Greenspan reverts to form

Alan Greenspan is as hard to follow as ever. Seemingly, too, as convinced of the transcendent wisdom of the market as ever.  Today, in a Financial Times op-ed, he argues that governments in wealthy countries overreach in trying to shield citizens from a variety of major risks. Along the way, he seems to equate strict earthquake-proofing standards for buildings, high capital ratios for banks, and a propensity to bail out banks that get in trouble as different manifestations of the same government malady. 

Those equations are hedged a bit. I don't think that Greenspan means to suggest that Japan's earthquake-proofing standards are as ill-advised as bank capital ratios that he regards as excessive or the bailout of Bear Stearns. But that's how I read it the first time:

The buffer may encompass expensive building materials whose earthquake flexibility is needed for only a minute or two every century, or an extensive stock of vaccines for a feared epidemic that may never occur. Any excess bank equity capital also would constitute a buffer that is not otherwise available to finance productivity-enhancing capital investment...

When Democratic Presidents reappoint Fed Chairmen

Regarding Fed Chairman Ben Bernanke's refusal to juice the economy at this point with further extraordinary measures such as a new round of quantitative easing, Jonathan Bernstein suspects that "Obama re-appointed Ben Bernanke without assuring himself that Bernanke would carry out policies that Obama presumably supports on the merits, and would have had the benefit of helping the Democrats in the 2010 election cycle."

Bernstein does grant that "it's possible that when Obama re-appointed Bernanke he thought he had such assurances, and it's possible that he believed that Fed policy to that point combined with fiscal stimulus would be sufficient to beat the recession, so that he underestimated the importance of the Fed in getting the economy back up to speed."  Finally, he arrives at what may have been the key point for Obama decision:

It's also fair to say that a year ago, in the wake of the financial crisis, reassuring the markets and keeping in place the person who had experience dealing with those issues was probably a more legitimate concern than it is today. 

As is the case on so many fronts, Bill Clinton, facing a rejectionist Republican majority, worked under constraints similar to those confronting Obama (and if Republicans capture one or both chambers of Congress this November, as seems increasingly likely, the operating environment will be more similar still).  According to Taylor Branch in The Clinton Tapes, when Clinton reappointed Greenspan in 1996, he

had wanted badly to replace chairman Alan Greenspan with Felix Rohatyn, the shrewd investment banker from Lazard Freres, but he ran into vexing constraints everywhere. Rohatyn himself advised Clinton to reappoint Greenspan instead, arguing that the Republican Senate would confirm no one else. Wall Street could not elect a U.S. president, Rohatyn told him, but it could surely un-elect one.  If threatened, financial, financial powers would sacrifice short-term profits to drive interest rates higher, hurting blue-collar workers with layoffs and shaky pension funds. In the end, Rohatyn refused appointment to both posts -vice chair as well as chair], and Clinton suspected that Greenspan had engineered this result by warning of political friction and terrible drudgery at the Fed.  He thought the wily incumbent protected his brittle ego from comparative scrutiny alongside Rohatyn, who was just as accomplished and a far more persuasive, attractive public speaker (p. 348).

Greenspan in denial

You don't have to be an economist to recognize that Alan Greenspan is disingenuous in his continued insistence, most recently in the Financial Times on Aug. 5, that the housing bubble and ensuing credit crunch were the product of impersonal and inevitable market forces, and that weak regulation played no role.

Note Greenspan's sleight-of-hand here:

When the current crisis emerged, it was assumed that the weak links would be unregulated hedge and private funds. The losses, however, have been predominately in the most heavily regulated institutions – banks.

Passing the banks off as "heavily regulated" ignores a pair of inconvenient truths: 1) the Fed on Greenspan's watch declined to regulate the out-of-control mortgage lending practices of both banks and non-bank lenders, despite having the authority to do so, and 2) investment banks were not subject to the same capital requirements as commercial banks .

Whether or not they were "heavily regulated" during the Greenspan era, banks were not effectively regulated. And non-bank mortgage lenders were effectively not regulated at all.

House on fire: Hillary opens a new front

After weeks of 'kitchen sink' attacks (and some defense) on matters of identity and character, Hillary Clinton made a strong bid today to shift the nomination battle to ground that plays to her strengths.

She delivered an economics speech that focuses almost entirely on the housing crisis -- from the homeowners' point of view. The speech isn't elegant, and may leave Hillary vulnerable on several policy points. But it may nonetheless give increased traction to her claims that she's ready with solutions to our most pressing problems.

The speech's rhetorical frame: Hillary casts the prospect of mass foreclosure as the the crisis threatening the middle class today. The Bush Administration is fiddling while home is burning, but Hillary will act as vigorously to protect Main Street as Bush has to protect Wall Street:

Last week when it became clear Wall Street was on the brink of a financial melt down, the Fed and the administration sprang into action. The Fed extended a $30 billion lifeline to prevent Bear Stearns from imploding and took unprecedented action to provide tens of billions of dollars in credit for other struggling investment banks as well. Homeowners, on the other hand, have received next to no assistance. Well, let's be clear. When families are losing their homes, that's also a financial crisis. When people’s greatest source of wealth is losing its worth, as college costs and health care costs and food and gas prices shoot up, that’s a financial crisis too. When "for sale" signs line streets across our country, when cities and towns are struggling with the costs of foreclosed properties, that is also a financial crisis.

The policy thrust is to move on multiple fronts to forestall foreclosures, guarantee loans, and create incentives and conditions under which lenders will renegotiate loans to keep people in their houses. In effect, bail out everyone: homeowners, with guaranteed renegotiated loans and/or with interest freezes; states, with money to buy foreclosed properties; mortgage companies, with protection against lawsuits by securities holders if they renegotiate loans. And of course, create another commission: an Emergency Working Group on Foreclosures, calling on Greenspan, Rubin, Volcker and presumably other ghosts of Christmas Past.

The political thrust: I've been out early and often on this issue. I've called for urgent action for a year, and I've got a comprehensive plan. I'm the one to get it done:

Now, a year ago in March 2007 I called for immediate action to address abuses in the subprime market, and I laid out detailed concrete proposals for how to do so. I warned this administration that the problems in subprime mortgages would soon spill over into regular mortgages.....I called for immediate action and laid out concrete proposals to prevent foreclosures and help states hard hit by this crisis.I also called for tighter regulation of the housing market....I also called for greater regulation of mortgage lenders...I’ve also proposed that we amend the bankruptcy code to give judges the discretion to write down the value of struggling families' homes.

Obama has not been slow on this issue, or short on proposals for easing the pressure on homeowners. But Hillary is upping the ante, putting the crisis and a web of proposed legislation to cope with it front and center. This marks a shift in the center of gravity on bread-and-butter Democratic economic issues. Obama will have to engage her in a sustained way if she keeps this up.

Mind you, there's plenty to engage. Hillary's plan can be hit from more than one direction. First, a blanket rate freeze on adjustable mortgages is a radical retroactive price control that would give a free lunch to lots of people who went into ARMS with eyes open. Second, another blue-ribbon commission will sound to some like another can kicked down the road. And to put forward Greenspan as Wise Man No. 1 is an eye-popper -- there's something like consensus, even among Greenspan admirers, that he bears considerable responsibility for blowing up the housing bubble -- by leaving interest rates too low too long, and by refusing to regulate mortgage lenders more vigorously when warned of excesses. To pair him with Rubin recalls what many Democrats regard as the Clinton Administration's excessive friendliness to business and acquiescence to Republican-driven bank deregulation.

Hillary may get caught between two stools -- advocating almost socialist price control on mortgages on one hand, and showing deference to yesterday's deregulators on the other. But Obama will have to pivot.

Related posts
McCain's economic bridge to nowhere
Obama gets down to tax brass
Obama brings it down to earth in Virginia