It's about time that Greenspan was held to account for his Randian bs. He is a major reason we are in this financial clusterf_ck. October 9, 2008 The Reckoning Taking Hard New Look at a Greenspan Legacy By PETER S. GOODMAN “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004 George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.” And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added. Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken. The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.” But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest. “Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation. The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them. If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted. Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences. Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes. On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur. Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions. Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately. But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading. See the rest of the article here- http://www.nytimes.com/2008/10/09/b...an.html?_r=1&hp=&oref=slogin&pagewanted=print
So for guys like Buffet, what is the inherit problem he has with derivatives. Is it that people don't understand the assets behind them. In the case of mbs's for example, do people not comb through these mortgages before purchasing.
It's pretty sad that apolitical stories that do give insight to this crisis and future disasters usually sink to the bottom within half a day. But but but Acorn, Fanny and Freddie do matter!
Here's a starter: One thing the religious right could look into was the economists' over religious use of statistical models and these experts' belief that they could assume every possible risk or dismiss one-in-a-lifetime events as insignificant or "risk worthy" Greenspan definitely shares this view. The "Nobel Prize" Econ winners and industry experts who led LTCM or wrote up the theory of Credit Default Swaps also do too. Blanket greed, expert salesmanship to peddle bull****, and the genuine hubris that they had the market pinned down led them to assume things like Russia never defaulting or the value of housing never sustaining a steep and prolonged decline. Since they were the stewards of the industry, everyone else was led by the nose in the hopes of even more profits. Greed was better in the 90's and early 2000s, and it paid to be ignorant and stupid.
An MBS security isn't inherently bad. Conceptually, its a very simple idea (basically, some mortgage holders would get paid before others - the higher you are on the totem pole, the lower return you would accept because you have less risk). However, the risk involved with them has turned out to be an abysmal failure. The guys higher up on the totem pole figured they would be sitting pretty and instead are taking a hit too. I didn't know Buffett had a problem with MBS....I've always heard he has an issue with credit derivative swaps...which is very understandable - simply put companies are buying insurance from companies that are unregulated so the value of that insurance is very questionable.
