I compared Greenspan's assumptions to religious articles of faith above. Archcrone at The Crone Speaks echoes this comparison. The blame game is on and you can tell which church the combatants worship in by who they want to blame. The Republicans blame Freddie and Fannie, the Community Reinvestment Act, the nefarious poor who hoodwinked innocent bankers into giving them mortgages they couldn't afford based on 'no income/no assets' standards, or the ghastly specter of an Obama victory which has spooked all those capitalist true believers who are selling stocks in quantity. Of course they attach no fault to their own policies. Like Greenspan they fervently believed in deregulation. Unlike Grenspan, they can't quite bring themselves to recognize their own faulty assumptions. The Democrats blame the rampant deregulation of the last fifteen years. On the whole the Democratic version appears to me to reflect reality while the Republican version does not. Unfortunately, it appears that certain people can no more question their economic faith than they can their religious faith.
Friday, October 24, 2008
I read and watched some of the accounts of Greenspan's testimony before Congress yesterday. I don't think I have ever seen a more bewildered and shattered man. Do you remember the line from 'Silence of the Lambs' concerning assumptions. "Assume makes an ASS of U and ME. " Well, Greenspan's assumptions certainly made an ASS out of someone. I thought his most pathetic statement was the one where he said he didn't quite know what went wrong. I can tell him and very likely any other moderately informed and perhaps a little cynical person could also. His basic assumptions, his 'articles of faith' to use an apt religious metaphor, were flawed from the beginning. Greenspan thought that self-interest would ensure that each party to any financial deal would rigorously examine the particulars of that deal to safeguard the profits and stability of his institution. That assumption rests on a couple of other faulty assumptions. First, that the deal was transparent enough for the parties to accurately gauge the value of the deal. Second, that the self-interest of the individuals involved was tightly aligned with the self-interest of the institutions on behalf of which they acted. Anyone who has followed the meltdown knows by now that the various financial instruments (credit default swaps, whatever) were anything but transparent. No one knew for sure what any of them were worth. Regarding the second assumption, I think that anyone assuming that the hired guns running the various institutions had any self-interest tied to the long term performance of their employing institutions was and is seriously deluded. Executive pay packages have been scandalous for over a decade, even for those who have managed to perform well. And many have been rewarded for poor performance with golden parachutes and bonuses completely divorced from results. Worse, when they leave they walk away with the remainder of their contracts no matter what the condition of the company they ran. A basic rule of logic is that when the assumptions are false the conclusions cannot be anything but false. Unfortunately, Greenspan evidently never took a course in logic.