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James K. Galbraith

Alan Greenspan recently penned a long paper on the crisis. Sixty-six pages, which I have read so that you don’t have to.

My response is just up on the National Journal Expert Blog :


Oh, Please

In 66 pages, Mr. Greenspan fails to use the word "responsibility" even once. The word "blame" does not appear. The word "mistake" occurs once ; financial firms made them. The word "failure" appears 14 times. None of them are self-referential. To have expected the phrase "mea culpa" would of course be asking too much.

I agree with the Chairman on two points. The first is his defense of the Federal Reserve against the charge of having violated the Taylor Rule. One of the few things more insufferable than this paper is that formula. Mr. Greenspan effectively rebuts the idea that low interest rates per se caused the crisis.

The second good point lies against the "global savings glut" argument. As Mr Greenspan says, "The main problem with that explanation is that there is no actual evidence of a global savings glut."

In view of this statement, Dr. Sawhill’s remark that the Chairman "lays most of the blame on a glut of global saving" seems odd. Well, the phrase quoted occurs on page 43. Perhaps Dr. Sawhill didn’t read that far.

The remaining noteworthy parts of this paper are substantially a meditation on two themes. The first consists of whatever reminders one can find that Chairman Greenspan really did foresee the crisis. Here he goes all the way back to his 1996 comment about irrational exuberance ! On the housing bubble, he writes that "almost all market participants of my acquaintance were aware of the growing risks." He quotes himself in the quiet sanctuary of the FOMC in 2002, that the "extraordinary housing boom... financed by very large increases in mortgage debt... cannot continue indefinitely."

So he did know. He wasn’t the innocent he made himself out to be, in October 2008, before Congress, when he said he was in a state of "shocked disbelief." Did he tell the public ? Did he get up on his incomparable soapbox ? Did he warn against the dangers of option ARMS with teaser rates ? He did not. On the contrary : he went on record encouraging their use.

The second main theme is that nothing could have been done. The whole thing started with the fall of the Soviet Union. It was global. It was a "hundred year flood." "The aftermath of the Lehman crisis traced out a startlingly larger negative tail than most anybody had earlier imagined." And even if they had tried, they would have done more harm than good :

"The complexity of our financial system in operation spawns, in any given week, many alleged pending crises that, in the event, never happen and innumerable allegations of financial misconduct. To examine each such possibility in the level of detail necessary to reach meaningful conclusions would require an examination force many multiples larger than those now in place in any of our banking regulatory agencies. Arguably, at such levels of examination, bank lending, and its necessary risk taking, would be impeded."

I’m sorry, but that’s garbage, in one word.

The most telling omission in this paper is that the word "fraud" does not appear. But the world knows that the collapse of the financial system had, at its core, the largest financial fraud of all time. That fraud was in the origination, the rating, the underwriting and the issuance of credit default swaps against sub-prime mortgages issued largely by private originators and securitized by the largest banks.

The world knows. The FBI knew it in 2004, when it warned in public of an "epidemic of mortgage fraud." When Fitch Ratings in 2007 undertook a small sample survey of "high CLTV, stated documentation loans" here’s what they found : "The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file." But Mr. Greenspan will not say the word aloud.

The Federal Reserve is a regulator. Alan Greenspan was the chief regulator for 18 years. He failed spectacularly. So did his colleagues, at the Office of Thrift Supervision and elsewhere. These facts are not obscured here. They are ignored.

I suppose the First Amendment applies to former Federal Reserve Chairmen attempting to cover their tracks. I wish it didn’t. At the very least, as a constitutional compromise, there might be a word limit.


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