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'Garbage, in one word'

James Galbraith is not impressed with Alan Greenspan's defense of his record:

In 66 pages, Mr. Greenspan fails to use the word "responsibility" even once. The word "blame" does not appear. The word "mistake" occurs once; financial firms made them. The word "failure" appears 14 times. None of them are self-referential. To have expected the phrase "mea culpa" would of course be asking too much.

I agree with the Chairman on two points. The first is his defense of the Federal Reserve against the charge of having violated the Taylor Rule. One of the few things more insufferable than this paper is that formula. Mr. Greenspan effectively rebuts the idea that low interest rates per se caused the crisis.

The second good point lies against the "global savings glut" argument. As Mr Greenspan says, "The main problem with that explanation is that there is no actual evidence of a global savings glut." ...

The most telling omission in this paper is that the word "fraud" does not appear. But the world knows that the collapse of the financial system had, at its core, the largest financial fraud of all time. That fraud was in the origination, the rating, the underwriting and the issuance of credit default swaps against sub-prime mortgages issued largely by private originators and securitized by the largest banks.


By Ezra Klein  |  March 25, 2010; 10:00 AM ET
Categories:  Financial Crisis  
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Comments

Ayn Rand on "responsibility:" http://aynrandlexicon.com/lexicon/responsibility-obligation.html

Posted by: bdballard | March 25, 2010 10:04 AM | Report abuse

Hey, let's not pick on the senile, but instead just nod and smile. Greenspawn is a disease correlated with senile decline, so Alan can be excused if he doesn't understand that either apologies for anal soiling of the financial environment, or a better senior diaper are appropriate for those suffering from advanced Lord Gaga syndrome.

Posted by: JimPortlandOR | March 25, 2010 10:29 AM | Report abuse

"fraud was in the origination, the rating, the underwriting and the issuance of credit default swaps against sub-prime mortgages issued largely by private originators and securitized by the largest banks"

And underwritten by the implicit guarantee (often made explicit) that the U.S. Government (i.e., the taxpayer) would cover all bets when the house of cards came crumbling down. And the sub-prime mortgage market was largely created by Fannie Mae, Freddie Mac, and legislation supposedly aimed and making home ownership more available, such as the Alternative Mortgage Transactions Parity Act, government tax incentives for purchasing mortgage backed securities, and the Community Reinvestment Act (and subsequent amendments) . Plus repealing the Glass-Steagall act and letting investment banks effectively self-regulate . . . there's a lot more to it than saying "those naughty big banks!"

Posted by: Kevin_Willis | March 25, 2010 10:31 AM | Report abuse

What galls me is his wife is going to come on TV here in a little while and give me some economic reporting without noting the huge conflict of interest.

Posted by: flounder2 | March 25, 2010 10:46 AM | Report abuse

Comparisons with Ireland and Canada show how tough it is to pin down particular causes of the financial crisis.

Posted by: jduptonma | March 25, 2010 10:47 AM | Report abuse

Greenspan has never been able to grasp that he could be wrong about anything! His verbose, windy, and boring speeches gave evidence of his ego; and the disdain in which he held everyone else. He's just an old man who cannot accept that his time in the sun is over! And, happily, no one give a damn what he has to say anymore.

visit: http://eclecticramblings.wordpress.com

Posted by: my4653 | March 25, 2010 10:59 AM | Report abuse

"What galls me is his wife is going to come on TV here in a little while and give me some economic reporting without noting the huge conflict of interest.

Posted by: flounder2 | March 25, 2010 10:46 AM | Report abuse"


yes. isnt that incredible that it is permitted?

the greenspan/clinton years:
the "whatever you can get away with" years.
they initiated the great backslide into lack of personal accountability, lack of personal responsibility....
and like a rock rolling down a hill,
it gathered momentum as it went down, down, down....
causing damage all along the way,
rolling like a runaway boulder, for years, down a mountain.

now,
it is not easy to repair this damage.
but president obama has made a courageous start.
maybe progress now, looks like nibbling around the edges...
but it takes a very long time to turn anything around.

i watched a firestorm go through a piece of the high desert
about seven or so years ago.
things are coming back, year after year....but it is slow...
and there have been continuing setbacks
in a year without rain , or an invasive insect or parasitic plant,can set new growth back again.
but slowly, it is coming back.
it is going to take time to recover from all of the damage.
but we are making progress.

there is no such thing as small change.

Posted by: jkaren | March 25, 2010 10:59 AM | Report abuse

Kevin_Willis: "the sub-prime mortgage market was largely created by Fannie Mae, Freddie Mac, and legislation supposedly aimed and making home ownership more available, such as the Alternative Mortgage Transactions Parity Act, government tax incentives for purchasing mortgage backed securities, and the Community Reinvestment Act"

I don't think so. It's worth reading this Daniel Gross piece in Slate, http://www.slate.com/id/2201641/. "As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt." And none of the above factors "forced Bear Stearns to run with an absurd leverage ratio of 33 to 1,... instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients' money, [or] required its septuagenarian CEO to play bridge while his company ran into trouble."

The article is worth reading in full. The issue may be more complicated than "those naughty big banks," but that doesn't mean the big banks are absolved of responsibility.

Posted by: dasimon | March 25, 2010 11:18 AM | Report abuse

James Galbraith has an excellent book "The Predator State" that is more timely than ever.

Mortgage brokers were also primary culprits, as they preyed on the uninformed. And did Fannie and Freddie issue those "synthetic mortgages" when the supply of real ones to back the credit default swaps was drying up? I don't think so.

Posted by: Mimikatz | March 25, 2010 11:30 AM | Report abuse

@dasimon

Word (the new lingo for I agree with you)

@ KW:the sub-prime mortgage market was largely created by Fannie Mae, Freddie Mac

Sorry this is not a correct observation.

Fannie and Freddie didn't get into the subprime market until way after the bubble inflated.

"Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis."

Read more: http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#ixzz0jCdXNtPL

The Alternative Mortgage Transaction Parity Act of 1982 preempts state laws that restrict banks from making any mortgage except conventional fixed rate amortizing mortgages. The law actually “allows lenders to make loans with terms that may obscure the total cost of a loan.”[1] This led to various exotic new mortgages many borrowers failed to understand and could not afford.

Note that this was a Reagan "Big Govt bad for regulating mortgages" bill. Let's make sure we are blaming the right (no pun intended) people.

"Plus repealing the Glass-Steagall act and letting investment banks effectively self-regulate."

Remember this was driven by republicans in the congress. Clinton not vetoing this was one of his biggest policy mistakes, although I think this was attached to a "must pass" bill. I know it was introduced at the very end of the session with only 1 day to debate it in the Senate.

Posted by: srw3 | March 25, 2010 11:39 AM | Report abuse

more @ Kevin_Willis, whose posts are usually factually accurate. Must be a bad day for him.

Federal Reserve Governor Randall Kroszner, says the CRA isn’t to blame for the subprime mess, "First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA-related loans appear to perform comparably to other types of subprime loans. Taken together… we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis," Kroszner said: "Only 6% of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes.
FDIC Chairman Sheila Bair disputes that the CRA was a problem "Let me ask you: where in the CRA does it say: make loans to people who can't afford to repay? No-where! And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth ... pure and simple.
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis#Repeal_of_the_Glass_Steagall_Act.

The other main cause of the mortgage crisis and financial meltdown...

The Commodity Futures Modernization Act of 2000 exempted derivatives from regulation, supervision, trading on established exchanges, and capital reserve requirements for major participants. More 11th hour "Govt regulation baaad" bill that set the stage for a few to make billions while the stability of the financial system teetered on the edge of destruction.

Posted by: srw3 | March 25, 2010 11:49 AM | Report abuse

"But the world knows that the collapse of the financial system had, at its core, the largest financial fraud of all time. That fraud was in the origination, the rating, the underwriting and the issuance of credit default swaps against sub-prime mortgages issued largely by private originators and securitized by the largest banks."

This is total BS. Subprime defaults were in no way the driving force. The biggest problem is not the repayment problem, but the bubble price problem itself. When a bank gives out a $500,000 loan for a $625,000 asset, and the asset drops in value to $400,000, the collateral no longer covers the debt.

For this bubble we must blame the consumer, who started to consider housing a get rich quick scheme, overpaying for homes and then refinancing to take out all the equity, the NAR, stealing 6% from every transaction, and the government for bailing out the idiots that should have blown up for giving out what amounted to margin loans to investors, creating interest rates deductions for mortgages, exempting most home sales from capital gains tax, getting fat on the expanded property tax base, and basically setting up the platform that allowed housing gamblers to take a momentum bet with taxpayer backed GSEs protecting them.

Even, unemployment is a vastly greater factor in foreclosure than sub-prime. Sure, there are some horrific anecdotes and plenty of bad behavior on both sides of the table, but the cause of the crisis has more to do with the unsustainable rise in prices.

Posted by: staticvars | March 25, 2010 12:09 PM | Report abuse

@ staticvars

I think you missed the money part of the quote.

" That fraud was in the origination, the rating, the underwriting and the issuance of credit default swaps "

The real problem was that the rating agencies rated the CDOs and MBSs as AAA when they were not even B- in quality. Nobody would have bought these securities if they were rated at their true risk profile.

It is true that housing was inflated and people took too on too much debt. This does make for a housing crash. In the old system, some banks would have gone belly up and been taken over by FDIC. Giant financial services firms didn't used to own mortgages. In the new, unregulated era however, the resultant financial crash had more to do with the tremendous overleveraging of CDOs and MBSs based on totally false credit ratings.

Posted by: srw3 | March 25, 2010 12:19 PM | Report abuse

"The real problem was that the rating agencies rated the CDOs and MBSs as AAA when they were not even B- in quality. Nobody would have bought these securities if they were rated at their true risk profile."

I agree that the ratings agencies did bad stuff, failing to take account for the failure of insurance providers. However, just about the only thing that makes something AAA is the explicit or implicit backing of the taxpayer. As we've seen in this week's auctions, Warren Buffet is getting a better rate than we are.

Posted by: staticvars | March 25, 2010 1:27 PM | Report abuse

@ staticvars: However, just about the only thing that makes something AAA is the explicit or implicit backing of the taxpayer.

Don't really see this as true unless the govt makes a decision to make it true.

"The biggest problem is not the repayment problem, but the bubble price problem itself. When a bank gives out a $500,000 loan for a $625,000 asset, and the asset drops in value to $400,000, the collateral no longer covers the debt."

So do you agree that the bigger problem by far was the rating agencies elevating the creditworthiness of CDOs and MBSs far beyond their actual riskiness?

Again, if the mortgages were owned by banks and not sliced, diced, and sold as AAA securities, the fall of the big investment banks and AIG would not have happened, because they would not have bought these securities or would have needed much greater capital on hand as a reserve to balance these risky investment instruments.

The housing bubble was bad, but it should have been confined to the borrowers and the banks that lent the money to them. By securitizing these mortgages and massively overleveraging the securities through CDSs, the big investment firms made the housing crisis an international financial crisis.

Posted by: srw3 | March 25, 2010 1:58 PM | Report abuse

Didn't one of the bank CEOs say recently in front of some congressional or oversight panel that they just thought housing prices wouldn't go down? That's a monumental assumption with potentially disastrous results when you're functioning with that much leverage. Jamie Dimon of JP Morgan said "We didn't stress test housing prices going down by 40%." But wasn't it pretty evident that there was a housing bubble? Even if people thought a 40% drop was unlikely, wouldn't it have been a good idea to reduce risk that might not only imperil the firm but also bring down the entire economy?

Yes, there were many points in the chain that could have stopped the disaster: people who took out loans they couldn't afford, people who gave the loans without checking whether they could be paid, ratings agencies who would rate anything by those paying to have them rated, and those aspects should be subject to reforms. But the bankers were the most sophisticated of the lot. They should have known better--especially considering how much they were getting paid for their supposedly superior judgment.

Posted by: dasimon | March 25, 2010 4:08 PM | Report abuse

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