Alan Greenspan, former Federal Reserve chairman, with John Snow, former Secretary of the Treasury, at a hearing on Capitol Hill on Thursday.
Greenspan's Revisionist History
October 23rd, 2008 - 11:06am ET
Former Federal Reserve Chairman Alan Greenspan today engaged in an attempt to rewrite history that was so egregious that even CNBC anchor Mark Haines, a free-market cheerleader, was aghast.
The offense was on the first page of Greenspan's written testimony before the House Government Oversight and Reform Committee. "In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences," he said.
He may be technically correct, but that warning was at best a footnote to his main message, which was that Congress and the White House should more or less leave markets alone, and that the masters of Wall Street will always do what's best.
We now know that Greenspan was devastatingly wrong, and now even Greenspan is forced to concede, as he did before the hearing chaired by Rep. Henry A. Waxman, D-Calif., that the crisis we're facing now "has turned out to be much broader than anything I could have imagined."
Worship before the god of market fundamentalism is blinding indeed.
As a report released Wednesday by the Center for Economic and Policy Research makes clear in its examination of the movie about the nation's fiscal crisis, "IOUSA," Greenspan "allowed for the unchecked growth of a $10 trillion stock bubble in the '90s and an $8 trillion housing bubble in the current decade. ... These bubbles were primarily responsible for the low saving rates decried in the film. Mr. Greenspan also ignored the reckless mortgage lending that led to the subprime meltdown and subsequent credit crisis. In addition, he played an active role in preventing the regulation of credit default swaps, the growth of which played a central role in the financial crisis."
Greenspan repeatedly scorned calls from members of Congress for regulating credit default swaps and derivatives. In a notable speech before the Federal Reserve in 2002 on the emerging shadowy jungle of financial instruments that were starting to be traded with accelerating velocity in world financial markets, Greenspan reduced the regulatory choices to "a trade-off between economic growth with its associated potential instability and a more civil and less stressful way of life with a lower standard of living."
Greenspan, of course, stood squarely on the false choice of growth in a just-trust-them-to-do-right environment.
Now he tells us, as he did at the House committee, "those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief."
Greenspan also admitted under questioning that the economic models he put his faith in were "flawed" and concedes that some of the regulation he opposed should be reconsidered. But Greenspan is still too vested in his own philosophy of how the financial world should work to be a reliable beacon for how we should move forward. For that, we need to rely on the progressive economic experts whose voices were dismissed in the age of Greenspan-worship but who now are showing the way to rebuild our economy.
Investors Flee as Hedge Fund Woes Deepen
The gilded age of hedge funds is losing its luster. The funds, pools of fast money that defined the era of Wall Street hyper-wealth, are in the throes of an unprecedented shakeout. Even some industry stars are falling back to earth.
This unregulated, at times volatile corner of finance — which is supposed to make money in bull and bear markets — lost $180 billion during the last three months. Investors, particularly wealthy individuals, are heading for the exits.
As the stock market plunged again on Wednesday, with the Dow Jones industrial average sinking 514 points, or 5.7 percent, the travails of the $1.7 trillion hedge fund industry loomed large. Some funds dumped stocks in September as their investors fled, and other funds could follow suit, contributing to the market plummet.
No one knows how much more hedge funds might have to sell to meet a rush of redemptions. But as the industry’s woes deepen, money managers fear hundreds or even thousands of funds could be driven out of business.
The implications stretch far beyond Manhattan and Greenwich, Conn., those moneyed redoubts of hedge-fund lords. That is because hedge funds are not just for the rich anymore. In recent years, public pension funds, foundations and endowments poured billions of dollars into these private partnerships. Now, in the midst of one of the deepest bear markets in generations, many of those investments are souring.
Granted, hedge funds are not going to disappear. In fact, some are still thriving. Even many of the ones that have stumbled this year are doing better than the mutual fund industry, which has also been hit with withdrawals that have forced their managers to sell.
But the reversal for the hedge fund industry represents a sea change for Wall Street and its money culture. Since hedge funds burst onto the scene in the 1990s, they have recast not only the rules of finance but also notions of wealth and status. Hedge-fund riches helped inflate the price of everything from modern art to Manhattan real estate. Top managers raked in billions of dollars a year, and managing a fund became the running dream on Wall Street.
Now, for lesser lights, at least, that dream is fading.
“For the past five or six years, it seemed anybody could go to their computer and print up a business card and say they were in the hedge fund business, and raise a pot of money,” said Richard H. Moore, the treasurer of North Carolina, which invests workers’ pension money in hedge funds. “That’s going to be gone forever.”
As are some hedge funds. For the first time, the industry is shrinking. Worldwide, the number of these funds dropped by 217 during the last three months, to 10,016, according to Hedge Fund Research.
Even some of the industry’s most well-regarded managers are starting to retrench. Richard Perry, who until now had not had a down year for his flagship fund in more than a decade, has laid off some employees. Mr. Perry, who began his career at Goldman Sachs, is moving away from stock-picking to focus on the troubled credit markets.
Three other hedge fund highfliers — Kenneth C. Griffin, Daniel S. Loeb and Philip Falcone — suffered double-digit losses in September.
Steven A. Cohen, the secretive chief of a fund called SAC Capital, has put much of the money in his funds into cash, reducing trading by some of his workers.
Many hedge fund investors, particularly the wealthy individuals, are flabbergasted by their losses this year. The average fund was down 17.6 percent through Tuesday, according to Hedge Fund Research.
“You’re seeing a lot of shock, a lot of inaction, a lot of reassessment of where their allocations are and what to do going forward,” said Patrick Welton, chief executive of the Welton Investment Corporation, whose fund is up double-digits this year.
Many investors, Mr. Welton said, had hoped hedge funds would protect them from a steep decline in the broader market. But in many cases, that has not happened.
Now Wall Street is buzzing about how much money could be pulled out of hedge funds — and which funds might bear the brunt of the redemptions.
Funds have set aside billions of dollars in cash to prepare for withdrawals, and many prominent funds require their investors to leave their money in the funds for years. That could help relieve some of the pressure.
But because hedge funds are largely unregulated, they do not publicly disclose the identity of their investors or whether they have received requests for withdrawals. While it might make sense to pull money out of poorly performing funds, investors might also exit funds that are doing well to offset losses elsewhere.
Institutions — pension funds, endowments and the like — pushed into hedge funds after the Nasdaq stock market bust at the turn of the century. Many hedge funds had prospered as technology stocks crashed, leading these investors to believe they would in the future.
In Massachusetts, for instance, Norfolk County broached the issue with the state’s pension oversight commission, said Robert A. Dennis, the investment director of the commission. Mr. Dennis was impressed that hedge funds had fared so much better than the broader stock market.
Though Mr. Dennis says he recognizes the risks that come with selecting hedge funds, he thinks they remain a good investment. Next week, the state commission will vote on whether to allow some towns with pension funds below $250 million to invest in hedge funds, a move Mr. Dennis supports.
“Hedge funds are having a bad year, absolutely, but they’re still holding up better than stocks,” Mr. Dennis said. “Losing less money than another investment is, while not great, it’s still something to be at least satisfied with.”
But now that the days of easy money are over, some fund managers are throwing in the towel.
One manager, Andrew Lahde, was blunt about his decision.
“I was in this game for the money,” Mr. Lahde wrote to his investors recently. He made a fortune betting against the mortgage markets, calling those on the other side of his trades “idiots.”
“I have enough of my own wealth to manage,” Mr. Lahde wrote. He did not return telephone calls seeking comment.
And what wealth there has been. More than anything else, hedge funds are vehicles for their managers to take a big cut of profits. The lucrative economics of the industry is known as “two and 20.” Managers typically collect annual management fees equal to 2 percent of the assets in their funds, and, on top of that, take a 20 percent cut of any profits. Last year, one manager, John Paulson, reportedly took home $3 billion.
But with the industry under pressure, those fat fees are being questioned. Mr. Moore and other investors are starting to ask whether hedge funds deserve all that money. Mr. Griffin, who runs Citadel Investment Group in Chicago, plans to offer funds with lower fees.
More changes could be coming, including increased regulation. The House Committee on Oversight and Government Reform is scheduled to hold a hearing about regulation next month with five hedge fund managers who reportedly made more than $1 billion last year: Mr. Griffin, Mr. Falcone and Mr. Paulson, as well as George Soros and James Simons. Greenspan Concedes Error on Regulation
Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted on Thursday that he “made a mistake” in trusting that free markets could regulate themselves without government oversight.
A fervent proponent of deregulation during his 18-year tenure at the Fed’s helm, Mr. Greenspan has faced mounting criticism this year for having refused to consider cracking down on credit derivatives, an unchecked market whose excesses partly led to the current financial crisis.
Although he defended the use of derivatives in general, Mr. Greenspan, who left office in 2006, told members of the House Committee of Government Oversight and Reform that he was “partially” wrong in not having tried to regulate the market for credit-default swaps.
But in a tense exchange with Representative Henry A. Waxman, the California Democrat who is chairman of the committee, Mr. Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy.
“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
The oversight committee is holding hearings to determine what gaps in the regulatory structure abetted the crisis that has roiled the world’s financial markets.
Mr. Greenspan appeared alongside Christopher Cox, the chairman of the Securities and Exchange Commission, and John W. Snow, who served as secretary of the Treasury early in the Bush administration.
In his prepared remarks, Mr. Greenspan said he was in “a state of shocked disbelief” about the breakdown in the ability of banks to regulate themselves. He also warned about the economic consequences of the crisis, saying that he “cannot see how we will avoid a significant rise in layoffs and unemployment.” Consumer spending will decline, too, he said, adding that a stabilization of home prices would be necessary to bring the crisis to its end.
Saying that his thinking “has evolved” in the last year, Mr. Greenspan also defended his record. “In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences,” he said. “This crisis, however, has turned out to be much broader than anything I could have imagined.”Former Federal Reserve chairman acknowledges that the financial crisis had exposed "a flaw" in his view of how the world and markets function.
They Did It On Purpose: The Housing Bubble & Its Crash were Engineered by the US Government, the Fed & Wall Street By Richard C. Cook | |
Global Research, October 23, 2008 | |
During the Clinton administration, the government required the financial industry to start expanding the frequency of mortgage loans to consumers who might not have qualified in the past.
When George W. Bush was named president by the Supreme Court in December 2000, the stock market had begun to decline with the bursting of the dot.com bubble.
In 2001 the frequency of White House visits by Alan Greenspan increased.
Greenspan endorsed President Bush’s March 2001 tax cuts for the rich. More such cuts took place in May 2003.
Signs of recession had begun to show in early 2001. The stock market crashed after 9/11. The U.S. invaded Afghanistan in October 2001 and Iraq in March 2003.
The Federal Reserve began cutting interest rates, and by 2002 a home-buying frenzy was underway. Fannie Mae and Freddie Mac went along by guaranteeing the increasing number of mortgage loans.
According to a mortgage broker this writer interviewed, word began to come down through the mortgage banks to begin falsifying mortgage applications to show more borrower income than borrowers actually possessed
Banks that wrote mortgages began to offload them when Wall Street packaged them into mortgage-backed securities that were sold around the world as bonds to investors.
Risk-analysts at the leading credit-rating agencies, such as Standard and Poor’s, Moody’s, and Fitch, gave their highest ratings to mortgage-backed securities whose risks were later acknowledged to be grossly underestimated.
Mortgage companies, with Alan Greenspan’s endorsement, began to offer more Adjustable Rate Mortgages (ARMs), loans that would reset at much higher rates in future years.
Mortgage brokers fed the growing bubble by telling people they should buy now because housing prices would keep going up and they could resell at a profit before their ARMs escalated.
Huge amounts of money began to flow into the economy from mortgages and home equity loans and from capital gains on resale of inflating property.
Meanwhile, in the world of investment securities, the Securities and Exchange Commission greatly reduced the amount of their own capital investors were required to bring to the table, resulting in a huge increase in bank leveraging of speculative trading.
George W. Bush was reelected in 2004 at the height of the housing and investment bubbles. By 2005 the housing bubble was accounting for half of all U.S. economic growth and yielding huge tax revenues to all levels of government.
Despite the tax revenues from the bubbles the Bush administration was running huge budget deficits from expenditures on the wars in Afghanistan and Iraq .
ABC News reports that during this time risk analysts at Washington Mutual, one of the nation’s largest banks, were told to ignore high risk loans because lending had to be maximized. Those who objected were disciplined or fired.
State attorneys-general moved to investigate mortgage fraud but were blocked from doing so by orders of the Treasury Department’s Comptroller of the Currency. There was no federal agency that was charged with regulating mortgage fraud.
In February 2006, Ben Bernanke replaced Alan Greenspan as Federal Reserve Chairman and held interest rates steady. Homeowners began to default as ARMs reset.
The housing bubble began to collapse in 2006-2007, with the economy showing early signs of a recession and the stock market starting to decline by August 2007. Home prices began to plummet in most markets, with millions of homeowners owing more on their homes than their new appraisals.
Homeowners began to default, with over four million homes going to foreclosure from 2006-2008. In many cases, homeowners simply walked away, dropping off the keys to their houses at the bank.
The U.S. economy shed 60,000 jobs in August 2008. In a year, Wall Street had cut 200,000 jobs. State and local governments began to cut budgets and jobs.
The “toxic debt” from the collapse of the housing bubble brought about a full-scale crash of the U.S. financial system by September 2008. The stock market immediately fell, with 40 percent of its value—$8 trillion—now having been lost in a year. $2 million of the losses were in retirement savings.
The crash of the U.S. economy began to reverberate around the world with bankers and the IMF warning of an onrushing global recession.
Massive bailouts by the U.S. Treasury Department and the Federal Reserve failed to stem the tide of the crashing markets. By late October 2008 the recession has begun to hit in force.
As the situation worsened, big banks like J.P. Morgan Chase received government capitalization even as they were buying up banks that were failing. J.P. Morgan Chase paid $1.9 billion for Washington Mutual with assets of over $300 billion.
The U.S. government joined with the nations of Europe in planning a series of economic summits to explore global financial solutions. President Bush will host the first summit in Washington , D.C. , on November 15, after the U.S. presidential election.
The U.S. military shifted combat troops from Iraq to the U.S. to contain possible civil unrest.
Most major retail chains began to close stores and lay off employees even as the Christmas season approached.
The Washington Post reported on October 23, 2008: “Employers are moving to aggressively cut jobs and reduce costs in the fact of the nation’s economic crisis, preparing for what many fear will be a long and painful recession.”
Richard C. Cook is a former U.S. federal government analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, NASA, and the U.S. Treasury Department. His articles on economics, politics, and space policy have appeared in numerous websites and print magazines. His book on monetary reform, entitled We Hold These Truths: The Hope of Monetary Reform, will soon be published by Tendril Press. He is the author of Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age, called by one reviewer, “the most important spaceflight book of the last twenty years.” His website is www.richardccook.com. Comments or requests to be added to his mailing list may be sent to EconomicSanity@gmail.com. Also see a series of his speeches on YouTube at http://www.youtube.com/user/GracchusJones. | |
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