Wednesday, March 19, 2008

Greenspan and the wealth of a nation

Greenspan submits to the FT:
We will never have a perfect model of risk

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...Risk management systems – and the models at their core – were supposed to guard against outsized losses. How did we go so wrong?...If we could adequately model each phase of the cycle separately and divine the signals that tell us when the shift in regimes is about to occur, risk management systems would be improved significantly. One difficult problem is that much of the dubious financial-market behaviour that chronically emerges during the expansion phase is the result not of ignorance of badly underpriced risk, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share....Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria. But risk management can never reach perfection. It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response.

Now it is official. Greenspan speaks out: "The crisis will leave many casualties", and risk management or the lack of it is to blame for it. What he willfully leaves out is his responsibility. As the chairman of the Federal Reserve he should have shown the way to a sound and strong financial system. Instead he choose to bail out Wall Street whenever need be, infusing into the managers of the firms that proper risk management is not necessary if only their balance sheet is big enough. Greenspan with his laissez-faire aaproach towards financial institutions has created a monster of counterparty risks over his years as the chairman of the most important central bank in the world. So if he submits an article that gets published for good money in the FT perhaps somebody else should point out that if this goes south history will not be as kind to him as he was to his buddies on Wall Street and in Washington. I have made up my mind. This man was an evil man with inferior qualifications and superior power. There exists a picture of him that shows him together with his powerful friends in the White House. He lies on the floor stretching his aching back. He looks like a poodle who wants to be scratched on his belly. I am not his biographer, I take a guess, but maybe that is what he was an underdog aching for acceptance among the big shots in this country. He sold out the wealth of a nation in order to satisfy his ambitions.

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