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‘The Oracle’ was blind

Post by David Seago on Oct. 12, 2008 at 11:22 am |
October 12, 2008 11:22 am

TNT business columnist Dan Voelpel seems to assign a major share of the blame for today’s financial meltdown to the Clinton administration, judging from his column today.


That’s a far too simplistic view of the factors behind America’s greatest financial crisis since the Depression.


It is true that Congressional Democrats and perhaps the Clinton White House spurred Fannie Mae and Fannie Mac to help make home ownership more available to low-income Americans who, almost by definition, were poor credit risks.


The Wall Street Journal’s editorial page and other conservative critics have repeatedly blamed much of the subprime mortgage crisis on the actions of the two mortgage finance giants, explicitly fingering Democrats for causing today’s mess.


For a factual rebuttal, see this excellent McClatchy Newspapers analysis that appeared in the TNT’s print edition today. Bottom line:


Federal housing data reveal that the charges aren’t true, and the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.


In retirement, I’ve had time to absorb the daily coverage and commentary on the crisis from both The New York Times and the Journal as well as other news sources.


What strikes me is how seldom the conservative camp acknowledges that simple greed — or at best a heedless pursuit of greater profit, unchecked by adequate regulation — got us into this mess.



One of most striking stories of the past week was the Times’ front-page look at former Federal Reserve chairman Alan Greenspan’s culpability for today’s market woes.


Even the Journal now faults Greenspan — long revered by Wall Street — for keeping interest rates too low for too long, thereby fueling the housing bubble. But the Oct. 8 Times report shows how Greenspan used his considerable stature and clout to block regulation of the exploding market in derivatives.


The sudden collapse of the market in these complex and risky financial instruments triggered the current crisis. But there had been plenty of warnings about the dangers:


George Soros, the prominent financier, avoids using the financial contracts known as derivatives "because we don’t really understand how they work." Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential "hydrogen bombs."


And Warren E. Buffett presciently observed five years ago that derivatives were "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."



But Greenspan cheered them on, staunchly fending off calls for regulation.


"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so," Mr. Greenspan told the Senate Banking Committee in 2003. "We think it would be a mistake" to more deeply regulate the contracts, he added.


A year later, Greenspan, still worshipped as the oracle on the economy, declared that derivatives had largely tamed market risks:


"Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient."



Today, as his legacy of leadership looks more like ideological blindness, Greenspan insists that greed, not a lack of regulation, is to blame.


But the frailty of human nature is exactly why we need laws and regulations, speed limits and stop signs.


There is plenty of blame to go around for today’s global economic disaster. Greenspan was only one major culprit. Millions of Americans who unwisely bought homes they couldn’t afford or tapped their home equity to buy new cars and big-screen TVs should have known better.


But the truth is that the markets failed, and they failed because regulation was not strong enough to curb the excesses of the profit motive.


Capitalism isn’t dead, but it’s in intensive care. After the elections in November, our leaders in the White House and Congress are going to have to construct a new regulatory regime for the markets.


It would be a mistake to let the pendulum swing too far toward the “dead hand” of over-regulation. But now we’ve learned the hard way that slavishly following the gospel of free markets without somebody playing traffic cop is a sure path to disaster.


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