In 1987 Ronald Reagan's, anti-government free-markets philosophy had gained a solid foothold in the American economic physic.
The newly appointed federal reserve chairman Alan Greenspan (an Arthur Burns protégé) subscribe to economist Milton Friedman and philosopher Ayn Rand's laissez-faire philosophy of no government intervention.
In the early 90's a powerful private financial committee was formed in Washington D.C. to promote the free-financial markets philosophy and to overturn the last great regulation hold-out from the 1930's financial crisis, the Glass-Steagall Act. The boys title for the bill was 'The Financial Modernization Act.' And so if you don't want to modernize, I guess you're considered hopelessly old fashioned."
By 1999 TIME's World section, takes you inside the most powerful economic triangle in Washington in its cover story on the Committee to Save the World, a.k.a. Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin and Deputy Treasury Secretary Larry Summers.
The Glass-Steagall Act was created after the first great financial crisis
The Glass-Steagall Act is the Depression-era law that separated commercial and investment banking. It was functionally repealed in 1998, when Travelers (the parent company of Salomon Smith Barney) acquired Citicorp. And it was officially repealed in 1999. And just seven years later the world found itself in another 1930's style worldwide financial crisis.
Recent events on Wall Street...the failure or sale of three of the five largest independent investment banks-have effectively turned back the clock to the 1920s, when investment banks and commercial banks cohabited under the same corporate umbrella.
Ironically the very ideology that said monopolies are bad and capitalism should allow bad businesses to fail...failed us. In the end we had private Capitalism of profits and excessive compensation but when the losses from those bad decisions came they were Socialized with taxpayer money. Amazingly both right and left wingers came together to say, "No Bail-Outs". Yet, the fear of systemic risk ( finance code for risk of collapse of an entire financial system or entire market ) seemed so great two presidents of two parties came to the same conclusion, government action not in action was required.
The architects of that failed philosophy now get promoted to clean up the mess. Thank you, Timothy Geithner and Lawrence Summers. These boys have make a great political living for themselves. Here is just one recent article on Larry Summers connections.
The Young Turk Gives Greenspan Advice
Last October Alan Greenspan, former Federal Reserve chairman, at a hearing on Capitol Hill (during the financial crisis) makes a profound self discovery. Greenspan Concedes a possible flaw in his thought process. This is classic Greenspan. He's incapable of admitting mistakes were made. Instead he carefully admits there may be a "flaw" in his ideology that says less financial regulation is always better for the public. He talks as if his decisions were based upon scientific models and rocket science rather than personal opinion.
Alan Greenspan is a classical intellectual. He's ideally suited to discuss macroeconomic issues, musical history and Adam Smith or Ayn Rand philosophy. Unfortunately that background is of little value in monitoring the realities of microeconomic details and human nature. He's not the type of detail oriented person you need to develop a minimal intrusive yet efficient and effective regulation system to protect America. And paradoxically the man who believed in free-markets and Laissez-Faire/hands-off government was in charge of the Federal Reserve, an entity created by government.
Over the last 10 years I've had the pleasure of listening to Treasury Wizard Greenspan speak many times. He is the master of grace and speaks with such elegance. Greenspan, a musician at heart, could make words dance to please democrats and republicans alike. Unlike others, I do not blame a few men or one party for the greatest financial crisis of our lifetime. There is plenty of blame to go around in Washington D.C., Wall Street and on Main Street. What's done is done. The question is will anything change for the better?
Listen to the PBS Frontline Special Report ( $25 DVD Video) for free (while we still have the viewing rights) below.
Shattering Glass-Steagall
The Senators, Economist and Glass-Steagall
Yes the most important point for now is to have someone who can help us get out of the crisis in the best way possible...For sure Bernanke is not the man who is expected to do this...But another 3 years or even more or Bernanke can make things even worse...Hope that he can do something unexpected (which is better for America and for the world).
ReplyDeleteAlso, the best regulation in my opinion is to let the flawed ones fail. So even if someone like Citigroup was allowed to fail then market participants would know that if they try to do things in excess their fate would be the same. But if the Government comes and saves everyone, its like giving the message that - speculate, overleverage, take risky bets and when you are in trouble come to me.I will give you tax payers money to go out there and play with it again.
Spoken like a true Adam Smith, Austrian and Milton Friedman Economist. Free-markets and capitalism means failures are a normal part of the process. Yet, Adam Smith should have foreseen that along with an invisible right hand of capitalism was the always present left hand of government.
ReplyDeleteAnd governments of all "isum" are born with a desire to protect their children from harm and to keep themselves in power.
One interesting fact about the financial crisis was most American conservatives and liberal groups where against these bail-outs, yet our elected officials were all advised that the " Financial System Systemic Risk " was so great something had to be done. So, in the land that made Capitalism, Freedom and Democracy famous the question now arises have our actions done more good than harm?
Certainly for those with investments in the world markets the answer is yes. For those who lost jobs and money the answer is government was too late. And, there exists a paradoxical complication. It was the belief that a lack of government regulation would benefit more people and in the end it was both government action ( holding interest rates low and instance on homeownership rather than affordable housing) and inaction ( lack of effective regulations on derivatives and lending practices) that enabled this bubble to grow.
This frontline video (below) and the one made by the BBC called "The Greed Game - The Making Of A World Wide Financial Crisis" do an excellent job of providing an understanding of the events enabling this financial crisis.
http://windowtowallstreet.com/financialgreedBBCreport.aspx