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Want to read a transript of Wall Street's regulators failing?


This transcript of Alan Greenspan trying to convince the Federal Reserve's Board of Governors to dismiss the obvious anomalies on the rent-to-price ratio graph (pictured) is a remarkable document. The SEC's case against Goldman Sachs might be more media-friendly, but this should be a similarly large bombshell for the people writing financial reform.

What you're reading is regulatory failure in transcript form. Presented with evidence that something is going awry in the economy, Greenspan and Co. nitpick, divert, speculate and finally just change the subject. They felt good about things, and so evidence to the contrary was ignored. And it's not because the people around that table were dumb or evil. It's because they were caught up in the times. If they hadn't been, we wouldn't be having this conversation.

But this is why you need to be very careful with the idea that regulation plus information is sufficient. We had regulators and they had information. And it proved totally insufficient. When I asked Sen. Mark Warner how the bill would have stopped the crisis, the first thing he brought up was the Office of Financial Research, which is there to distribute real-time information. Maybe the OFR would put the dots together and maybe it wouldn't, but there's a serious chance that even if it did, the top-line regulators would find reasons to ignore the conclusions of these nameless quants who don't understand the sophistication of the risk analysis being performed on Wall Street, or the anger that the president and the Congress and the Wall Street Journal editorial page will turn on any regulator dumb enough to try and interrupt the good times based on a graph and a theory.

By Ezra Klein  |  May 3, 2010; 4:55 PM ET
Categories:  Financial Regulation  
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Next: Legislating so your children can get elected


just a heads up but whoever posted the headline spelled transCript wrong ;-)

Posted by: visionbrkr | May 3, 2010 5:03 PM | Report abuse

I don't think it's quite accurate to call the Fed "Wall Street's regulators." "Monetary Policy setters" maybe

Posted by: bdballard | May 3, 2010 5:10 PM | Report abuse

It is partly group-think and partly ideology. Greenspan was such an Ayn Rand acolyte that he couldn't comprehend that markets could run amok because of the greed of the participants. He thought they would self-correct. He also did not want to be too far outside the consensus. Remember his "irrational exuberance" speech? Right, but early. He became a cheerleader after that, never sounding an alarm again. Real courage, that.

As for the particiupants themselves, no one is fiored for being as wrong as the rest of the herd. And people who did sound the alarm are prophets without honor in their own country.

What might help is a requirement that there be a real diversity of opinion on the Fed. And within the WH, whoever is the occupant. But nothing can make people listen who do not want to and/or who make money from not fully understanding.

Posted by: Mimikatz | May 3, 2010 5:13 PM | Report abuse

Laurence Meyer's "A Term at the Fed"

Posted by: bdballard | May 3, 2010 5:29 PM | Report abuse

"Presented with evidence that something is going awry in the economy, Greenspan and Co. nitpick, divert, speculate and finally just change the subject."

Agreed! Even Greenspan's predecessor had noted (and ignored) some warning signs. While I agree now as much as I did back then that certain warning signs were present and suggested action, there's no time machine that can turn back the clock and, even at present, there's no way to make ostensibly competent individuals wake up and smell the coffee. By the way, does anybody want to talk about the cost and financial effects of the PPACA?

Posted by: rmgregory | May 3, 2010 5:42 PM | Report abuse

not for nothing but Peter Schiff was right.

I also love his daily show visit where if I remember correctly he bashed Cramer.

Posted by: visionbrkr | May 3, 2010 5:56 PM | Report abuse

I don't think the house price/rent ratio is the best measure.

Rates on mortgage loans were falling over the time period on the chart. A 30-yr fixed rate mortgage for $200,000 at 8.5% generates a payment of $1,537.83. Using a rate of 5.5%, that payment falls to $1,135.58. The mortgage would need to rise to $271,000 to generate an equivalent payment - conversely, a given household that could buy a $200,000 house can now afford a $271,000 house (provided it can make the downpayment on each).

Also, as people shift into owner occupied housing, that would put downward pressure on rents.

Then again, interest rates were artificially lowered by money creation, and lending standards were slashed, and rapidly soaring asset prices tends sends a lot of investors rushing into the game. Clearly, things didn't end well.

I suppose all I'm saying is that given how far interest rates had fallen, watching a 40% rise in price/rent ratio from 2000 to 2004 could have seemed rational to an observer during that time.

Posted by: justin84 | May 3, 2010 7:12 PM | Report abuse

"Maybe the OFR would put the dots together and maybe it wouldn't, but there's a serious chance that even if it did, the top-line regulators would find reasons to ignore the conclusions of these nameless quants . . ."

This sounds like learned helplessness to me. This isn't some mysterious force of nature, it's actual people making actual decisions with actual consequences. You can do something about that "serious chance" by putting people smarter than Alan Greenspan in the top job. And why so ready to concede that Greenspan wasn't dumb or evil? Or both?

Posted by: randrewm | May 3, 2010 7:30 PM | Report abuse

So a question - was this transcript brought to light in the Greenspan testimony / hearings to Congress? If so, what did that old hack say? If not, why was it not brought?

Posted by: umesh409 | May 3, 2010 7:53 PM | Report abuse

I agree. Peter Schiff was right.

Posted by: giantsequoia | May 3, 2010 11:03 PM | Report abuse

Wow you blew it here Ezra. The Fed isn't the regulator (that's the SEC), it was the Fed that served as the primary dealer of excessive liquidity, needed by Bush II to pretend the economy was doing swell. What most people seem to miss is that we have been going full bore on (monetary) stimulus for way too long.

The bill would not have stopped the crisis. It could have made it smaller. Shutting down Freddie, Fannie, and Ginnie from buying bad, or any, loans would have prevented the crisis. If anything, political pressure on the Fed is always pushing down on rates, because politicians love to borrow money to buy votes.

The economy is cyclical. Assets were mispriced. Bankers mispriced risk. Regulation can't solve all problems.

However, we can stop the government from allowing 3.5% down payment loans to be backed by future taxpayers. Why won't you say anything about that?

Posted by: staticvars | May 3, 2010 11:50 PM | Report abuse

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