Failure Of Market Forces

A matter of irrational exuberance indeed. Not so long ago the economic mavens were still saying that our market forces were going to solve their own problems. It has entered into a few discussions I've had lately, so I would like to point out that Alan Greenspan is directly responsible for the size of the present recession, for failing to regulate when he had the power, and saw what was occurring.

The failure of ratings agencies honestly to evaluate subprime loans, giving them wholly unjustifiable AAA ratings, guaranteed that investors of all sorts would wind up holding valueless paper, mortgages that represented no security. Subprime loans that were made on false information, on premises that established in advance the loans were unrepayable, are the basis for the losses that businesses are suffering. They are holding worthless paper, funny money, quite literally. All of this could have been stopped long ago, by the Fed's exercising its power to stop the ratings falsification.

The financial guru estimated that rising values, endlessly rising values, would make all of this mess go away.

In an interview with Sunday’s Frankfurter Allgemeine Zeitung, one of Germany’s most prominent newspapers, former Federal Reserve Chairman Alan Greenspan sharply criticized ratings agencies for their role in the current credit crisis. “People believed they knew what they were doing,” Mr. Greenspan says in today’s FAZ. “And they don’t.”

Still, he doesn’t think it’s necessary to strengthen rating-agency regulation. Essentially, they’re “already regulated,” he says, because investors’ loss of trust means the agencies are likely to lose business. “There’s no point regulating this. The horse is out of the barn, as we like to say.” Greenspan also said he believes that the volume of structured-finance products will decrease. “What kept them in place is a belief on the part of those who invested in that, that they were properly priced. Now everyone knows that they weren’t. And they know that they can’t really be properly priced,” said Greenspan.

This was written in September of last year, when the crumbling was already underway.

The same Fed ex-Chairman acknowledged in his Meet the Press interview, cited in the same article, that he had in a speech in 2004 urged more use of adjustable rate mortgages, "because they weren't going to live in the house long enough", but assured his audience that it was only justifiable, soundly based, mortgages he meant.

The myth that Alan Greenspan reveled in that prosperity had resulted from the 'sound economy' the absence of regulation had wrought was one that kept his own personal bubble up for long enough to expose it for the cruel hoax that it is. Losing their homes should teach those rowdy nouveau riche - so it would seem the mortgage industry is trying to escape all consequences of its excellent adventure.

Interestingly, I discovered in a conversation about these myths, that I was victim of another one. I have several times mentioned the sound policies of Henry Ford, who was the visionary who instituted paying workers enough to afford the product they made.

From my son, recently graduated from George Mason Law School, I found out that a 'classic' business law study is of the suit brought against Henry Ford by his stockholders. He was busily putting all of his profits back into the firm, and into those excellent wages, rather than pay dividends on investments. When the suit was finally settled in favor of investors, they took the returns and founded Dodge. I have to say that "dodge" now has a whole new meaning for me.

Was it greed, and diversion of funds from competitors, that actually underlay the concept that created the greatest properity that any country, at any time, ever experienced? While I never thought Henry Ford was a great benefactor, I apologize, I may have ennobled him more than I knew.

History is hardly kind to the robber barons, and it has a few more to add to their ranks.

...the merging of commercial and investment banking helped enable high-risk mortgage lending to make its way into the mutual funds and 401Ks of millions of Americans in the form of mortgage-backed securities. "Diversifying bad debt just spreads the poison," as Frank said in his Boston speech. It also makes a falling housing market reverberate throughout the economy far more than it did even during the S&L collapse. Enter the subprime crisis. And welcome back, 1929.

Quite possibly, our 401K just became a 200.5k, and we have the deregulator boosters in the GoPervian party to blame. Hopefully, we can make sure they never have the power to wreak this havoc again.