A Response to Mr. Greenspan's Comments to His Critics
Former Chairman of the Federal Reserve
April 13, 2008
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APPLICATION OF SOUND MANAGEMENT SKILLS & PRACTICES ARE MORE IMPORTANT THAN ANTICIPATING OR REACTING TO ANOMALIES OR DISCONTINUITIES IN FINANACIAL MARKETS
Prudent and sound management of the economy, interest rates, inflation and the money supply can go a long way to mitigate risks and discontinuities in financial markets, even when such cannot be ascertain or validated with certainty. Whenever the Fed ignores its primary responsibility to the stability and security of households that make up the economy, it abandons its sacred duty, trust and responsibly for maintaining and improving the financial health of larger financial institutions upon which all depends.
MACRO- & MICRO-ECONOMIC MANAGEMENT
In this respect, the relationship and policies at the macroeconomic level must be filtered and balanced through the eye of a needle to ensure that the microeconomic effect and consequences will play out in ways that support continued timely and responsive alignment, realignment and corrections by the Fed at the macroeconomic level to achieve and support desired economic outcomes and effects.
This has not been the case since the turn of the new millennium. What we have witnessed is a form of unfettered, unbridled les affair liberalism devoid of social conscience, moral economic order and ethics that would have caused Adam Smith and the Worldly Philosophers to turn in their graves. The relationship between the macro- and micro- economic reality and order of world affairs were completely out of balance. Someone needed to spot it and take corrective actions, which inevitably is the responsibility of the Feds that no one can deny.
SEEING OUTSIDE OF & FULLY WITHIN THE BOX BY PROMOTING A KEEN SENSE OF WATCHFULNESS, NOT INCREASED REGULATION!
Here we are not talking about ‘going against the wind’, but knowing that there is a wind that needs to be harnessed and directed through positive channels to maintain a sense of control in order to ascertain that the Fed’s actions or the lack thereof would have the desired effect is steering the economy and world financial markets toward increased stability through manageable growth expectations. The mathematically based, static and dynamic economic models and systems through which economists view the world in making their assessments, predictions and adjustments, or the lack of the need thereof, are useless when variables pop-up in the system with great magnitudes of impact for which there was no foreknowledge or anticipation.
DISTINQUISHING THE FOREST FROM THE TREES
Under such circumstances as was seen in the past eight years, the Federal Reserve Bank as well as fiscal and monetary policies failed to work because they are being applied towards an economic system that did not exists vis-à-vis the economic reality on the ground. This requires not more regulations, which should be decreased and not increased, or more audits or further regulatory controls or oversight as we saw with SOX audits in a post 9-11 environment, but better knowledge and urgent overview promoting an attitude to adapt and change when and where changes are required by seeking out and integrating new knowledge and information that is being brought into the system on a daily basis often at the most fundamental level of economic reality and activity. It is often said that if you listen to the seashell, that sometimes you can hear the ocean. One does not have to be close to an ocean or next to a tsunami to try this experiment.
OBSERVING THE OCEAN WITH FOGGED LENSES
This is what was missing, this is what went wrong for which there has not been any rational explanation, sound assessment or written analysis to date. In essence, it was using an old hammer to make new bricks, when the nature, purpose, constitution, strength, tenacity and character of the bricks that were needed had changed in light of recent developments in the marketplace. The mortgage crisis and meltdown was caused by a situation of which the Fed themselves promoted and fostered at the turn of the century against the best micro-economic interests and needs of those most affected. The problem with the embattled author’s comments is not so much what he said, but what he failed to say that is crucial in gaining a deeper respect and understanding of the factors that caused or greatly contributed to the housing crisis.
AWAKENING TO A CRISIS AT OUR DOORS!
The result was helter-skelter, commonly referred to as the sub-mortgage crisis and meltdown that led to the Feds breaking with long established and honored, even sacred, banking principles, practices and traditions of not supporting or helping non-bank financial institutions such as Bear Sterns, partly because they felt responsible for the situation.
EUPHORIA AT THE HIGHEST LEVEL
What this reveals is that the Fed was living in clouds of illusion fettered by experimental idealism and had lost all rational and human perspective on the economic reality on the ground that had and was transpiring daily in the marketplace and were essentially forced to act and re-act to an economic situation for which they had no control. Because of the great speed and suddenness with which markets were overwhelmed by steadfastly accumulating negative forces, the Fed was ill prepared to deal with or handle the situation, bringing about much public criticism and condemnation upon themselves in the process.
THE ECONOMIC TORNADO
When the Fed acts to protect the macro economy with no sense or preconceived notion or understanding of the ultimate effect on the micro-economy or vice versa, policymakers will fail to lean on the wind and be blown away by impeding storms of doom instead – short for an economic tornado where until the dust clears nobody in government, on the ground or at the Federal Reserve level really knows what hit them.
ROLE OF THE FREE MARKET
Market flexibility and open competition was never “at risk” in this debate and debacle. It was the sense that we did not have leaders who were true umpires and referees of the system by overseeing, assessing and reacting to the ebbs, flows and order of the economy in all its majestic beauty discerning truth from fiction, hopefulness from lies and common economic rewards and benefits from abuse. In this case, it was as if the teachers, referees and umpires went out to play leaving the weaker children to suffer at the hands of a tall, strong and powerful economic bully. No wonder all the toys were lost and the children had nothing with which to play! No economist or economic advisor should expect to be blessed with the honor of economic par excellence after having just created or managed over what can only be described or considered as the largest economic mess and blunder in recent history. Somebody must be held accountable, for someone must have been sleeping on the job!
LESS IS MORE & MORE IS LESS WHEN THE ESSENCE OF A PRINCIPLE IS NOT SACRIFIED BUT MAINTAINED
To walk or look the other way depending on some unforeseen divine providence, invisible hand or blind luck when new economic forces are being unleashed on the marketplace is tantamount to negligence. Les affair means non-intrusion when forces blend harmoniously together creating beauty for all to see, not well meaning “hands-off economics” when untamed, spirited, unknown, unpredictable and unchallenged economic forces speed away and disappear deep into the blackness of night without trace, sight or expression of their impending effect upon the prevailing light of well intentioned household of peoples.
CUMULATIVE ECONOMIC LOSS & FAILURE
What really are our most reliable and effective safeguards against cumulative economic loss and failure, and if such do exist, how could the sub-prime mortgage crisis and meltdown have happened on our clock in the first place? In this respect, nomenclature becomes important. By calling what is perhaps the worst economic disaster since the Great Depression a “bubble,” policymakers undermine its impact and severity as a means of directing blame away from themselves giving the false impression and illusion that what happened in the domestic and global economy is nothing but a “small blimp” or pimple on the greater radar screen or economic scheme of things. Nothing could be further from the truth. It is clear that either we do not have reliable and effective safeguards to prevent such an economic catastrophe from occurring again in the future or those safeguards where not effective or functioning well (the argument for increased regulations), allowing the bubble and debacle to manifest and unfold into a faithful economic monster over a very short period of time.
I SEE, AM PUZZLED BUT DO NOT UNDERSTAND!
The housing crisis emerged in more than two dozen countries between 2001 and 2006 due precisely to single digit interest promoted by the US Federal Reserve Bank in cooperation and agreement with major G-4 member countries, which the world has never seen before in recent history, because the Feds and others allowed it to happen primarily to boost economic output in the global economy to balance the finance of a protracted, never-ending, costly and unpopular war occurring in a finite global economic order that has limited resources at the lowest rates possible ever.
IMPACT OF THE WAR
In other words, if you are going to finance continuous military operations and ever watchful all-seeing security actions on the populous of your people into far reaching perpetuity, you cannot do it at a high interest cost. Many thought and still believe today that the war was justified and necessary in order to secure the free market and the world’s long term economic good, regardless of cost or consequences and as a result, acted in concert across global lines to make it so. The result has been the incurrence of a cost and debt so great that when the housing meltdown and debacle is viewed against this back drop of loss economic opportunity and vision, it is rightly viewed as only being a “bubble.”
TEMPORAL VERSUS PERPETUAL REALITY
We live in a finite world with finite resources. No matter how great the strength of the dollar, US and global economy or the veracity and fortitude of European and Western powers, we cannot finance a never-ending war in perpetuity using reflows of petro-dollars and low interest rates. Let’s face it, too much stress was placed on the engine and the dam thing blew up!
Our concept of time versus the value of money played a role as well. Any old donkey can be used to carry a heavy load up a hill, but not all at the same time, and in this way the public suffered. Our lack of recognition, imagination and creativity blocked us from bringing fruitful solutions to the market sooner.
INFLUENCE OF THE FED
Fed funds rate drives Eurodollar rate, which similarly affect the cost of almost every other major currency in the world. To cry misunderstanding of the basic economic facts and reality that caused the housing crisis in the USA and other countries around the world is a nice way of saying, “it wasn’t me,” by claiming that “the evidence of monetary policy adding to the bubble is statistically very fragile”!
There is a common expression that says if it looks like ice cream, smells like ice cream, feels like ice cream and tastes like ice cream, it is ice cream. How else can we tell?
LACK OF DATA & SOUND ANALYSIS
Much of the economic statistics quoted to support these untenable positions were very fragile indeed. They alluded to the movement and positions of monetary aggregates and flows but not to the quality of the underlying stock and benchmark criteria which was largely responsible for the dramatic waves that slammed into financial markets. Yes, the waves were not high, but their force and impact were enormous.
OUR LEADERS HAVE COMMON SENSE, EVEN THOUGH MOST DON’T BELIEVE IT IS SO
To say that the Fed did not understand what was happening on the ground or had no foreknowledge of the risks in the housing sector is to show a complete lack of knowledge of the capabilities of astute policymakers who possess enormous skills, acumen and judgment.
THERE IS NO GOOD SUBSTITUTE FOR PURE LOGIC
If adjustable rate mortgage (ARM) did not fuel “the bubble,” it certainly broke the camel’s back. One must consider other factors as well since nothing happens in a vacuum or by itself. Persistent out sourcing of jobs in the US that began in the 1990s under the Clinton Administration through NAFTA and other free trade agreements and fall in employment at the professional, semi-professional and other levels were major contributors, leaving economic households all across the country and the world ill-equipped to address the economic plight with which they had to contend. The levels of interest rate that are imbedded in ARMs are a better forecaster of home prices than ARMs themselves. Yet, there can be no denying that ARMs that carried extremely low teaser rates that ballooned into ever increasing variable rates of interest did not help the situation much and was one of the primary factors that drove homeowners into foreclosure and bankruptcy all across the 50 states of the United States of America, including the District of Columbia.
A MATTER OF INTEREST RATES
If at anytime during the build-up towards the financial explosion and collapse that recently occurred in the housing market had interest rates been raised to a reasonable level of expectation and affordability to combat real and expected inflation and protect the free-falling dollar that has been a victim of Fed sponsored experimental supra-normal low interest rate scenario, sale of sub-prime mortgages would have slowed or even stopped completely depending on the level of interest rates achieved, leaving in its wake a more manageable economic situation with which to address. Instead the experiment continued, owing very much for reasons to continue financing the war, even though the baby was running out of fresh air to breathe.
MUCH ADO ABOUT NOTHING!
Much of the discussion and arguments posed by De Grauwe that were collaborated or countered by the author is much ado about nothing and for the most part irrelevant when discussing the mortgage crisis. The role of “The Regulators” is to regulate based on prescribed laws, processes and procedures. At no time in the process can regulators be asked to play “God” by anticipating possible future market calamities. Their role and function is at best achieved by giving a sense that procedures are important and that prudence is better than impropriety. No one would agree that increased regulation and micro surveillance might have prevented the sub-prime market debacle, because the problem had nothing to do with the lack or circumvention of regulations, in fact quite the opposite. Existing regulations approved from higher authorities in government and at the Federal Reserve level paved the way for the unfolding of the sub-prime market mess supported and aided by a continuously healthy feed and diet of ever lowering interest rates, the essential protein food that the untarnished beast needed to support its growing yet wasteful appetite pending its albeit slow but never arriving metamorphosis or inner self transformation.
PRICING SECURITIES OR RISK?
Again, was it a problem of price, whereby the securitization of sub-prime mortgages were considered underpriced or one of quality and sustainability for which the market had no tool by which to address or assess, including rating agencies that got swept away in the ensuing flood. Quality had a direct bearing on risk, which at certain levels of risk were simply not worth taking. This was a judgment call which the Fed, regulators, accountants, credit rating agencies, bankers, mortgage companies, intermediaries and the market failed to make, maybe because profits and unrealistic assessment of success were too good to ignore or forego.
THE BOY THAT CRIED WOLF!
If regulators had the ability to prevent the sub-prime debacle it would have been through the use of broader economic tools and instruments, primarily interest rate management, which regulators often used to curtail or diminish market risks and volatility. Those tools and instruments it now seem were dedicated to solving other anticipated and looming problems on the horizon with respect to the foundation and structure of the broader national and global economies and could not at the time be taken out of operations or borrowed, even temporarily, to solve what at the time seem like a less than meaningful domestic situation. When the defending author having the benefit of influence, oversight, foresight and hindsight chooses in his best interest to obtain a fixed rate mortgage over a variable rate product, the action speaks volume in pointing out that the beef was not safe to eat.
DON’T REGULATE THE REGULATORS
Was there truly a collapse in bank underwriting standards or the improper or non application of extant standards? Having direct experience with SOX, I will forever argue, at least temporarily for now, that what we need is not more regulation but good regulators that have a clear sense, feel and confidence that they can act on their observations and analyses, statistical or otherwise, with support, sound judgment, independence, professionalism, ethics and integrity for which the present system grossly denies and lacks.
In this sense, it is not a question of the role of regulations or increased application of the same, but rather the supervisors of regulation that must support efforts from within that wishes to transform these embolden, unchanging static systems into a lean, mean, clean and capable audit machines.
IF IT IS STILL NOT BROKEN, FIX IT!
Regulators see the problems and oftentimes know what they are doing. The problem in today’s world comes from the “higher ups” who often know better about what is needed in order to maintain the status quo or achieve party or other political interests and objectives in order to maintain a prescribed or waning social order, job security, promotion, severance and retirement. Nobody wants to rock the boat. It does not pay and oftentimes no one out there is listening.
CHANGING THE CULTURE IS EASIER SAID THAN DONE!
In a nutshell, we need a change in culture not an increase or rewriting of extant rules and regulations that merely pour old wine into new bottles under new guises of scientific formulas in order to massage or eke out a sense of social integrity, validity and responsibility. But there can be no change in culture unless the tone is set, rewarded and maintained from the top! In many cases this means employing new management that is willing to take risks and face challenges that voice decent conjuring up potential inertia in the minds of the beholders.
ROLE OF ART & CULTURE
One of the gravest problems of modern economic reality and society is that application of “the law” and what constitutes “legality” is often substituted by professional business managers, promoters and marketers for decency, common sense, morals, ethics and having a sense of economic prudence and social justice which points to depravity of fast depleting conscience in the system. This is one of the greatest problems that modern man faces today, which only a sense of dignity, pride and a firm sense of mission or destiny can correct.
The pursuit of happiness defined in strictly financial and wealth accumulation terms will never address the needs of man of having lasting peace and joy in the work that he does throughout his chosen career and professional life. That sense of peace and satisfaction can only be attained from having made a difference, which inculcates a profound sense of making a worthwhile and meaningful contribution to the fabric, strength, tenacity and composition of society of which he partakes.
When companies or businessmen uphold the law, but cheat their customers under the table by providing inferior products or craftsmanship, pushes the sale of a class of items for which the market or customer does not want or need, use deceptive advertisement or manipulate the terms of an agreement to suit the interest if the company against the best interest of the client in order to earn more profits or commissions, we all suffer.
Taken to the extreme, the cumulative effect of spreading “bad economic blood” can lead to substantial market failure where government and regulators are forced to step in to correct a corrosive or diseased situation.
Increasing security forces to enforce compliance, applying more regulations or even tightening regulatory standards oftentimes do not solve the problem. The economic vampires and culprits that spread bad economic blood simply run away to feast another day.
It is easier to persuade the mind than to change the heart, yet that is exactly what we need to do under our current economic system and culture. To achieve this we need to promote trust, values and conscience, which cannot be mandated or sustained by instruments of the law or modern religion.
It is the duty and role of the creative arts and artists to change society. Until the creative arts are self induced and internally influenced toward a higher calling, our economic system will suffer since people exposed to garbage will breathe the same and spit it out. Can there be a merge of arts and economics? Only if we imagine that it can be so. As Albert Einstein himself said, imagination is more important than intelligence.
ROLE OF GOVERNMENT IN PROMOTING A HIGHER CULTURE IN SOCIETY
Government has a role to play. To the extent that people lack genuine leaders, but more importantly true living heroes that are active in turning and churning society toward the common good, the system will fail. Government can help by reforming itself and require parallel reforms in banking and other financial intermediaries which fall under their purview and influence. When government is seen as being only for the rich, powerful and well connected and not for the common man, citizen or people, the rebellion will start and the eclipse certain.
When people believe from within that government and industry are working for their best interest in addressing the challenges of the day in order to promote the greater good of society, culture spawns to new heights and dimensions that is for the most part unstoppable.
Until the best of us, promotes the best in us, the people will not change and culture will stagnate leading towards future economic losses, gross mismanagement and ultimate decadence and decline. It takes leadership, but not one of accomplishments, principles and standards, but rather one of character.
CHALLENGES TO THE WORLD ECONOMY & PLANET: NOAH’S ARK!
The creative arts and artists spontaneously react to what they view as the risks, problems and challenges of society. Movement towards greater social consciousness and awareness often come after or is initiated by disastrous events or periods that require a great outpouring of love (personal attributes of self and family) and compassion (higher octave of brotherhood/sisterhood and global community), which World War II triggered and global warming through earth changes promise to deliver to us as well.
In this regard, developing a stronger sense of local, national or even global community by promoting goodwill through positive human relations can only occur when society and individuals stop focusing on I, me and mine and start focusing on we, us and thou in working toward and serving the greater good of not only humanity but of all life forms on planet earth. Today’s challenges on the planet urgently demand a change in innate focus, attitude and direction towards such an orientation and position.
LONDON BRIDGE HAS FALLEN DOWN!
For free competitive markets to remain the unrivaled way to organize economies, we have to do more to support and maintain trust in the system. In this regard, maintaining a high level of investor confidence is crucial, in fact critical, and cannot be overstated. When trust is broken, it often is not because some improperly supervised trader cheating to benefit his own pocketbook or a bank of great statue or importance failing due to market or management failures or some other economic mal intrinsic, it often is when all the regulators, government and market players appear to all fall down at the same time leaving the public, investors and counterparties fending for themselves in the dark without help or support from designers, regulators or controllers of the system.
Under such economic realities and circumstances, there shall be much public outcry for action and results, which if not delivered immediately could lead to a worst economic situation than we had before.
For this reason, it is important for regulators, government and the public to maintain a high sense of integrity and constant vigil and watchful eye on all that can contribute to market failures that has the potential to strike at the heart of investor confidence and public opinion.
WHEN MORE IS LESS!
Sometimes the mere raising of consciousness, alertness and watchfulness backed by sound economic assessments and analyses as well as proactive actions and reactions, meaning actions aimed at addressing a situation with a constant open view towards change, clarity and understanding as opposed to one based on increased regulations, wastefulness or impressive accumulation of base line, mathematical or scientific data that feed unnecessary and redundant analyses, preemptive strikes, regulatory or government “policemanship” and caustic inquisitiveness, remembering at all times that when the cat’s away, the mice will play. In this regard, the best way to promote equity, equality and balance in the system is to not necessarily take away from that which already exists, accumulated or is happening in the air or on the ground but to empower and embolden the other side in order to create more leverage and balance in the system.
Written By E. Anthony Shields
Columbia Buisness School