online.wsj.com/article/SB1238112 … us_opinion
wsj seem to think so.
No, he’s going senile. He admits that the models for risk in the run up were all bullshit!
The reason Volcker was kicked out by Reagan and replaced by Greenspan was because Volcker was all for more financial regaulation and a tighter grip on Wall Street. Reagan (and Thatcher) had a different model in mind.
Greenspan was put in place because he was generally seen as someone who would let Wall Street police itself a bit more. Over the next 2 decades he happily oversaw 2 bubbles.
The fatal mistake he made was letting Wall Street run crazy. Regulators globally have capital ratios in place for banks such that they cant over-leverage themselves and have enough cushion for disasters. Wall Street found ways to ‘arbitrage’ the system and the rating agencies. The boom we have seen in the last 10 years would have been a hell of alot less boomier if it wasnt for the credit derivatives market allowing the AIGs of this world to take alot of notional risk off global banks books, thus allowing them to go a head and lend more and more.
Its a zero sum game though…If the banking system off loads the risk, then it must reside somewhere else. What regulators missed though was that this somewhere else was not regulated in the same way banks were. Somehow, the risk just disappeared?!?..Until of course it didnt and AIG needs a 160bln$ bailout or else 10 years of Wall Street hiding risk somewhere else would have come back to bite them overnight. A nightmare thought to say the least
Then there is the rating agencies. Wall Street again was too smart for these guys. The rating agencies put ratings on very complex risk using very simple methodoligies. Wall Street knew the methodologies so they just came up with structures that maximised the return per unit of rating, so to speak. As such a basket of BBB bonds could instantly become AAA and voila another pile of risk just evaporates into thin air.
A 10% capital requirement allows banks to lend 9$ for every 1$ deposited. If somehow Wall Street manages to make it “look like” the system has a 10% capital cushion, while in reality its only 5%, well we have 10 years of hyper credit growth and a boom like we have never seen before.
If Greenspan had managed to keep Wall Street “honest” things would never have gotten out of hand as the banking system wouldnt have had the ability to create as much money out of nothing as they did
Every bubble is justified with a “new paradigm” argument…The internet will change the world, The glut of petrodollars and Asian Savings needing a home etc
The reality is that this glut of liquidity (which was most often used as justification for the recent bubble), wasn’t a real justification for borrowing way beyond our needs, it was in reality a booming 85$trillion Credit derivative market turning the traditional banking model on its head and into something that could suddenly create three times as much credit as before without regulators noticing what was going on
To regulators, banks appeared as well capitalised as they had always been…now they realise they weren’t
I don’t think it’s possible to pin this on a particular individual or organisation but not being wholly responsible doesn’t mean one is absolved.
Low interest rates were a contributer. Letting high street banks act as investment banks was a contributer. Letting debt be sold was a contributer. Bonuses which incentivised short term gains at the expense of risk management and overall health were a contributer. You don’t get a financial failure on this scale without multiple simultaneous disasters.
On the political side the Republicans in the US seem confused. They want to simultaneously “blame America” and accuse the Democratic party of causing this entire mess while somehow also vindicating their own ideology since they were in charge throughout most of this mess.