Saturday, March 20, 2010

Alan Greenspan: The Fed Failed

Let's take a momentary break from our series for this must-read treatsie from Alan Greenspan.

I will post some concluding thoughts on this past week's series on Monday.

Today, however, check out this newly released paper from the former US Federal Reserve Chairman. In it, Greenspan discusses the causes of the financial crisis and the Fed’s failures leading up to it.

Greenspan is famous for his libertarian leanings and hands-off approach to Wall Street, but he now appears (finally) to be having some second thoughts.

Once celebrated as the “maestro” of economic policy, Greenspan has seen his reputation dim after failing to avert the credit bubble that nearly brought down the financial system. Now, in a 48-page paper that is by both analytical and apologetic, he is calling for a degree of greater banking regulation in several areas.

The report, which he presented Friday to the Brookings Institution, acknowledges his shortcomings in regulation and admits that, "regrettably, we did little to address the problem."

The former Fed chairman also acknowledged that the central bank failed to grasp the magnitude of the housing bubble but argued, as he has before, that its policy of low interest rates was not to blame. He stood by his conviction that little could be done to identify a bubble before it burst, much less to pop it.

“We had been lulled into a sense of complacency by the only modestly negative economic aftermaths of the stock market crash of 1987 and the dot-com boom,” Mr. Greenspan writes. “Given history, we believed that any declines in home prices would be gradual. Destabilizing debt problems were not perceived to arise under those conditions.”

Click here to see full document

To read the next part of our series, click here.


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1 comment:

  1. When people of the future look back at this time, they are really going to wonder why people during these last few decades borrowed and lent so much money, and why the central bankers/financial regulators/elected politicians who were at the helm of the good ships of all of the so-called developed countries let so much debt get injected into their economies.

    I think economists have spent far too much time studying and learning complicated formulas, and far too little time using plain old common sense.

    To borrow a phrase from Karl Denninger "You cannot expand credit at a rate faster than GDP forever without suffering a financial panic and collapse".

    The following link will take you to a chart of the m3 money supply growth in the United States from 1960 to 2006. (The U.S. Federal Reserve discontinued releasing the m3 money supply statistics in 2006)[1][id]=M3NS

    The following link will take you to a chart of total (credit market) debt vs the gdp for the U.S. from 1951 to 2009.

    The following link gives more information about the total credit market debt in the United States. (The very top line says it all)

    The above two charts explain why Governments and Central Banks all over the world are trying "to solve" a financial crisis which was caused by too much debt by going further into debt.

    It is truly (to borrow a phrase from Richard Russell), "Inflate or Die."