Tuesday, April 8, 2008

Alan Greenspan - the charade continues

Greenspan continues to defend his legacy in the face of ever harsher criticism and he succeeds because his critics continue to bark up the wrong tree. Today Greg Ip from the WSJ, a long term Fed follower and Greenspan admirer, submits on the Journal's front page: His Legacy Tarnished, Greenspan Goes on Defensive. The beleaguered ex-chairman contends that he is "...now being blamed for things that he didn't do". He does not regret "a single decision" and challenges critics of "failing to assess the process by which he made decisions".

Also finance blogger and Fusion IO CEO, Barry Rithltz, weighs in with his blog: Greenspan 'Reputation Tarnishment' Tour Continues.

"Greenspan's ideological refusal to allow the Fed to fulfill its role of Banking System Regulator is what is directly the root cause of many of the conflagrations we are dealing with today -- from housing to credit to derivatives to the demise of Bear Stearns."

The picture is clear. In general the criticism of the former chairman goes in two directions. The first is, that the Fed lowered interest rates too much from 2001 to 2003, and waited too long to raise them again. The second criticism is aimed towards the Fed's lax regulatory role in the brewing problems of the subprime mortgage market.

I respectfully disagree with both points. I hate to say but I think Greenspan's libertarian approach is the right one when it comes to regulating markets.

The current crises is not the result of lack of regulation and not entirely the result of low interest rates ( although 1% did help) but rather of a culture of bailing out Wall Street and the moral hazard issues that come with it. It is the result of an unsustainable expansion of counterparty risks made possible by abandoning sensible risk management. This is the legacy of Alan Greenspan. By accusing him of lack of regulation or keeping interest rates too low after the 2001 recession we let him off too easy.

The real question we should ask is: Why does the Fed as the only central bank in the world still have a dual mandate of price stability and optimal growth? The dual mandate compromises the independence of the Fed and the outcome of that can bee observed in the current credit crises, which may or may not (for this time) topple our financial system and our economies.

The demise of Bear Sterns is probably the first bank in the history of capital markets that failed because of the sheer force of counterparty risks. It did not fail, as so many still believe, because of lack of capital or lack of liquidity.

the charade continues - click for video

source: His Legacy Tarnished, Greenspan Goes on Defensive

source: Greenspan 'Reputation Tarnishment' Tour Continues
Barry Ritholtz, Fusion IQ CEO

source: Greenspan setting the record straight
by Greg Ip and CNBC's Steve Lisman

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