Sunday, February 15, 2009

Waaaay Smarter than Einsten

Back in the day... I remember it well. It was at the height of the Clinton presidency. The hallways of Wall Street firms might as well have been the streets of Pamplona what with the sea rampaging bulls trampling anyone and anything that dared get in their way. Every other day the DOW set a different record: on the even days it rose to a new high, on the odd days it closed at a new high. I was in grad school at the time, and I remember sitting back in a smelly, old overstuffed couch watching CNBC when the DOW first broke 10,000. The traders on the floor went crazy. One million and one champagne corks popped in boardrooms across the nation. Maria Bartiromo arched her back, savored the moment three times and then relaxed and lit a cigarette.

And there was one man we all thanked for this financial miracle. It wasn't of course president Clinton. Good Lord, no. A Democrat responsible for all this? Hello no. He was too busy covering up the Vince Foster murder (along with all those other guys he and his wife murdered that Jerry Falwell was brave enough to tell us about). No, the Midas hand that touched the markets and turned them to gold could be none other than Alan Greenspan. He was the "maestro" of Wall Street, conducting the orchestra to to a rousing crescendo of diamond studded profits. The New Yorker printed cartoons of children directing their bedtime prayers to Greenspan. Every time he spoke the nation grew silent as professional and non-professional traders alike (and everyone was a trader back then) leaned forward in an attempt to intuit and interpret the oracle's latest opaque and quizzical pronouncement. For when it came to the economy, Alan Greenspan was smarter than Einstein... waaay smarter. He was, for all intents and purposes, our new god.

Flash forward fifteen years. The markets are down... way down. The economy is on the verge of collapse. A Republican president has left office in disgrace, leaving behind a doubling of the national debt and a nation mired in military quagmires in Iraq and Afghanistan. The entire investment banking sector has collapsed. Many of of the largest, most venerable names in traditional banking have disappeared, and those that are still left are busy foreclosing on the American dream. And Alan Greenspan presided over most of it.

So it's puzzling to hear the onetime maestro admit that he kinda sorta really had no idea what was happening on Wall Street during the last few years of his tenure. Not because he wasn't paying attention, but because it was all just so mystifying:

Alan Greenspan, the former chairman of the Federal Reserve, told CNBC in a documentary to be shown Thursday night that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.

“So everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it,” Mr. Greenspan told CNBC’s David Faber. “In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging,” he said.

It's all a little hard to swallow, of course. The disciple of Ayn Rand who teamed up with Bill Clinton to help slay the deficit beast, then promoted irresponsible tax cuts once a Republican president came into office tells us he just didn't know what was happening on Wall Street. The man who briefly warned us of the markets' "irrational exhuberance" during the Tech Sector boom (and witnessed its collapse in 2000 along with the rest of us) then turned around and began promoting complex non-traditional mortgage instruments to financially naive home buyers tells us that he was worried that stemming the housing boom would have "generated a 10 percent unemployment rate."

In retrospect, I think Greenspan's change of heart on economic policy was part of a bigger picture that helped lead the US down this sorry path. In 2000 the nation sailed into a perfect storm of Republican governance. Every branch of government was or would soon be controlled by the Republicans. The GOP held the presidency and a majority in both houses of congress. And, of course, they held the Supreme Court, too, and with the fourth estate long since cowed and no real alternative to right-wing radio and the emergence of the Fox News propaganda juggernaut, there was really nothing to stand in their way. The entire apparatus of government controlled by people who held two beliefs with absolute certainty: First, that government was the problem and could do little but stand in the way of progress; and second, that greed is good. Greed is the motor that drives all of human progress, and while greed itself can have destructive consequences, the greed of others, paradoxically enough, keeps our own greed in check and for the most part prevents these consequences from growing into something that winds up corrupting our culture.

Taken together these two beliefs have brought us to where we are today. If Alan Greenspan truly didn't understand the complexities what was going on in the market, as he claims, it was only his blind faith in those two principles that allowed him to assume that such opaqueness was nothing to get worked up about. Because while the exotic financial instruments that investment bankers were trading in may have been complex, even impenetrable to an outsider, Greenspan should easily have been able to predict where we'd end up by glancing at the other side of the coin; the unsustainable boom in real-estate prices, fueled by a wave of mortgages that even the most novice of analysts couldn't not help but conclude would end up in foreclosure sometime in the next five years. If you can't afford a particular home on your salary, then financing that home with a teaser-rate, negative-amortization, variable ARM balloon mortgage doesn't make it any more affordable. It just turns the property into a ticking foreclosure time-bomb. Greenspan should have known that. He should have warned against that. Instead he promoted the scam because it was the market's latest financial "innovation" and the market surely knows best.

No one could have forseen 9/11. No one could have foreseen the New Orleans levees breaking during hurricane Katrina. No one could have foreseen the financial meltdown of 2008.

But of course they could have... every one of them... had they only opened their eyes.


zencycle said...

"Maria Bartiromo arched her back, savored the moment three times and then relaxed and lit a cigarette."

Thank you for that image. I shall use it well.

isn't it disturbing that of that entire post post, all I took from it is a sexual image?

Seriously though, I was just turned on to your blog today, and have been enjoying it immensely.

Greenspan was pretty much detached from the situation for the past several years, imo. I don't think he gave the whole mortgage derivatives thingie much thought at all, much less make an attempt at understanding it.

But still, your last comment hit the nail on the head. Simple things like giving securities backed by sub-prime mortgages a AAA rating should have raised at least a red flag somewhere.....

Patriot's Quill said...

Thanks, yeah, I sorta had to take a cold shower myself after I wrote it.