The Economy

I have just finished watching four hours of Congressional testimony on the subprime motgage mess by Greenspan, Cox and Snow. The following is my take on their testimony and my own understanding (or lack thereof) of the overall mess.

Greenspan - Greenspan, based on his testimony, is now re-evaluating his basic economic philosophy. He half-heartedly admited to errors during his term as Federal Reserve Chairman and offered, in some cases, what I believe to be a legitimate defense - such as his attitude in regard to derivatives and hedge funds. He correctly pointed our that both continue to do well in their original areas of origin - essentially a hedge on equity prices and foreign exchange. He admitted that the area he failed to see was in mortgage securitization and its rapid growth due to demand.

When questioned about neglecting the Federal Reserve's oversight responsibilities (given by Congress in a 1994 law, which he generally ignored), his answer was that he believed that area needed more study internally by the Federal Reserve and they had basically "tabled" implementation of the law to explore its intent and means of implementation. A weak answer.

Greenspan is a self-described "libertarian." Basically, within economics,that means a believer in minimum government interference and deregulation to allow the free markets to operate on their own. The philosophy has always impressed me as one of failing to consider the imprefections of human nature...in this particular case, greed and corruption of the political/financial institutions. That subject is worthy of a separate and lengthy essay, but in a phrase: Greenspan was too involved in econometrics, with an overall niave economic philosophy.

But, and this is a very important "but," Greenspan's lack of action was in large measure due to his political masters, both Democratic (Clinton) and Republican (Bush). They both used him. Perhaps the best lesson to take away from his reign is that he stayed too long. We should consider a law that limits the amount of time a Fed Chairman may serve. Greenspan was around long enough for both parties to learn how to play him (18 years).

If Greenspan was the niave idealist in the trio, Chris Cox was the political realist. Cox is a man who all of a sudden has found religion, namely that of additional oversight and regulation. This new religion is appropriate for the moment and I don't doubt his sincerity. Yet, during his tenure as head of the SEC he pretty much followed the Administration's economic policies of deregulation, unrestricted markets, etc. Cox impresses me as one smart enough to have had serious doubts about the Administration's direction, but just went along. Cox is to the Administration's economic policies as Powell was to its foreign and defense policies. Although he will undoubtedly be gone shortly as SEC Chairman, he may have a promising future in helping to rebuild the Republican Party.

Former Secretary of the Treasury Snow was the "organization man" of the trio. The answer to past failures and future successes lies in "reorganization," eliminating duplicative and "stove pipe" regulatory organization, etc. Snow, who came out of corporate America, has much of its current philosophy - anything can be accomplished with the right organization. Much of what he testified to, I believe to be true, but much was neglected and he, like Greenspan and Cox, "bought in" to the Administration's misguided philosophies and policies.

What they all agreed upon, to one degree or another, was a need for both reorganization and expansion of government oversight and regulatory authority.

Another major observation of the testimony and questions was the intensity of the some Republicans to escape blame for the economic disaster. The exceptiopn to this was Republican Tom Davis of Virginia, who seemed to steer away from party politics and asked serious questions (another candidate for rebuilding the Republican Party). Aside from Davis, the very clear Republican position on the financial melt down is that it's all the fault of Democratics and their treatment of Freddie Max and Fanny May.

There is certainly SOME truth to this argument. However, none of the witnesses (Greenspan, Cox or Snow) felt it was the primary cause and Henry Waxman, the Democratic Chairman pointed out that at it's peak, both organizations held less than 15% of the total subprime market.
Nevertheless, Democrats such as Barney Frank, Chuck Schmur, Chris Dodd and a collection of others, primarily from the New York region have serious questions to answer in regard for their support of an untenable financial system. Obama, has the 2nd largest receipant in the Senate of Banking interest contributions probably falls into this category as well, although because of his relative newness, was probably being "cultivated" for the future. However, all of these contributions pall in comparison to the amounts raised in his Presidential campaign and it is a question mark as to the influence of these past industry contributions on his future behavior as President.

Basically, I see the issue as not one of Party per se, but rather one of "Pro-Wall Street vs. Anti-Wall Street," with the former primarily responsible for deregulation. Within that category, and very broadly, Republicans seem to have acted in regard to economic philosophy, while Democrats acted in regard to campaign contributions. Yet, regardless of motivation, the extent to which deregulation and lack of oversight occured has, in my opinion, seriously endangered the global financial system.

Next Post will be a reasonably lengthy overview of how we got into trouble and why Reganeconomics has failed.