There's your problem:

Bloomberg headline: Greenspan Concedes to `Flaw' in His Market Ideology

Greenspan reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading counterparties to prevent surging losses. The ``breakdown'' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.

``As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,'' Greenspan said. That would give the companies an incentive to ensure the assets are properly priced for their risk, advocates say.

It's the ideology, stupid. And in Greenspan's case it was that of Ayn Rand.

MORE: From the Los Angeles Times:

"As I wrote last March, those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief," Greenspan said. "Such counter-party surveillance is a central pillar of our financial markets' state of balance. If it fails, as occurred this year, market stability is undermined."

"The problem here is something that looked to be a very solid edifice ... did break down. And I think that, as I said, shocked me. I still do not fully understand why it happened." Greenspan said.

Here's why it happened (at least the aspect Greenspan talked about): Without regulation, short term gains - especially for those running the companies - will often take priority over long-term solvency.

CODA:

... when asked by Waxman if he had "any personal responsibility for the financial crisis," Greenspan dodged a direct answer. He admitted a flaw in his free-market ideology, but said he made decisions as chairman based on federal laws, "not my own views."

"Not my own views". Right.

ON THE LOOKOUT: For Brad DeLong's commentary, if any, on Greenspan. DeLong is a Greenspan fan, so it'll be interesting to see what he'll say about the guy. Maybe, just maybe, if DeLong conceeds that Greenspan was wrong, he'll take a step towards conceeding that free-trade globalization is also wrong. C'mon Brad, admit it. Free-trade globalization has weakened domestic labor for the last couple of decades, resulting in no-growth of wages, no sharing in the productivity gains, and diminished welfare capitalism (e.g. no more defined benefit pensions).


posted by Quiddity at 10/23/2008 09:17:00 AM