By Orson Aguilar and Preeti Vissa
The free-market fundamentalists who brought us economic collapse are now frantically rewriting history in an attempt to justify their mistakes and head off effective regulation.
Some people never learn, and it seems that Alan Greenspan is one of them. The former Fed chair, who ignored repeated warnings of trouble in the subprime mortgage and derivatives markets and whose inaction played a key role in the crash of ’08, is now claiming that the reason the economic recovery is so weak is too much government action.
Is he kidding?
For a while, Greenspan seemed to have learned at least a little from the crisis, acknowledging that he’d put too much faith in the ability of financial markets to self-correct. But lately he’s retreated back into free-market fantasyland.
Writing recently in International Finance, Greenspan objected to the “frenetic pace of new financial regulations,” claiming that by creating uncertainty, regulations have hampered “what should be a broad-based robust economic recovery.” And speaking March 15 at the Council on Foreign Relations, he blamed the 2009 stimulus program for causing too much government borrowing, crowding private companies out of the capital markets. He also blamed government efforts to shore up the housing market and ease the foreclosure crisis, as CNN reported, “for having delayed and prolonged foreclosures. He said such efforts have created uncertainty about when the housing market will hit rock bottom, at which point speculators can rush in and start buying up houses.”
Speculators, after all, “are essential to the process of stability and recovery,” he wrote in the International Finance column.
Oh dear. One almost doesn’t know where to begin.
Those poor companies that Greenspan says can’t invest in growth because they’ve been crowded out of the capital markets are sitting on $1.9 trillion in cash and liquid assets. Yes, that’s trillion with a “t” — just a shade less than the entire national budget of Japan.
That kind of money could put a lot of people to work. The idea that businesses aren’t hiring because they can’t borrow even as they sit on such a mountain of cash doesn’t pass the smell test.
Of course, Greenspan lately seems to have no idea that he’s crossed the line into self-parody. On March 29 he wrote in the Financial Times, “Today’s competitive markets, whether we seek to recognize it or not, are driven by an international version of Adam Smith’s ‘invisible hand’ that is unredeemably opaque. With notably rare exceptions (2008, for example), the global ‘invisible hand’ has created relatively stable exchange rates, interest rates, prices, and wage rates.”
Sure. And with notably rare exceptions (Hiroshima and Nagasaki in 1945, for example), nuclear explosions have proven to be remarkably safe.
And while it may not be surprising that a free-market fundamentalist like Greenspan would object to efforts to help people save their homes, he ignores the practical impact of letting the millions of expected foreclosures proceed full-steam. Foreclosures on that scale don’t just affect individual borrowers. They tank property values in whole communities, harm local businesses and throw city and county budgets into turmoil as the tax base implodes. Just how is this good for economic recovery?
As for regulation creating uncertainty: Sure, it’s a possibility for a short time, while regulators — especially the new Consumer Financial Protection Bureau — are getting their act together. But such uncertainty will be temporary, so long as Congress doesn’t hamper the effort to get CFPB up and running.
But in the long run, effective regulation means more certainty and stability for financial markets, because that certainty will be certainty based on reality, not fantasy.
The housing bubble and subprime mortgage boom of the last decade were built on what looked like certainty at the time. The combination of deregulation, low interest rates and an out-of-control derivatives market created an unshakable but false belief that the boom would continue indefinitely.
That “certainty” was so unshakable that Greenspan himself blew off repeated warnings of trouble in the subprime market, from us and others. But lack of regulation allowed financial institutions and speculators to build a house of cards whose collapse was inevitable.
The free-market fundamentalists like Greenspan who brought us economic collapse are now frantically rewriting history in an attempt to justify their mistakes and head off effective regulation of the financial sector. Sane people should ignore them.