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When it’s better to shut up

March 30th, 2011 · No Comments

 Men after a certain age don’t change, they reveal themselves. Sometimes, the results are quite ugly..


If there is a single person most responsible for the financial crisis, it’s Alan Greenspan. One would assume that he would have retired quietly. Unfortunately, he keeps missing golden opportunities to shut up.

Now, there is quite a lot wrong with the Dodd-Frank act, but it’s better than what we got, and is Alan Greenspan really the most adequate person to point out problems (real or imaginary, mostly the latter, by the way)? We don’t think so..

Greenspan: US Financial Regulations to Cause ‘Market Distortions’
Wednesday, 30 Mar 2011 07:21 AM

Sweeping regulation introduced by the United States to prevent future financial crises could create major “market distortions,” former Federal Reserve Chairman Alan Greenspan wrote in Wednesday’s Financial Times.

The former bank chief slammed the Dodd-Frank Act, which imposes wide-ranging and strict new checks on financial institutions, for failing to “capture the degree of global interconnectedness.”

Greenspan says the reforms, passed by Congress last year, would be impossible to implement, distortive to markets and a possible threat to U.S. living standards, the FT reported.

“The act may create the largest regulatory-induced market distortion since America’s ill-fated imposition of wage and price controls in 1971,” warned Greenspan, who was Fed boss from 1987 to 2006.

The Dodd-Frank legislation was the Obama administration’s response to the financial crisis, signaling a “re-regulation” of financial markets after the deregulation championed by Greenspan in the 1990s.

Greenspan says that Dodd-Frank’s “most surprising failure to rein in supposed market-determined excess” is to avoid a draconian clampdown on bankers’ pay, which he says would be of “doubtful” use.

The economist has been widely accused of having encouraged the recent U.S. housing bubble that led to the recent financial crisis due to his low interest rate policy.

But Greenspan, in his article, pointed out several areas where he believed the regulation was hindering economic recovery.

Greenspan argued that firms such as Ford Motor Credit were struggling to pull out of the slump as they could not meet credit rating requirements needed to raise funds.

He also said that new rules on proprietary trading unfairly punished U.S. banks.

He warned that a “significant proportion” of the foreign exchange derivatives market could leave the U.S. and that rules to limit bloated Wall Street bonuses would fail.

Top bankers would simply leave to work for their major “clients,” he wrote.

“The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems,” Greenspan wrote in the business broadsheet.

“Is the answer to complex modern-day finance that we return to the simpler banking practices of a half century ago? That may not be possible if we wish to maintain today’s levels of productivity and standards of living,” he wrote.

“In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living,” he added.

————–[End of article]————-

Here is what Krugman wrote in reaction to another Greenspan ranting

Rantings of an Ex-Maestro

Some people have asked me for reactions to this piece by Alan Greenspan (pdf) on how Obama’s activism is preventing economic recovery. I could go through the weak reasoning, the shoddy econometrics that ignores a large literature on business investment and ignores simultaneity problems, etc., etc..

But never mind; just consider the tone.

Greenspan writes in characteristic form: other people may have their models, but he’s the wise oracle who knows the deep mysteries of human behavior, who can discern patterns based on his ineffable knowledge of economic psychology and history.

Sorry, but he doesn’t get to do that any more. 2011 is not 2006. Greenspan is an ex-Maestro; his reputation is pushing up the daisies, it’s gone to meet its maker, it’s joined the choir invisible.

He’s no longer the Man Who Knows; he’s the man who presided over an economy careening to the worst economic crisis since the Great Depression — and who saw no evil, heard no evil, refused to do anything about subprime, insisted that derivatives made the financial system more stable, denied not only that there was a national housing bubble but that such a bubble was even possible.

If he wants to redeem himself through hard and serious reflection about how he got it so wrong, fine — and I’d be interested in listening. If he thinks he can still lecture us from his pedestal of wisdom, he’s wasting our time.

Tags: Economics