SeriousBull

Greenspan still pushing “Fedspeak.” This time to clear his name.

Tags: Fed + Ginnie Mae + Greenspan + housing + Reform + Treasury

Former Federal Reserve Chairman Alan Greenspan is on a road trip to defend himself as not being responsible for the current financial crisis. In a recent Fortune e-zine broadcast interview he argued that the housing bubble was a crisis waiting to happen; that we have been through this type of event

innumerable times over the centuries. In a Financial Times article this week he argued that bad decisions by investment banks caused the sub-prime problem.  In a  Wall Street Journal article he argued that the dramatic rate cuts to 1% from 6.5% were necessary to spur growth and prevent deflation on the horizon at the time (2004).  And on CNBC yesterday he argued something akin to ‘we tried our best’ saying that during his last years at the Fed they tried to reel in the housing sector by raising interest rates, but were unsuccessful each time it tried to raise long-term interest rates because the Fed had lost control over long term rates.  How about an examination of the facts to make a determination?  Let’s list them:

• We have a global financial crisis caused by the US
• Excessive Sub-prime loans and mortgage-backed guarantees were made by banks and other financial institutions and sold to investors including, mutual funds, pension funds, and sovereign governments. 
• Derivative contracts and off-balance sheet entities were used by banks and brokers to leverage their earnings
• Greenspan counseled Congress not to regulate Hedge funds or Derivative securities and to scrap the Glass Steagall Act that bifurcated lending from speculation
• The Federal Reserve is charged with the responsibility to safeguard the US Banking system and has direct oversight responsibility for federally chartered banks and mortgage companies
• In 2001-2003 the Fed raised interest rates arguing that inflationary (not deflationary) pressures and increases in productivity necessitated the rate hikes
• The FOMC made an emergency rate cut from 6.5% to 1% after the financial markets corrected and the economy dramatically slowed under the weight of rising energy prices and the Fed’s rate hikes
• Neither the Federal Reserve, the Comptroller, nor FDIC took appropriate action to increase capital reserve deposit ratios or curtail speculative lending practices that perpetuated the current credit crisis
• Mum’s the official word on Ginnie Mae’s losses related to the sub-prime debacle
• Greenspan deliberately confused Congress in his testimony before them to mask the Fed’s policy intentions
• By the end of the Greenspan’s term, the US government recognized the probability of dire financial consequence as they sought out a Depression era expert (Bernanke) to head the Fed

What can not be explained away as “global forces” are the inherent, structural conflicts of interests between the Federal Reserve and their constituent banks. The Fed consistently views its role as helping banks grow and make profits and bailing them out when they fail. There is little historical evidence of effective regulatory oversight and certainly no empirical data to rely upon that the Fed has, or would ever, notice that rising Risks are confronting the financial system. Neither is their evidence that the Fed has ever taken preemptive corrective action to keep the system solvent before a crisis was actually upon us. Evidence abounds of their emergency, hindsight, reactionary initiatives–Long Term Capital Mgmt, Telecom meltdown of late 90’s, current Housing debacle to name a few that occurred under Maestro Greenspan.  The problem is that the Fed perpetuates more of the same having never acted in any way other than to protect their constituent banks while the US taxpayer and shareholders pay for the frauds and costs.

No the Maestro is not without blemish and blame.  Greenspan failed in his department’s responsibility to curtail excess speculation contributing to unsound banking practices. Greenspan advocated loose controls when confronted with greater financial instrument complexity. And he personally failed to correctly, and perhaps honestly, inform Congress on matters as general as whether the US faced Inflationary or Deflationary pressures, and as specifically as the need for regulation of new derivative security risk in the financial system.  We can not accept his latest defensive argument that he still believes that the markets are the best mechanism to correct excesses as he is on record for targeting the stock market boom of the 1990’s both with his infamous “Irrational Exuberance” speech and by his ill-timed interest rate hikes tied to his Inflationary pressures testimony in Congress back in 2000-2003.  Because it is obvious that Greenspan’s arguments to assist banks in broadening their operating leverage was intended to benefit banks so that they could compete with investment brokers for greater profits, we must now ask to see any evidence of risk management at the Fed and ask if the Fed’s banking policy making didn’t confront it with a conflict of interest with its constituent banks.  In fact, Greenspan had a direct responsibility to  disclose this potential and inherent conflict of interest at the Fed and not to disguise his testimony as impartial using his “Fedspeak” to win one for the banks at the risk and costs (easily anticipated if you’re job is oversight) to the financial system we now bear.

Indeed the Justice Department and the Congress need investigate this structural deficiency and conflict of interest at the Fed and pass judgement on whether there was only an overlooked structural deficiency with regulator incompetence, or an intent to deceive for profit. It will not due to simply move around the chairs and change a few of the players as Treasury Secretary Paulson has called for in his recent reform of the financial system. For just as we have seen in the private sector, the public sector is also ripe with greed and self-interest and this blemish must be investigated and purged to re-establish faith and credibility in the US financial system.                                                                                    

As for history’s judgement of Maestro Greenspan it is time to review the record and the facts. No doubt an impartial review will credit him with steering the US economy through some difficult times by virtue of the confidence he held, but also judge his counsel to the Congress at best short-sighted for his view that the new risks of complex financial securities should go unregulated and record the Fed’s oversight during his tenure as sorely deficient. Finally, we should not let his current ‘Fedspeak’ to clear his name dissuade from reforming the US financial system and leaving a structurally flawed, inherently conflicted system in place. Doing so will only doom us to future failures of the past.   

April 9, 2008 - Economy, Politics