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Investing and Economics Blog

Greenspan Says He Was Wrong On Regulation

Greenspan Says He Was Wrong On Regulation

Greenspan alternately defended his legacy and acknowledged mistakes. Waxman asked whether the former chairman was wrong to consistently oppose regulating the multitrillion dollar derivative market that has contributed to the financial crisis. “Well, partially,” said Greenspan, before stressing the difference between credit-default swaps and other types of derivatives.
…
Even Greenspan seemed genuinely perplexed yesterday by all that had happened, hard-pressed to explain how formerly fundamental truths about how markets work could have proved so wrong.
…
“When bubbles cause huge problems is when they cause the financial sector to seize up,” said Frederic S. Mishkin, a Columbia University economist and, until recently, Fed governor. “The right way to deal with that kind of bubble is not with monetary policy,” but with bank supervision and other regulatory powers.
…
While endorsing some expanded regulation yesterday, such as requiring the companies that combine large numbers of loans into securities to hold on to significant numbers of those securities, he also repeatedly retreated to his libertarian-leaning roots, and warned of the dangers of overreacting.
…
“I made a mistake,” Greenspan said, “in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”

The key is to strive for properly functioning markets. Unfortunately that does not mean allowing those that give large payments to politicians to foist huge risks on the economy by exempting themselves from sensible regulation. I guess some people get confused that the benefits of “free markets” are not the same as standing back and allowing powerful interests to manipulate markets and risk economies. The benefits of a free market are provided to the economy when the market is free not when large, powerful organizations are allowed to exert undue influence on markets.

I don’t really understand how people could think “free markets” are about letting special interests be free to manipulate markets. It is not really something that should be confusing to people that have thought enough to have an opinion on the benefits of free markets. The dangers of monopolies and business people conspiring to extract benefit (for those in the cartel, trust, conspiracy…) by manipulating the market was well know from the initial minds putting together capitalist theory. And the obvious method to allow the benefits of the free market to be maintained was regulation to prevent those that sought to manipulate the market for their benefit.

And the dangers of overly leveraged financial institutions should be obvious to anyone with a modicum of understanding of financial history. Then make those overly leveraged financial institutions large (too be to fail) types and you really are asking for disaster. Add in a extremely large use of debt by the public and private sectors (living beyond your means). Then throw in encouraging reckless short term thinking by providing enormous cash bonuses for paper potential profits and you really have to wonder how anyone could think this was not a perfect design to assure a financial meltdown.

Related: Too Big to Fail, Too Big to Exist – Fed to Loan AIG $85 Billion in Rescue – 2nd Largest Bank Failure in USA History

October 24th, 2008 John Hunter | 2 Comments | Tags: Economics

Comments

2 Comments so far

  1. CuriousCat: What Does That Say About the Field of Economics? on November 11, 2008 12:00 pm

    there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?
    Dr. Galbraith: Ten or 12 would be closer than two or three…

  2. There is No Invisible Hand at Curious Cat Economics Blog on March 20, 2009 10:56 am

    That such models prevailed, especially in America’s graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science…

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