Greenspan, chastened
Today the New York Times reports that Greenspan Concedes Flaws in His Deregulatory Approach. His solution for dealing with financial regulation going forward?
...companies selling mortgage-backed securities [should] be required to hold a significant number themselves.
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1. Did Congress never ask Greenspan about his opinion?
If anyone had answered “I presume that the self-interest of organizations, specifically banks and others, is such that they are capable of protecting their own shareholders” we would never ever dream of appointing said person to anything that has to do with banking regulations… since that would just be a waste of money. Now since this is what Alan Greenspan tells us he always believed does this imply that in their confirmation hearings the US Congress never asked him about his views? Can Bernanke be hurriedly recalled to Congress for a brief follow-up question?
The saddest part of the story though is that had only Alan Greenspan regulated according to his beliefs, he would never ever have imposed upon the banks the opinions of some few credit rating agencies, and these agencies would therefore never ever have been officially empowered as the supreme risk guides, and therefore they would never ever have been so much enabled to have so much of the market follow them over the subprime precipice.
2. At most, what now collapsed was an intellectual hut.
Alan Greenspan, one of our current generation of bank regulators, one of those who gave in to the idea of the minimum bank capital requirements based on risk of default assessments and the empowerment of the credit rating agencies as the supreme risk assessors, should have known that, sooner or later, this regulatory mishmash had to lead the world over a precipice of new and unknown systemic risks.
In the hearings before Congress of October 23 on the financial crisis and the role of the regulators Greenspan explained that: “The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.”
That explanation, the old “garbage-in garbage-out” points to no intellectual edifice, at the most to an intellectual hut.
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