seems to be a recurring problem for him.

This nonsense passes for rational discussion in the mainstream.  Yet one after another, these mainstream gatekeepers are going belly up – with viewership and readership falling like a stone.  The internet has taken the place, relieving the gatekeepers of their duty.

In the not-too-distant future when the book is written about the most calamitous adventures in central banking, one thing is certain: on the cover will be a picture of Alan Greenspan.  Under his watch, the entire world economy was brought to its knees.

We are still living through the consequences, and will continue to do so for some time to come.