GOOD NYT ARTICLE ABOUT UNCLE ALAN

Here's the headline & link:

Taking Hard New Look at a Greenspan Legacy
By PETER S. GOODMAN
Published: October 8, 2008
NY Times

Just under the title, there's this juicy quote:

“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

Greenspan opposed regulating the HUGE derivatives market, the one that includes the infamous credit default swaps:

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.”

Just like Karl Marx and Ayn Rand, Alan's Free Market Fairy needs better people to make the magic work.

This factoid is a real shocker to me:

The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago.

This amount is something like 9-10 times the GDP of the entire world. We simply can't let the clowns on Wall Street fool around with these things without oversight.

Back in 2004, Greenspan made this argument in favor of keeping derivatives unregulated:

“Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.

“There is nothing involved in federal regulation per se which makes it superior to market regulation.”

THERE IS something involved in market regulation - UNBRIDLED GREED - that makes it inferior to government regulation. This is something that Robert Rubin, Secretary of the Treasury under Clinton and his deputy, Lawrence Summers, failed to grasp in 1997 when there was a chance to corral the MOTU before they really screwed up the global financial system.

In 2000, Greenspan made another statement that should be considered a classic along the lines of some descriptions of the TITANIC:

...at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.

“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.

“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”