Greenspan squanders his final reserve of credibility

By Felix Salmon
March 30, 2011
Henry Farrell and his commenters have all the snark so desperately required in response to Alan Greenspan's ludicrous op-ed in the FT.

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Thank you, internet: Henry Farrell and his commenters have all the snark so desperately required in response to Alan Greenspan’s ludicrous op-ed in the FT. And they’re not alone: as Alex Eichler notes, “everyone is laughing at Alan Greenspan today”. Greenspan could hardly have made himself look like more of an idiot if he’d tried, not only because the “notably rare exceptions” construction is so inherently snarkworthy, but also because it’s so boneheadedly stupid. Anything which normally makes money is a good idea if you ignore the times that it doesn’t work.

That said, it’s worth looking in a bit more detail at Greenspan’s nutty ramblings, because scarily they’re actually representative of what much of the financial sector believes these days. (And Clive Crook, too.) The context is the GOP-controlled Congress, which has the ability to hobble or even abolish key parts of Dodd-Frank. And Greenspan is urging them on, saying that the early consequences of Dodd-Frank “do not bode well”. In order to do this, he first sets up a straw man, saying that Dodd-Frank was designed to “readily address” the causes of the financial crisis. It wasn’t, of course, but Greenspan pretends it does, and proceeds to give five examples of how it fails to do so, helpfully delineated with bullet points.

The first is that the credit rating agencies didn’t like the idea that they should take responsibility for their ratings. Well of course they didn’t like that idea — but the SEC was so captured that it happily waived the relevant bit of Dodd-Frank. Is it true, pace Greenspan, that the SEC’s supine reaction could not have been “readily anticipated”? Maybe. But the point here is that the unintended consequence of Dodd-Frank was a significant weakening of Dodd-Frank. Greenspan should be happy about this one! It’s the intended consequence of Dodd-Frank that he didn’t like.

Greenspan’s second point is that banks “contend” that they won’t afford to be able to issue debt cards if the Durbin amendment to Dodd-Frank goes through. This contention is silly, of course: no one’s going to stop issuing debit cards at all. But Greenspan believes them, maybe because his entire career was based on trusting whatever he was told by the banks, since banks are always going to do what’s best for their shareholders, and what’s good for bank shareholders is good for America. Or something along those lines, anyway.

Back in 2008, Greenspan admitted that there was “a flaw” in that reasoning, and that he was “very distressed by that fact”. But he’s clearly got over his distress at this point, and is back to his old tricks of simply parroting the spin of the very entities he was purportedly regulating. “Concerns are growing,” he writes, “that without immediate exemption from Dodd-Frank, a significant proportion of the foreign exchange derivatives market would leave the US.”

Who has these concerns? Greenspan doesn’t say, but I’ll let you into a secret: it’s bankers. They like trading derivatives because trading derivatives makes them lots of money. Does it help the broader economy, or create a significant number of jobs? That doesn’t really matter, and neither does any specificity as to what the word “significant” might mean in this context. This isn’t argument, it’s inchoate scaremongering.

Greenspan then moves on to the Volcker Rule, complaining that it puts US banks at a competitive disadvantage. Well, yes. If you have a central bank which takes its regulatory function seriously, then less fettered banks are likely to be at a competitive advantage to your own. Ask Canada. Which is feeling pretty smug, these days, about putting its banks at a competitive disadvantage.

And of course on the subject of international regulatory arbitrage, Greenspan makes no mention of the rumors that Barclays might relocate to the US, welcomed with open arms by Mike Bloomberg among others. Either Greenspan isn’t being intellectually honest here, or else he really believes it’s the function of government to relax regulations in every conceivable area to the point at which all governments compete to see who is the most laissez-faire in as many parts of the financial system as possible. He’s an acolyte of Ayn Rand, so that’s possible. But it’s not an idea which deserves serious consideration.

Finally, Greenspan defends high pay for bankers on the grounds that “small differences in the skill level of senior bankers tend to translate into large differences in the bank’s bottom line” — an assertion which cannot possibly have any empirical basis.

At this point, Greenspan clearly decides that nothing he writes need have any factual or even rational basis:

These “tips of the iceberg” suggest a broader concern about the act: that it fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008. The act may create the largest regulatory-induced market distortion since America’s ill-fated imposition of wage and price controls in 1971.

Well, he’s right that banks are just as interconnected now as they were pre-crisis. But how Dodd-Frank was meant to “capture” that, and what that has to do with “regulatory-induced market distortion”, is left as an exercise for the reader. I think that what he’s saying is that any deviation from a complete laissez-faire approach where banks can do anything they want is, ipso facto, a market distortion. And that since Dodd-Frank is the first time in living memory that bank regulation has got tougher rather than laxer, that gives him license to wax apocalyptic about unintended consequences and the like. Despite the fact that the main unintended consequence to boot seems to have been a massive increase in bank profits.

Greenspan concludes with a paean to financialization and leverage, which Yves Smith has already done a great job of demolishing.

The main problem with all of this is that it’s coming from someone who still, depressingly, is respected in certain policy circles — and who is using that credibility not to advance debate, but rather to lobby for his finance-sector clients. Last year, I thought that Greenspan had realized that he had been wrong in terms of regulatory policy, but not in terms of monetary policy. At this point, however, it seems that Greenspan is having second thoughts about his regulatory-policy apologies, and has reverted to his position of All Regulation Is Bad. I’m sure that’ll get him lots of cheers (and dollars from Wall Street. But it should be the final nail in his coffin when it comes to credibility. There have been many bad Fed chairmen. But Greenspan is out on his own as by far the worst former Fed chairman of all time.

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