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Alan Greenspan's 'shocked disbelief'
Former Federal Reserve Chairman Alan Greenspan testifies during a House Oversight and Government Reform Committee hearing on Capitol Hill October 23, 2008 in Washington, DC.
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TEXT OF STORY
Kai Ryssdal: Yeah, that line from "Casablanca" is horribly overused, the one about being shocked, shocked, to find gambling going on in Rick's cafe. But Alan Greenspan trotted out a version of it today. The former Fed chairman said he is "shocked," at the meltdown of U.S. credit markets. And that he made some mistakes in his beliefs about deregulation. Marketplace's Nancy Marshall Genzer has more.
Nancy Marshall Genzer: What a difference nearly three years makes.
Alan Greenspan: The impressive performance of the U.S. economy over the past couple of decades offers clear evidence of the benefits of increased market flexibility.
That was Alan Greenspan speaking in late 2005. Here's what he told the House Oversight Committee today.
Greenspan: Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity are in a state of shocked disbelief.
Morris Davis: Yeah, it was typical Greenspan speak.
Morris Davis is a former Fed economist, now at the University of Wisconsin.
Davis: It looks like he had perfect foresight at the time but the truth of the matter is I think he was ignoring a lot of people that suggested there might be a big problem.
Davis says Greenspan did get conflicting advice, but some economists warned him that the housing market could collapse. So, was Greenspan genuinely surprised? Yes, says Douglas Diamond. He teaches finance at the University of Chicago and consults for the Fed.
Douglas Diamond: Well, I think he had a very simple view of the world that free markets always provided very good incentives.
Today Greenspan avoided taking personal responsibility for the crisis. But he did say it was a mistake to assume that banks would stay out of trouble to protect their shareholders.
In Washington, I'm Nancy Marshall Genzer for Marketplace.
"Stormy Weather" is a lovely melody and I have enjoyed listening to all the different variations you have been playing lately -- we'll sort of. However, enough is enough! How about dusting off and playing some of your variations of "We're in the Money". Please!
A "bank" is not a monolithic entity that acts. Rather, it's a name for a collection of people, each of whom act in their self interest, that has been reliable.
The issue is that bank employee and bank executive self interest, especially short term, was rather misaligned with shareholder interest. This happens a great deal. It's harder to avoid than it might seem.
Finally, certain representations of shareholder interest - quarterly and annual profits - strongly encouraged bank employees to play for quaterly and annual results, giving quite little weight to long term risks/results.
It's not magic. Greenspan understands it perfectly well, he just needs to cover his ass right now.
And arranging that such misalignments do not happen is very very hard indeed.
I like where Greenspan said "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity are in a state of shocked disbelief."
It makes him look like a benighted college sophomore disciple of Ayn Rand who has just had his term paper ripped off by another budding objectivist.
In the Randy universe, there are sharks and marks. Everyone who doesn't like it there is a decandant collectivist. Now Bush are one too.
It boggles my mind that Mr. Greenspan can say, with a straight face, he is "shocked" about this credit crisis because he must know that you cannot grow an economy over the long term by continuously consuming more than you produce - value simply travels the wrong way (as our trade deficit so clearly indicates). Perhaps what he meant to say is that he is shocked the system of market indicators (mis-indicators?) failed to shield us from the consequences of trying to continuously grow a national economy on a line of credit.
Re. Greenspan's "shock" at this latest meltdown that germinated on his watch ... just how convincing and impressive is contrition of the eleventh hour conversion sort? Cheap shame. Let's have some genuine humiliation in ye ole towne square.
