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Greenspan Admits ‘Flaw’ to Congress, Predicts More Economic Problems

Angry Bear | October 28, 2023 7:00 am

Politics

Taxes/regulation

US Economics

US/Global Economics

Just some economic and political history . . .

An October 15, 2008, article in The Washington Post analyzing the origins of the economic crisis claims Greenspan vehemently opposed any regulation of derivatives, and actively sought to undermine the office of the Commodity Futures Trading Commission.

If you recall, Brooksley Born was the head of the CFTC. A litany od experts and political figures mounted an attack on her in Congress. “The messenger wore a skirt,” says Marna Tucker, “Could Alan Greenspan take that?”* – Angry Bear

The CFTC commission sought to initiate regulation of derivatives. Meanwhile, Greenspan recommended improving mark-to-market regulations to avoid having derivatives or other complex assets marked to a distressed or illiquid market during times of material adverse conditions seen during the late 2000s credit crisis.

Today: Fifteen years ago, the maestro FED Chairman Alan Greenspan is testifying to Congress. Greenspan admits he is not omnipotent in his testimony and mistakes were made. Judy Woodruff covers the testimony.

In testimony, Greenspan Admits ‘Flaw’ to Congress, Predicts More Economic Problems, PBS NewsHour, October 23. 2008

Former Fed Chair Alan Greenspan told Congress Thursday (October 23, 2008) the economic crisis unveiled “a flaw” in his view of world markets. Economic analysts discuss his testimony and legacy. October 23, 2008

JIM LEHRER: Judy Woodruff has our financial crisis story tonight.

JUDY WOODRUFF: The former chair of the Federal Reserve and one of the best-known names in finance returned to Capitol Hill today for the first time since the financial crisis began. Alan Greenspan, who headed the Fed for 18 years, until early 2006, appeared with the chairman of the Securities and Exchange Commission, Chris Cox, and former Treasury Secretary John Snow, at a hearing examining the role of federal regulators in the current crisis.

REP. HENRY WAXMAN (D), California: And my question for you is simple: Were you wrong?

ALAN GREENSPAN: Partially.

JUDY WOODRUFF: Democrats on the committee, led by the chairman, Henry Waxman of California, pressed Greenspan on whether his fundamental economic philosophy was mistaken.

REP. HENRY WAXMAN: The question I have for you is, you had an ideology, you had a belief that free, competitive — and this is your statement —

“I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. None meaningfully worked.”

That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price. Do you feel that your ideology pushed you to make decisions that you wish you had not made?

ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.

REP. HENRY WAXMAN: You found a flaw in the reality . . .

ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

JUDY WOODRUFF: When he was Fed chair, Greenspan made many appearances before congressional committees and was generally treated with deference. His opinion was widely sought and his words heeded.

But today, in the aftermath of the financial meltdown, Greenspan faced a much rougher reception from Democrats.

REP. DENNIS KUCINICH (D), Ohio: ÂNow, Mr. Greenspan, before the collapse of the housing bubble, didn’t you also say that the U.S. has not experienced housing slumps to justify your policy that there would be no bubble? And can you tell this committee when it occurred to you that there was a housing bubble?

ALAN GREENSPAN: I knew — the housing bubble became clear to me sometime in early 2006, in retrospect. I did not forecast a significant decline because we had never had a significant decline in prices. And it’s only as the process began to emerge that it became clear that we were about to have what essentially was a global decline in home prices.

JUDY WOODRUFF: Republicans sought to shift the focus to the role of Fannie Mae and Freddie Mac, the government-backed mortgage entities in the crisis.

Idaho Republican Bill Sali asked SEC Chair Cox whether those responsible for the crisis will pay a price.

REP. BILL SALI (R), Idaho: Are the people that have caused this, is somebody going to go to jail?

CHRISTOPHER COX, Chairman, Securities and Exchange Commission: There is no question that, somewhere in this terrible mess, many laws were broken. Right now, the criminal authorities and the civil authorities, not only in the federal government and the state governments, but in other countries, because this is now, as you know, a matter of intense international focus, are working to make sure that lawbreakers are held accountable and people are brought to justice.

JUDY WOODRUFF: Greenspan and Cox contended regulators cannot predict crises. Chairman Waxman took issue with that.

REP. HENRY WAXMAN: Well, I want smart regulation. But I want to point out that what I’m hearing from our witnesses today is that they just didn’t know. They couldn’t make projections about what the future was or they’re not always right. The truth of the matter is that there were a lot of warning signs. The reasons why we set up your agencies and gave you budget authority to hire people is so that you can see problems developing before they become a financial crisis. To tell us afterwards, when we are now faced with the disaster that we’re seeing, that you couldn’t have foreseen it just doesn’t satisfy me.

JUDY WOODRUFF: Greenspan, who was once dubbed the Oracle in the world of finance, said his predictive powers were limited.

ALAN GREENSPAN: So it strikes me that, if you go back and ask yourself how in the early years anybody could realistically make a judgment as to what was ultimately going to happen to subprime, I think you’re asking more than anybody is capable of judging. And we have this extraordinarily complex global economy, which as everybody now realizes is very difficult to forecast in any considerable detail. And, Mr. Chairman, I know — I agree with you in the fact that there were a lot of people who raised issues about problems emerging, but there are always a lot of people raising issues, and half the time they’re wrong. And the question is, what do you do? I mean, you point out quite correctly that the Federal Reserve had as good an economic organization as exists, and I would say, in the world. If all those extraordinarily capable people were unable to foresee the development of this critical problem, which undoubtedly was the cause of the world problem with respect to mortgage-backed securities, I have to — I think we have to ask ourselves, why is that? And the answer is that we’re not smart enough as people. We just cannot see events that far in advance. And unless we can, it’s very difficult to look back and say, why didn’t we catch something?

Larry’s testimony set the stage for Congress to rein in the power of the Brooksley Born’s CFTC and the passage of Phil Gramm’s Financial Service Modernization Act of 1999 prohibiting the regulation of the derivatives market (In 2005, the revised bankruptcy laws would place derivatives outside of the laws also making it the first to receive compensation). W$ and banks had clear unregulated sailing in the sea of laissez faire in 2000 with a closing of the door for debtors in 2005. It was little better than a roach motel, you could check in but you can not check out.

15 Comments

Eric377 says:

October 28, 2023 at 9:30 am

What really happened? I don’t think it was the backwash of predatory home loans devaluing. Or rather, don’t think the loans were predatory exactly. As I understand it, predatory loans are those that the lender has an interest in them failing. Here there was grossly inadequate concern that these loans would not fail, but the lenders had no interest in them failing really. There were almost certainly lots of crimes, just more on the mortgage originating and then securitization process. If the borrower with the incredibly stressful, underwater NINJA loan paid it anyway, that upset nobody’s plans. No one was lending $440k to repossess a $310k house in a glutted market. I’d call it a wave of “honest” dishonesty on the origination side and normal dishonesty on the securitization. Exceptions to this are probably easy to find of course.
Fred C. Dobbs says:

October 28, 2023 at 9:32 am

This article is more than 15 years old

Greenspan – I was wrong about the economy. Sort of

The Guardian – October 24, 2008

The former Federal Reserve chairman, Alan Greenspan, has conceded that the global financial crisis has exposed a “mistake” in the free market ideology which guided his 18-year stewardship of US monetary policy.

A long-time cheerleader for deregulation, Greenspan admitted to a congressional committee yesterday that he had been “partially wrong” in his hands-off approach towards the banking industry and that the credit crunch had left him in a state of shocked disbelief. “I have found a flaw,” said Greenspan, referring to his economic philosophy. “I don’t know how significant or permanent it is. But I have been very distressed by that fact.” …
Fred C. Dobbs says:

October 28, 2023 at 10:09 am

Seems (to me) at least Vaguely Related.

New Normal or No Normal? How Economists Got It Wrong for 3 Years.

NY Times – Oct 24

Economists first underestimated inflation, then underestimated consumers and the labor market. The key question is why.
Fred C. Dobbs says:

October 28, 2023 at 10:11 am

Economists spent 2021 expecting inflation to prove “transitory.” They spent much of 2022 underestimating its staying power. And they spent early 2023 predicting that the Federal Reserve’s rate increases, meant to cure the inflation, would plunge the economy into a recession.

None of those forecasts have panned out.

Rapid inflation has now been a fact of life for 30 consecutive months. The Fed has lifted rates above 5.25 percent to hit the brakes on price increases, but the economy has remained surprisingly strong in the face of those moves. Americans are working in greater numbers than predicted, and recent retail sales data showed that consumers are still spending at a faster clip than just about anyone expected. For now, there is no economic downturn in sight. …
- Fred C. Dobbs says:
  
  October 28, 2023 at 10:13 am
  
  Economists generally expect growth to slow late this year and into early next, nudging unemployment higher and gradually weighing inflation down. But several said the economy had been so hard to predict since the pandemic that they had low confidence about future projections.
  
  “The forecasts have been embarrassingly wrong, in the entire forecasting community,” said Torsten Slok at the asset manager Apollo Global Management. “We are still trying to figure out how this new economy works.” …
  
  Fed officials, for their part, are still predicting a return to an economy that looks like 2019. They expect rates to return to 2.5 percent over the longer term. They think that inflation will fade and growth will cool next year.
  
  The question is, what happens if they are wrong? The economy could slow more sharply than expected as the accumulated rate moves finally bite. Or inflation could get stuck, forcing the Fed to contemplate heftier interest rates than anyone has gambled on. Not a single person in a Bloomberg survey of nearly 60 economists expects interest rates to be higher at the end of 2024 than at the end of this year.
  
  Mr. Slok said it was a moment for modesty.
  
  “I think we have not figured it out,” he said.
dw says:

October 28, 2023 at 7:05 pm

one wonders why we continue to hope that the Fed and Economists will actually accomplish their goal (so far only one rime in eleven tries have they done so). course those that came before then, performed worse, after all they depressions fairly regularly, so that earlier method was actually much worse. a fact that make one think the entire scheme is to just punish the workers and not do much else
Markg says:

October 29, 2023 at 9:51 am

This is not the first time Greenspan has changed his tune. The Greenspan commission developed the plan to increase payroll taxes (on the backs of the middle class) to run a SS surplus to pay future benefits. He had this exchange with Paul Ryan:

Ryan prodded Greenspan to agree with him that privatizing Social Security “can help us achieve solvency for the system.” Instead, Greenspan surprised everyone by stating, “I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.

Hmm… Greenspan agreeing with MMT!! Here is a link to the article with a good explanation.

For a truly progressive reform of Social Security, follow Alan Greenspan, not Bernie Sanders
- Bill Haskell says:
  
  October 29, 2023 at 10:19 am
  
  Mark:
  
  Minor fix on the Greenspan article. Just inserted the title.
Fred C. Dobbs says:

October 30, 2023 at 12:25 am

Is This What Winning Looks Like?

NY Times – February 6, 2022

Modern Monetary Theory, the buzziest economic idea in decades, got a pandemic tryout of sorts. Now inflation is testing its limits.

… What Stephanie Kelton sounds like, circa early 2022, is the star architect of a movement that is on something of a victory lap. A victory lap with an asterisk.

Ms. Kelton, 52, is the most familiar public face of Modern Monetary Theory, which posits that if a government controls its own currency and needs money — to make sure its citizens have food and places to live when, say, a global pandemic pushes many out of work — it can just print it, as long as its economy has the ability to churn out the needed goods and services.

In the M.M.T. view of the world, “How will you pay for it?” is a vapid policy question. Real-world resources and political priorities determine how much lawmakers can and should spend.

It is an idea that was forged, and put to something of a test, during a low-inflation era.

When Ms. Kelton’s book, “The Deficit Myth,” was published in June 2020 and shot onto best seller lists, inflation had been weak for decades and had dropped below 1 percent as consumers retrenched in the pandemic. The government had begun to spend rapidly to try to prop up flailing households. …
- Fred C. Dobbs says:
  
  October 30, 2023 at 12:30 am
  
  … In economics, there’s a school of thought sometimes called “freshwater.” It’s the set of ideas that became popular at inland universities in the 1970s, when they began to embrace rational markets and limited government intervention to fight recessions. There’s also “saltwater” thinking, an updated version of Keynesianism that argues that the government occasionally needs to jump-start the economy. It has traditionally been championed in the Ivy League and other top-ranked schools on the coasts.
  
  You might call the school of thought Ms. Kelton is popularizing, from a bay that feeds into the East River, brackish economics.
  
  M.M.T. theorists argue that society should feel capable of spending to achieve its goals to the extent that there are resources available to fulfill them. Deficit spending need not be constrained to recessions, even theoretically. Want to build a road? No problem, so long as you have asphalt and construction workers. Want to feed children free lunches? Also not a problem, so long as you have the food and the cafeteria workers. …
  - Fred C. Dobbs says:
    
    October 30, 2023 at 12:39 am
    
    … As 2021 demonstrated, however, the economy is a big, complex entity, and it can be hard to predict. Many economists, both mainstream andM.M.T. ones, did not think that the March 2021 package would be inflationary.
    
    But homebound consumers, flush with cash, spent their money far more heavily on goods than they typically do, and it took them longer to shift back to services than just about anyone expected. That roiled supply chains, pushing up prices for cars and furniture and precipitating the heady inflation that now has America in its grip.
    
    Ms. Kelton supported the $1.9 trillion package that passed last March, and she stands by that. She just questions how much of the inflation now is really coming from the demand it drove. Plus, she argues, you know what is worse than inflation? A crawling recovery.
    
    One of M.M.T.’s big ideas is that the Federal Reserve, which in the United States is in charge of trying to keep prices under control by raising interest rates to lower demand, should not be the one-stop shop for economic management. Raising rates now would cool off investment, the logic goes, and how is that helpful at a moment when we don’t have enough factories or cargo ships?
    
    The problem is that the alternative to a Fed response is, at the moment, not obvious. The Biden administration’s attempts at tamping down price increases — longer port hours, release of strategic petroleum reserves, calling out corporate price gouging — have mostly tinkered around the edges of the issue.
    
    Those kinds of precise moves to counter inflation are what M.M.T. economists would recommend, though. Ms. Kelton laid out other suggestions M.M.T. economists have made in a recent blog post. Among them: Medicare for All, cutting the Pentagon budget, repealing some tariffs and unclogging the ports.
    
    Not exactly “easy peasy,” to borrow a phrase of hers.
    
    “M.M.T. was already pretty marginal,” said Jason Furman, a Harvard economist, noting that, in his view, most policymakers and prominent academics ignored it already. Even if policy in the pandemic effectively embraced the idea that you do not have to pay for your spending, that idea, he said, was also Keynesian.
    
    And the M.M.T crowd, while dismissing the Fed’s role, has not come up with a clear and obviously workable idea for how to stem inflation, he argued, adding, “If you were open-minded, this would discredit it still further.”
    
    In Washington, the suite of ideas has clearly been dealt a setback. Deficit concerns have returned. Mr. Biden’s sweeping policy agenda has not passed because Senator Joseph Manchin, a West Virginia Democrat and member of his own party, has opposed it on concerns about government debt and inflation.
    
    Despite that, some of M.M.T.’s proponents are still sounding celebratory.
    
    “We’ve won the debate on the intellectual level — there are no flaws,” Mr. Wray said.
    
    Flaws or not, there are questions.
    
    Questions like: “Did Congress ‘experiment’ with MMT, and does the run-up in inflation mean that MMT has ‘failed’?”
    
    That is how Ms. Kelton put it in a Substack post — she upgraded from WordPress last year — that she called “How Do You Solve a Problem Like Inflation,” complete with “Sound of Music” art. (The Von Trapps, who famously fled Nazi-occupied Austria in 1938, would have known a thing or two about inflation.) …
    
    (There’s more. Hopefully you’ll be able to read it somewhere else.)
    - Markg says:
      
      October 30, 2023 at 8:17 am
      
      Questions like: “Did Congress ‘experiment’ with MMT, and does the run-up in inflation mean that MMT has ‘failed’?”
      
      This is a common mistake in understanding MMT. Do not confuse the explanation of how the monetary system works with the policy advocated by any individual within the MMT community.
      The point of my comment was to expose the fact that even Greenspan understands the government can “create as much money “ to pay for anything. Whether this leads to or is the cause of inflation is open for debate. Did the government spending during the pandemic cause the inflation or did the shutdown of supply chains? Or both?
      - Fred C. Dobbs says:
        
        October 30, 2023 at 5:06 pm
        
        Questions like: “Did Congress ‘experiment’ with MMT, and does the run-up in inflation mean that MMT has ‘failed’?”
        
        That is how Ms. Kelton put it in a Substack post — she upgraded from WordPress last year — that she called “How Do You Solve a Problem Like Inflation,” complete with “Sound of Music” art …
        
        She published the 3,715-word riff hours before I was scheduled to visit her at her home in Stony Brook. The question she notes that “some people” have been asking is the main one I posed to her in an initial conversation.
        
        During our first talk, she never broke her cool when questioned about the inflationary moment and what it says about her theory. She laid out her response methodically. Times are weird, supply chains are constrained, decades of corporate consolidation make it all worse. True M.M.T. policy would have thought about inflation in the first place, with tax increases or other stabilizers built in.
        
        She was also emphatic. And that tone carries over to the post, if type style expresses tone. Has the M.M.T. experiment failed? “The answer,” it declares, in bold face, “is an unequivocal no.”
        
        Why let someone else shape your narrative, when you could shape your own?
        
        (That’s the end of the piece. There may be further insights in her Substack post – “the 3,715-word riff” – link above.)
Fred C. Dobbs says:

October 31, 2023 at 11:46 am

‘The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy’ by Stephanie Kelton

Book review – March 31, 2021
Fred C. Dobbs says:

October 31, 2023 at 5:20 pm

Alan Greenspan ran the Fed from 1987 to 2006.

Governments can create more money without threat of economic collapse. Given the fact that money is no longer backed by gold and is more theoretical in the sense it can be created at any time, many MMT supporters believe that money can be created without tanking the economy. In 2005, former Federal Reserve Chairman Alan Greenspan followed that line of thought: “There’s nothing to prevent the federal government from creating as much money as it wants.”

What is Modern Monetary Theory?

Business Insider – July 22, 2022

Is this where he went wrong?