Friday, October 24, 2008

Greenspan's Flaw

Greenspan may be blamed for having too loose monetary policy, in particular choosing to target interest rates rather than money supply. And if this flaw is accepted as such, it would be large enough in its own right to tarnish the Fed Chairmanship of the man once called "Maestro".

But the much vaunted "ideological" flaw was the assumption of near perfect and/or complete information among financial institutions.

Financial institutions did quite a bit to compensate for this... insurance, credit rating agencies, put options, credit default swaps, securitization, etc. But it wasn't enough to compensate for fraud at the credit rating agencies, fraud at the mortgage origination level, and an asset class bubble inflated in large part by government policy, and certainly not enough to compensate for such things at ridiculously low levels of capital requirement as per the SEC's 2004 ruling.

And as bad as the mortgage situation is, over-leverage was bound to create a problem somewhere. It should come as no surprise that over-leverage found its way into a manipulated market, but were it not for that, some other asset would have become inflated. But then we're back -at least in part- to questions of monetary policy, Mr. Greenspan.

These assumptions, however flawed, were not about the basic nature of the game structure... the incentives... the punishments. Criticizing the nature of the game is a bridge too far, and to assume that changing the fundamental structure of the game will lead to better outcomes does not logically follow. Nor does it follow that just because the market participants have imperfect and incomplete information that the government has superior information. Anybody who has watched a House or Senate banking committee hearing (particularly in the last six months) should immediately grasp this concept.

The most useful models tend toward simplicity at the expense of perfect explanation. And in this, Greenspan was basically right, but he confused the idea of a brilliant and useful model with the reality before him.

1 comment:

Seven Star Hand said...

Hey Joe,

Understand clearly, that these leaders have, once again, been caught red-handed, with their pants down around their ankles, and their hands in the cookie-jar/till, colluding to exploit and deceive everyone and at a scale and scope that is absolutely mind-boggling. Furthermore, this model of civilization (money, politics, and religion) has repeatedly failed. Unlike past failures though, this one is global in scope and greatly compounded by massive international deception and rampant greed in the form of derivatives, other smoke and mirrors financial schemes (scams), and several layers of speculation. The same out-of-control "betting schemes" were also behind the skyrocketing oil prices of recent years.

The derivatives scams alone have grown to more than 10-times the entire global GDP (at last counting) and are now failing because the scam/pyramid scheme broke and exposed the deception for all to see. A significant portion of global wealth and power was created and propped-up using these and other now-proven smoke and mirrors and house of cards illusions and delusions. These deceptions have grown many times larger than the rest of the entire world economy. Consequently, there is no way that all of the world's governments combined, who themselves borrow so-called "money" from other central-bank smoke and mirror deceptions, can solve this debacle, by using more smoke and mirrors money scams. The only solutions they are offering will take centuries to repay, if ever.

So, why should all of humanity be forced to suffer and struggle any longer now that the entire global financial system has been exposed as a mind-boggling deception within many other deceptions? No one in their right mind would continue to be enslaved by a proven deception, which is also proven to be undeniable slavery-by-proxy !!!

Here is Wisdom...