Greenspan: Free Market Ideology Flawed
By Justin Gardner | Related entries in 2008 Election, Economy, History, Money
Is this stunning? Not really. I mean, it’s not like Greenspan has claimed the free market ideology is flawless.
However…
This admission by one of the biggest players in the Milton Friedman camp is certainly welcome, especially after years of them shunning any sort of regulations because they were deemed unhealthy for the market.
“Yes, I found a flaw,” Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. “That is precisely the reason I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well.”Greenspan said he was “partially” wrong in opposing regulation of derivatives and acknowledged that financial institutions didn’t protect shareholders and investments as well as he expected.
“We cannot expect perfection in any area where forecasting is required,” he said. “We have to do our best but not expect infallibility or omniscience.”
So, is the “freer” market era over? Are we moving into a different territory now where government intervention in the markets is the rule, not the exception?
What say you?
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October 23rd, 2008 at 1:34 pm
More? Of course. How much more? Who knows. Some sort of fundamental shift? I doubt it.
The big thing Greenspan said he was shocked by was that he always felt that banks’ management responsibility to shareholders was always sufficient to ensure that management would seriously, carefully, and fairly accurately measure risk exposure and investment soundness, but this episode showed circumstances where it was grossly insufficient.
What might this lead to? One thing is more tying of top management compensation to company performance. That can’t possibly be a bad thing, I don’t think. Do we need regulations for this? Quite possibly not, but it sure wouldn’t trouble me to see limits. Another thing it could lead to a return to requirements that certain classes of banks stick to more prosaic (simply understood, IOW) types of investments.
Another thing Greenspan mentioned was that he had fought for (and lost) regulations requiring the originators of risk to keep ownership of some fairly substantial portion of the risk. In other words, if the people issuing and packaging subprime loans had been required to remain exposed to the much of the downside risk instead of selling most of it off, things might have turned out differently.
Being an outsider with very little understanding of the details of such matters, my opinion is not worth much. But as a layman, I think this area in particular sounds like one where we’ll see future regulatory efforts concentrate. I think we’ll see regulations requiring derivative packagers to keep very substantial stakes in the schemes they cook up, and we’ll probably also see investment rating firms get SERIOUS scrutiny.
October 23rd, 2008 at 1:58 pm
I think one of the most fundamental problems as far as a functioning free market goes is the general focus in our culture (including business and politics) on the short term and immediate gratification. A lot of the excesses in the market that we’ve seen have grown out of attempts to maximize the short term gain, and then I guess just hope that the future will somehow work itself out.
While the government can’t force people to think long term (although I do think good leaders can slowly influence how others think about things), I certainly think it’s appropriate for parts of government to ensure that the more significant parts of our economy and industry retain at least some basic long term fundamental strengths. The banking sector is the obvious story right now, as we’re all realizing just how dependent we are on the actions of others. But other industries need some babysitting as well. Utilities and communication companies are another place where it’s very important.
October 23rd, 2008 at 2:22 pm
man, that guy looks like Golem with glasses.
October 23rd, 2008 at 2:38 pm
“Rrrrregulaaaaate, my Precioussssssss….”
October 23rd, 2008 at 3:10 pm
kranky kritter: “What might this lead to? One thing is more tying of top management compensation to company performance. That can’t possibly be a bad thing, I don’t think.”
Not to take issue with the rest of your post, but that is exactly the huge incentive for execs to find ways to cook the books in various ways.
“Ooh! Look! We made our financial goals again!” *nudge* *nudge* Followed by the bonuses and/or better stock option valuations and other rewards for cooking the books.
Sarbanes-Oxley was supposed to address this to the extent it addresses what happened with Enron. It isn’t the sole cause by any stretch, but I also think there’s a healthy helping of this company-performance-based incentive compensation involved in the current credit crisis as well. I’m not saying there’s a simple solution. I have no idea what the answer is.
October 28th, 2008 at 11:42 pm
I believe that Congress was looking for a scapegoat in the financial crisis and Greenspan was it. In a free market, regulation is not an appropriate deterrent to financial failure – failure itself is.
Personally, I would like to see less government regulation and not more, but regardless of who our next president is, I doubt that is where we are heading.
By the way, I can’t stop laughing about the Golem comment. It’s true!