Some Clear Thinking on the Financial Mess from Norris and Krugman

I read both of these columns in last Friday’s edition of the New York Times.  It’s the end of a historic year for the U.S. economy.  We may look back in a few years and say that 2008 was the beginning of the end for supply-side economics (trickle down) and a nearly wholly unregulated financial services system.  2008 will hopefully become known as the time when ordinary people got concerned enough about the price they were paying for the excesses of banks which traded stocks, brokerages which sold insurance and insurance companies which did both.  2008 was a year when ordinary folks began to understand mortgage backed securities and credit default swaps – and what the failure of those derivatives meant for their local widget makers’ line of credit.

If you don’t read anything else today, read these two columns:

• Op-Ed, Floyd Norris: A year of financial contradictions and chaos - New York Times
• Op-Ed, Paul Krugman: The Madoff Economy – The New York Times

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Full Text: President George W. Bush, Speech on the Financial Markets and World Economy, Manhattan Institute, November 13

(Source: White House Press Office)

THE PRESIDENT: Thank you very much. Please be seated. Thank you. Larry, thank you for the introduction. Thank you for giving Laura and me a chance to come to this historic hall to talk about a big issue facing the world. And today I appreciate you giving me a chance to come and for me to outline the steps that America and our partners are taking and are going to take to overcome this financial crisis.

And I thank the Manhattan Institute for all you have done. I appreciate the fact that I am here in a fabulous city to give this speech. (Applause.) People say, are you confident about our future? And the answer is, absolutely. And it’s easy to be confident when you’re a city like New York City. After all, there’s an unbelievable spirit in this city. This is a city whose skyline has offered immigrants their first glimpse of freedom. This is a city where people rallied when that freedom came under attack. This is a city whose capital markets have attracted investments from around the world and financed the dreams of entrepreneurs all across America. This is a city that has been and will always be the financial capital of the world. (Applause.) Read more

Text: George Soros Testimony to U.S. House Committee on Oversight and Government Reform, November 13, 2008

(Source: U.S. Congress, House Committee on Oversight and Government Reform)

Click Here for PDF of Soros’ Prepared Testimony

Greenspan: Why History is not Written Contemporaneously

Today the New York Times has what I would call the definitive mainstream media piece (so-far) regarding just what 19 years of Alan Greenspan meant as head of the Federal Reserve. You can read it here.

One cannot place the blame for today’s out-of-control financial system on person or one institution. Greenspan’s still unyielding scorn for government regulation of the financial sector and markets does invite debate. There is a conversation and ensuing action that needs to take place over such issues as transparency and governance – and what role the federal government will take. Today’s mess also invites another look at the rules which were loosened under Presidents Bill Clinton and George W. Bush affecting what businesses should be engaged in lending, securities, and insurance. Under the old system where banks lent, insurers insured and brokers made markets I don’t think we would be dealing with problems which may cost the “little people,” taxpayers, trillions.

Another point worth debating is human nature. Just last week, at a speech at Georgetown University, Greenspan concluded:

Wealth creation requires people to take risks, and thus we cannot be sure our actions to enhance our material wellbeing will succeed. But the greater our ability to trust in the people with whom we trade, that is, the more enhanced their reputation, the greater the accumulation of wealth. In a market system based on trust, reputation has a significant economic value. I am therefore distressed at how far we have let concerns for reputation slip in recent years.

Reputation and the trust it fosters have always appeared to me to be the core attributes required of competitive markets. Laws at best can prescribe only a small fraction of the day-by-day activities in the marketplace. When trust is lost, a nation’s ability to transact business is palpably undermined. In the marketplace, uncertainties created by not always truthful counterparties raise credit risk and thereby increase real interest rates and weaker economies.

During the past year, lack of trust in the validity of accounting records of banks and other financial institutions in the context of inadequate capital led to a massive hesitancy in lending to them. The result has been a freezing up of credit.

As I noted in my opening remarks, trust will eventually reemerge as investors dip hesitantly back into the marketplace. From that point, history tells us, financial and economic revival sets in. I suspect it will be sooner rather than later. In either event, human nature being what it is, revival will come. It always has in this society governed by that remarkable document we call the Constitution of the United States.

What I would say to Greenspan is that humanity is broken by nature. Take a look at history and the things people still do to one another on a daily basis all over the world. The bad actors are a minority, but common sense regulation protects the rest of us from the minority of bad actors who are apparently able to take a whole loosely or unregulated system down. When Greenspan speaks of trust as foundational to the marketplace, I can’t help but think: “Trust but verify.” If there is weak regulation, and there are billions or trillions of dollars at stake who other than the government can guarantee the “validity of accounting records of banks and other financial institutions …?”

Americans should hope that the next president is willing to take back the control Wall Street has had over federal financial and economic policy since at least the Clinton Administration. It might even be nice to have a Treasury Secretary who is not an alum of Goldman Sachs.

Everyone hailed Greenspan as “The Oracle” when his low interest rates inflated the value of the housing market and helped create the boom of the nineties and early 2000s. Now those same interest rates and his relentless fight against regulation are being derided. At some point, years from now, we’ll know the true legacy of Alan Greenspan’s Federal Reserve.

Click Here for Text of Greenspan’s Speech at Georgetown