Tuesday, October 14, 2008


so a friend sent me this article... and i responded...

the rising tide of capitalism occasionally sinks a few boats.


no seriously though, greenspan was a good fed chairman. its easy to look back once things go wrong. greenspans love for the market probably made him an overall better fed chairman than he would have been otherwise (all other things equal). thats impossible to say conclusively (as is the reverse) because wed have to know the hypothetical of what the world would look like if greenspan were instead someone with a different ideological framework... and we cant know that.

ill admit he had it wrong on some of the derivatives, but so did a lot of people. its important to remember that although he obviously does have significant influence by virtue of his stature, regulating derivatives is ultimately not part of the fed charimans job description. in fact i might even be willing to admit that were i to learn about some of these crazy derivatives during the bull market, i probably wouldve been impressed by the various financial innovators' "skills of an artist." (-strongbad. "look it up, dummy." (-max stone, rebel extreme trillionaire.)) and although the derivatives are a huge part of the current crisis, that doesnt mean they shouldnt exist. the preponderance of evidence suggests they need regulation and oversight. and im ok with that. as ive said in the past, theres a vas deferens between centralized government control or planning and the intelligent delineation of property rights. the former is tyrrany, while the latter includes civil and common law and administrative regulation, which doesnt necessarily involve the government siezing or controlling any property.

heres a good illustration of this... take the difference between a carbon tax and a cap and trade system. while a carbon tax is essentially the moral equivalent to the government demanding payment for the use of air (a de facto claim of ownership), a cap and trade system is simply a delineation of property rights that says this air (the amount below the cap) is henceforth considered property that the market is free to trade or consume or save or whatever. (this is kind of a weak argument but itll work for now.)

that doesnt mean regulation cant sometimes be a trojan horse for government control, but it can also be an intelligent reassessment of property rights. for example, at what points will we recognize debt as property? how many times can it be securitized? can it be repackaged 100 times? how about 10? how about 2 or 3? can i obtain a credit default swap without a specific credit issuance disclosed, or will the law choose to regard credit default swaps as by definition having an identifiable counterparty? or will the law choose to disregard credit default swaps altogether and refuse to enforce them, rendering them a de facto unrecognized type of property? (or more accurately, and unrecognized property relation, right, or contract.)

ok you get it. intelligent regulation is a ok. (for example, a contract for slavery will not be recognized but a contract for labor will.) but blaming greenspan? eh. sure he was part of it, but theres blame to go around. from irresponsible borrowers to disinterested mortgage brokers to banks who bundled the mortgages to investment banks in the secondary mortgage markets that bought the bundles to insurers (or credit swappers) who didnt know what they were insuring because credit rating agencies didnt know what they were rating to people like our parents who thought real estate was an indestructible bubble to courts who recognized crazy derivatives with unknown counterparties to lawmakers and policymakers who ignored it all in the bull markets and turned to populist fingerpointing (blame wall st!) when the bull market turned bear. (bare?)

i once wrote this about patrick bond's looting africa: the economics of exploitation...

I disagree with Bond's characterization of the international power relations regarding Africa. Though a certain degree of cynicism is warranted by Africa's unfortunate position, I believe Bond makes a mistake that I myself am often tempted to make. No one wants to believe that the outcome of so many international institutions' well intentioned efforts could be so disappointing, and no one wants to believe that our good will alone is simply not enough to repair Africa. That would entail accepting some degree of responsibility for Africa's current condition and thus some degree of blame. It's much easier to blame some identifiable (or often unidentifiable) malicious entity as the culprit in "looting" Africa, perhaps understandably so. I don't mean to imply that Africa has never suffered at the hands of another's agency, the scars of slavery and colonialism are all too apparent, but Bond's characterization of a continued and deliberate exploitation of Africa by (well intentioned) actors is neither true nor helpful.

its always easier and simpler to blame someone than to accept that (given the perspective of compounding mistakes and misperceptions,) sometimes the outcome of many benign actors' efforts can be disasterously disappointing. its important to remember that now more than ever.

et la réponse...

greenspan def. has to take a lot of the blame, obviously, something so complex cannot be the fault of just one person or even just one institution but alan is at the root of the problem.

for one thing, greenspan cut rates to 1% and left them there for far too long, as the fed has done in the past (slow to react) that was a key part of this whole disaster. next obviously is the bundling and then re-bundling of mortgages that removed risk at every step of the way. finally it was fierce competition in lending, fueled by a mad desire to run up profits, that gave us no doc, no money down, neg amortization, arm loans that eventually burst the r/e bubble.

the fed does and can regulate banks and other lenders and force upon them stricter lending standards like verifying income or requiring a d/p etc, which many lenders are now self-imposing for obvious reason. greenspan could have and should have increased rates sooner and sharper, further weeding out those who shouldnt be buying houses to begin with. none of this happened and it is b.c so many of the richest and most powerful players in this game believe govt and regulation are bad b.c the stifle and slow growth and that the less of each the better.

the only problem is that the market is irrational, and individuals and corporations are inherently greedy and driven by their greed they will ALWAYS, make decisions to satisfy their greedy inclinations (read increase profits, drive revenues, grow the balance sheet, or whatever other fancy jargon they are peddling these days) and this b.s about the invisible hand is something rich people made up to prevent agents of social justice from reigning in their money printing machines and from clamping down on them and their ability to enrich themselves.

and this is not me looking back and playing monday morning quarter back, i was saying this exact same stuff when i was working at wachovia 2-3 years ago, it was glaringly obvious to me that this was a house of cards built on a myth about as real as the tooth fairy... it was very easy to see this coming, the problem is that all the "smart" people who should have known better were too busy reveling in the glory of their free market solves all problems ideology was finally paying off and no one wanted to rain on the parade.