Federal Reserve Chairman Ben Bernacke, in the midst of financial meltdowns, struggles with federal monetary policy, or as bloomberg.com put it "Plays `Whac-A-Mole' With Turmoil in Markets". Meanwhile his predecessor Alan Greenspan pens oft-quoted editorials offering policy hints and cryptic foretelling of the economy's prospects. Today he looked in his crystal ball and wrote in the Financial Times the future looked "most wrenching".
Greenspan seemed dismayed: "Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief." Shocked, shocked shocked. Greenspan's own "self-interest", is as an adviser to Deutsche Bank, Pimco, and Paulson & Co, a hedge fund company that has "posted stratospheric gains" by betting on credit crises.
Throughout his tenure, as indicated by this speech back in 2005, Greenspan advocated deregulation, along with "innovation and structural change in the financial services industry", which were critical to "providing expanded access to credit". As he concluded in his 2005 speech: "this fact underscores the importance of our roles as policymakers, researchers, bankers, and consumer advocates in fostering constructive innovation."
Greenspan didn't shy from acknowledging his influence then, but now in 2008, he pops up with sage words but quickly scuttles away from responsibility. Using this tactic he also blamed the federal debt and the housing crises on aberrant circumstances. In today's editorial titled: "We Will Never Have a Perfect Model of Risk", Greenspan abdicates responsibility and lets "the model" take the blow. Once he accomplishes that neat abstraction, he rallies for more of the same, warning against regulatory changes in the market that would "inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition."
Krugman, writing in today's article "The B Word", doesn't buy it. "Between 2002 and 2007, false beliefs in the private sector -- the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe -- led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena -- the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing -- led Washington to ignore the warning signs." Krugman thinks a bailout is inevitable.
