07/09/09 New York, NY There are so many players responsible for the housing boom and bust, the credit crisis, and the financial collapse that it is difficult to blame any one person–it is a broadly shared culpability.
There are many who were rooting for the blame to be assessed to a given political party, a particular player, or a specific act of malfeasance. In reality, the situation is far more complex. The responsibility is widespread, and there is plenty of shared blame. Joseph Stiglitz, the Nobel Prize–winning professor of economics at Columbia University, called it a “system failure”—not merely one bad decision, but a cascade of many decisions that produced tragic results.
The recklessness and incompetence seemed to be a team effort. With no single villain and so much blame to go around, I fear missing some person or event that significantly contributed to the mess now enveloping the global economy.
That does not mean we cannot attempt to highlight those whose contributions have disproportionately led to the final catastrophe. After exhaustively reviewing this debacle, I assess responsibility in order of culpability as follows:
Many of the monetary and regulatory errors that directly led to the present crisis are attributable to the man they once called the Maestro. Under the guidance of Alan Greenspan, the Federal Reserve abused monetary policy, ignored critical lending issues, and failed to regulate new and irresponsible banking products.
Several of Greenspan’s policies proved to be wildly misguided: the regular interventions to protect asset prices and bail out investors, the irresponsibly low rates after the post-2000 crash, and his nonfeasance in supervising lending. Most of all, it was his deeply held philosophical conviction that all regulations are bad, and are to be avoided at all cost. We now know what that cost is, and it’s astronomical.
Alan Greenspan had spent his years at the Fed operating under an enormous philosophical misconception, as the former Fed chairman admitted in testimony before Congress on October 22, 2008: “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such as that they were capable of protecting their own shareholders.”
Based on Greenspan’s worldview, the events of the present crisis and many others that occurred over the past decade were impossible, given that the so-called wisdom of the free markets would prevent them. Only they did occur. Greenspan’s faith was wildly misplaced, and the taxpayers are that much poorer for it. If we have to put our finger on the single intellectual flaw that underlies the housing collapse, the credit crisis, the economic recession, and the problems with toxic paper, it would be a misplaced belief that markets could self-regulate. One is reminded of the Benjamin Disraeli quote: “He was distinguished for ignorance; for he had only one idea, and that was wrong.”
Given how enamored Greenspan was of free markets, it is increasingly difficult to reconcile many of the actions he undertook. The very concept of the champion of free markets repeatedly intervening in their inner workings is a contradiction of enormous proportions. It is a catch-22 worthy of Joseph Heller.
It is beyond my capacity to decipher how Greenspan justified his internal conflicts, but at least he later admitted that his primary philosophy “had a flaw.” Unfortunately, his flawed economic belief system colored nearly every policy he enacted as Federal Reserve chairman. Most of today’s crises trace their roots in part to his policies.
In 1836, Mayer Rothschild wrote, “Give me control of a nation’s money, and I care not who makes the laws.” If only that prescient warning had been heeded by the Federal Reserve. It might also serve as an admonition for Ben Bernanke, the current Fed chief.
The Greenspan era lasted 20 years (1987 to 2006). The Federal Open Market Committee (FOMC) must take responsibility for following him so obsequiously, especially in the latter years of his reign. Exceptions include Edward Gramlich, whose timely warnings about subprime and early concern with predatory lending were on target and ignored. So, too, William Poole deserves credit for his many cautionary warnings about the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. To our chagrin, neither man was paid much heed by Greenspan or the FOMC.
The single biggest fault found within the Fed is its inability to fulfill its responsibilities as bank regulator. The Fed not only failed to supervise lending institutions, but it also ignored the most significant shift in lending standards in the history of human finance. The results were disastrous.
The Fed, as an institution, failed the nation. It directly encouraged mass speculation. It failed to supervise innovative new forms of lending. The inflationary spiral that sent oil soaring from $16 in 2001 to $147 per barrel seven years later, along with other commodity and food prices, is attributable to its radical rate-cutting regime.
The current chairman, Ben Bernanke, deserves partial blame for the Fed’s slumber during this inflationary spike. A renowned student of the Great Depression, it was then Fed Governor Bernanke who raised warning flags about deflation after the tech bubble burst. He provided the framework and intellectual cover for Greenspan’s ultra-easy money circa 2001 to 2003.
As Fed chair, Bernanke was terribly slow to realize the subprime mortgage crisis was anything but “contained.” By the time he did awaken to the crisis in August 2007, he responded with a series of programs that pushed the envelope of legality, dramatically expanded the Fed’s balance sheet, and put the central bank’s credibility at risk.
Of all the institutions that played a part in the current crisis, none had a more prominent role than the Federal Reserve.
The first telegraph message ever sent, “What hath God wrought,” reflected Samuel Morse’s deep concern for the repercussions of his own actions. If only Phil Gramm were so similarly introspective.
While Congress deserves much blame for the crisis, no one elected official looms larger in our drama than Gramm. He was the senator behind the Commodity Futures Modernization Act of 2000 (CFMA), and spearheaded the repeal of Glass-Steagall. The legislation that overturned it bears his name (Gramm-Leach-Bliley Act).Both legislative acts were WMDs—weapons of monetary destruction. These time bombs eventually led to mass financial destruction.
Barbara Roper, director of investor protection for the Consumer Federation of America, said: “Since the financial meltdown, people have been asking, ‘Where was Congress? Why didn’t they see this coming? Why didn’t they provide better oversight?’” We now know the answer is that members of Congress were too busy pursuing a radical deregulatory agenda. Instead of protecting investors and defending the overall economic system, their misplaced concern was how to make life easier for Wall Street.
During the late-1990s era of deregulatory dogma, the GOP controlled the House and Senate, and Gramm was the point man on issues of deregulation. The Texas Republican was aided in his deregulatory quest in part by Senator Chuck Schumer, a New York Democrat. Perhaps Schumer represented the interests of New York’s Wall Street too well.
To this day, Gramm still claims deregulation had no impact on the housing collapse or the credit crisis. The exempting of derivatives from all regulation—including state insurance supervision, reserve requirements, or clearing information—was not at all related to the eventual problems, according to Gramm. He remains unrepentant as to his impact. Placing any blame on deregulation was simply “an emerging myth,” the retired Texas senator has said. Deregulation “played virtually no role” in the economic turmoil engulfing the globe, Gramm claimed in November 2008.
What shameless nonsense. You will not come across a greater example of cognitive dissonance in your lifetime. Gramm’s inability to recognize the results of his legislative handiwork is a function of a flawed mind protecting itself from the harsh reality. The inconsistency of his deeply held philosophy and the results thereof are logically incomprehensible to Gramm’s conflicted brain. If he were ever to admit the truth, he would likely go stark, raving mad.
I’ll give Alan Greenspan this much credit: At least he has come clean about the “flaw” in his philosophy. Gramm, by contrast, remains committed to his tainted brand of unregulated, free-market absolutism. Of all the players in the tragic drama that has unfolded, he alone remains unrepentant. Gramm is Bailout Nation’s most intellectually bankrupt citizen. Like Greenspan, Gramm had only one idea; unlike Greenspan, he had no comprehension it was wrong.
Barry Ritholtz
for The Daily Reckoning
Barry Ritholtz
Barry Ritholtz is author of Bailout Nation (Wiley), publisher and editor of The Big Picture , and CEO and director of equity research at FusionIQ , a quantitative research firm that provides web-based software services to individual investors and traders. Ritholtz makes frequent TV & Radio appearances, including Bloomberg, CNBC, CNN, Fox and PBS. He is regularly quoted in the New York Times, Wall Street Journal, Barron's, Forbes, TheStreet.com, and other media. At the moment, he has his eye on a 28-foot Doral Venezio and a 1968 230 SL.
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This is the first time I have read anything by this author, and it will be my last. In my opinion, it is pure political propaganda. It wasn’t the Democrats who said, “Deficits don’t matter.” The Republicans led and pushed the country and world into financial disaster with a long string of failures and incompetent leadership! Is there any traditional principle of the Republican Party Bush and Company didn’t violate?!!!!
Get your head out of the sand and let’s rebuild the Republican Party along the lines of common sense again!
The “market” certainly has a way of regulating itself. It’s called bankruptcy. If these bloodsuckers and hucksters were allowed to go under as they deserve this country could possibly already be on the way to recovery. Of course this cleansing could and should have happened in the past.
I find it difficult to believe that the author of “Bailout Nation” could have written such a naive piece.
There hasn’t been anything even vaguely resembling a free market in the United States for a long time. Even before the meltdown, government intervention in the economy was both systemic and pervasive: minimum wages laws, discrimination laws, tends of thousands of pages of regulations, Fannie Mae and Freddie Mac, a fiat currency, legal tender laws, et. al.
(Now, in the wake of the meltdown, the financial and housing markets have been nationalized in all but name, along with a significant portion of the auto industry!)
Did the Republicans’ fiddling with the Jenga-esque monstrosity of financial regulations contribute to the meltdown? Absolutely. But the bubble and subsequent meltdown would have occurred anyway, because all that new money that the Fed was creating had to go somewhere. And since there’s a huge revolving door between Wall Street and government, all the big firms that took insane risks knew that when it all burned down, their buddies in government would bail them out.
The foundation of the U.S. economy rests not on the free market, but on central planning and fiat money. And as history has shown again and again and again, central planning and fiat money are the true, ultimate WMDs: all fiat currencies are destroyed by their own governments, and all attempts at central planning end in complete disaster.
So let’s place the ultimate blame squarely on who most deserves it: the government. It was the root of all the evils that arose.
There is no chance of any lasting economic recovery until currency is returned to the people and the economy is returned to the markets.
(Check out campaignforliberty.com and mises.org for more info.)
Quite an interesting read however my view is that this was always going to happen with a fiat currency. Greenspan just accelerated the process that was going to happen no matter what.
The market is correcting Mr. Greenspan’s mistakes. It doesn’t need any help. If Long Term Capital had been allowed to go bankrupt we would not have these problems with swaps today.
Greenspan’s protestations that he was mistaken in presuming that the bank’s (et.al.) self-interest would cause them to protect their, and their shareholders, interests has always seemed a bit lame to me. In fact, very lame, to the point of just being untrue.
Was he unaware of the stupid manipulation of the entire housing market by the GSE’and their Wall Street analogs. How could he have been?
The CFMAof 2000, and it creators and he who signed it into law, are certainly at the core of this also. Without the Act I believe there would have been no Credit Default Swaps, no ability for the destructive manipulation that occurred, and probably a far lesser current disaster.
Greenspan’s conduct at the Fed seems just to have provided the necessary monetary subsidy for the entire enterprise to happen. And, the entire enterprise was public policy, brought to us by the elected branches of government.
Why did the Fed not exercise appropriate monetary control, or perhaps appropriate regulatory control, to protect the nation and its citizens from the predations of the political class?? The world wonders.
The Bilderbergers have stated what they wish to do with the World’s economy such as destroy the US dollar. Alan Greenspan is is part of the group as many other well known prople. Do they wish to help the country and public….not likely…..ask yourself, where would their alegiance be? Barack Obama sometimes hangs out with the Bilders, where does his alegiance hang? These people must be brought out as to who they support….so far, it is not the public!
The Bilders, all 130 of them, want us dead!
Barry.
What happend to the gold standard, until the Government stops printing money they don’t have value to back up, we are headed for disaster, If my business does not have money to operate, I stop until I get it, I cannot print my money to keep operating and neither can the Government, AND, all the money they are spending is truly the tax payers money and we get back to the old saying, taxation without representation, check out your history and see what happend because of this, I think the same drastic measure should apply today, if the people don’t speak up and take back our GOVERNMENT, there will be no Government to take back, we are working our lives away and our money is being spent on someone else, I believe in the old adage- no work- no eat, every person must carry their own load, no one owes you a free ride. in every family on welfare, there is at least one person able to work and take care of the family, we have three and four generations on welfare, stop this and you stop the cause of much of our money problems, protect the working people who protect and keep America going, if every worker in America stopped working for one week, where would the Government get all its money to blow on worthless projects and businesses, its up to every working American to speak up and protect our freedoms and money, no where in our constitution does it say the Government has the right to take our money without our approval and bail out banks that caused the problem in the first place, Obama and his demmies are destroying America and its tax payers, when social security was first implimentd, it had to be used for social security only, guess who voted to change this, the Demmies, it has taken me 64 years to figure out what the demmies were doing with my hard earned tax money, I changed parties, I cannot afford to be a demmie any longer
Barry is like a lot of smart people on the left – they can identify the bankers as villains, and even the Fed chairman in some cases, but it never gets through their heads that what just happened was NOT the result of “deregulation” (more like mal-regulation) of any kind of “free market”.
Great article. Deregulation and lack of the right regulation were the culprits that allowed Wall Street to go berserk.