Sage of Wall Street gets it wrong … again
March 18th, 2008
ALAN Greenspan, a man who was described as a “bigger threat to the US economy than Osama bin Laden” during his Fed years and now increasingly regarded as the architect of the sub-prime crisis that could tip us into global recession, certainly has quite a cheek.
In an article published in Monday’s FT (“We will never have a perfect model of risk“) Greenspan showed no remorse for the mayhem that he helped create during his period as Fed chairman. Nor did he offer any workable solutions to get us out of the deepening financial crisis that has engulfed financial markets.
The critical issue here is whether self-regulation can survive at a time of unlimited state hand-outs to the failures of Wall Street. First, you have to remember that the US bank JP Morgan Chase is not buying its collapsed rival, Bear Sterns, out of altruism or a noble desire to preserve the capitalist system.
No.
- The bank founded by John Pierpont Morgan is buying Bear Sterns because it can – it is snapping up a bank whose market capitalisation reached $25bn in January 2007 for a mere $236m and;
- It only agreed to take on the Bear because the Federal Reserve offered to guarantee $30 billion of the failed bank’s riskiest assets.
Despite these facts, Greenspan seems oblivious to the “moral hazard” (this is, the notion that implicit government guarantees and knowledge of the existence of unlimited government bail-outs might distort bankers’ behaviour, promoting recklessness among banks and other financial players) involved in this and related deals. In his FT article, Wall Street’s erstwhile oracle wrote:
“I hope that one of the casualties will not be reliance on counter-party surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance.”
To me, this is a wild hope. Unlimited state hand-outs to failed banks and other enterprises can never — never — go hand in hand with continuing self-regulation. Just think about it.
The FT’s Washington columnist, Clive Crook, put it rather succinctly in his blog yesterday:
The real lesson of this crisis is that the authorities will do anything—at any cost to taxpayers—to shore up a financial system on the point of being wrecked by greed and incompetence. For the sake of minimising the harm to innocent bystanders, they may very well be right to take that view. But the quid pro quo is stricter regulation. Implicit uncapped guarantees plus “self-regulation” is a formula for the very disaster that is now unfolding.
Short URL: https://www.ianfraser.org/?p=485
Posted by Ian Fraser
on Mar 18 2008. Filed under Blog.
You can follow any responses to this entry through the RSS 2.0.
You can leave a response or trackback to this entry