Greenspan's Ghouls, Kool-Aid Drinkers and the Shortcomings of Obama's Reforms

Today's Bloomberg commentary by David Reilly on the subject of the Obama administration's massive financial overhaul plan has two equally entertaining titles, one on the Bloomberg opinion page which, understandably, has far more appeal to yours truly:

Greenspan's Ghouls Stalk Obama Financial Plan

And another one on the commentary itself, which has its own particular charm:

Kool-Aid Drinkers Survive Financial Overhaul

The contents of the editorial are as good as the titles, Mr. Reilly joining the chorus of opposition to the many shortcomings of the reform plan focusing on how we got to this juncture and who was most responsible for getting us here.

President Barack Obama doesn’t need to just overhaul financial regulation. He needs to exorcise the ghost of Alan Greenspan.

For far too long, regulators weren’t willing to regulate, inspired by the view of the former Federal Reserve chairman that too much oversight is a greater threat to markets than too little. That turned out to be a bigger cause of the credit crisis than the particular structure of the agencies overseeing the financial system.

There does appear to be far too little recognition of how miserable a job the Fed has done over the last ten or fifteen years in its role as a regulator.

Yesterday, during Senate hearings on the reform plan, the characterization of the central bank seems to have been spot on, the idea of giving the Fed more authority being likened to "a parent giving his son a bigger, faster car right after he crashed the family station wagon.”

Back to Mr. Reilly:

Donald Kohn, the Fed’s vice chairman, summed up the prevailing regulatory attitude in 2005, saying, “The actions of private parties to protect themselves -- what chairman Greenspan has called private regulation -- are generally quite effective,” while government regulation risks undermining “financial stability itself.”

Unless Obama can change that mindset, which is entrenched in many of the institutions overseeing banks and markets, the details of his 88-page reform plan won’t matter much.

And while there appears to be a newfound appreciation for government oversight, we can’t be certain yet about the intentions of those shaping the Obama plan. Some of them, after all, were one-time advocates of Greenspan’s views, or at least failed to challenge them.

There's much more... actually it's all quite good, so more is reproduced below:

Greenspan’s Disciples
Treasury Secretary Timothy Geithner, one of the architects of the Obama overhaul, was a big promoter of the kind of so- called financial innovation that ultimately helped bring about the crisis.

During a speech in early 2007, Geithner argued that innovative products such as credit default swaps and collateralized debt obligations “should help make markets both more efficient and more resilient.”

And Geithner, at least back then, echoed Greenspan’s belief that regulators shouldn’t try to stop bubbles from forming. In the same speech, the then-chief executive of the Federal Reserve Bank of New York also said, “We cannot identify the likely sources of future stress to the system and act preemptively to diffuse them.”...

...Given that so many regulators and political leaders sipped from the Greenspan Kool-Aid cup, it will take time to see if the financial crisis has sobered them up.

If not, Obama can play with regulatory organizational charts all he wants, and it won’t make much difference.

The quandary of the headline writer becomes clear after that second-to-last paragraph - perhaps they should have opted for the combined "Greenspan Kool-Aid" angle instead.

Than again, "Greenspan's Ghouls" is kind of catchy.

Comments

[Mad Hedge F...:]

The regionals can't stand this stuff. I have really been avoiding financials for the last few months after they had their dead cat bounces. However, I had to listen to Midsouth Bank CEO Rusty Cloutier when he spoke on CNBC. His 24 branch bank, with a market cap of only $103 million, is based in Lafayette, LA, one of my old stomping grounds and home of the world’s greatest étouffée and shrimp gumbo. He says that “Unless we break up the big banks and get back to sound banking principles we are going to relive this over and over again….Free enterprise has to have the right to fail….Allan Greenspan and his administration have some problems they have to ‘fess up to.” With the current system of megabanks “they get the gain and we get the pain….I’m regulated now by 13 agencies of the US government and I don’t know that I need a 14th.” There’s no one who can read you a riot act like a Southern regional banker.

Jun 20 05:43 AM

[John Bowman:]

When I got a job in the mid-seventies outside of Trenton, NJ, I went looking for a smal bank. I figured a small bank would be responsible with the customer's money.I found one which had one near my job and another branch downtown.

Well, it wasn't long before a larger NJ bank bought them out and then another and another. About ten years ago, Bank of America consumed them. And look what has happened to it.

I remember when Wachovia was a small bank in the South and was one of the healthiest banks in the nation.

Just like governments, when they get too big, they get careless and try to please too many people.

Jun 20 08:34 AM

[The Geoffster:]

Great observation. My account started with a small local bank as well. I've left it there through five acquisitions. It's now CHASE! The MFs yanked my unsecured credit line which I've maintained for 35 years. I'm switching to a credit union.


On Jun 20 08:34 AM John Bowman wrote:

> When I got a job in the mid-seventies outside of Trenton, NJ, I went
> looking for a smal bank. I figured a small bank would be responsible
> with the customer's money.I found one which had one near my job and
> another branch downtown.
>
> Well, it wasn't long before a larger NJ bank bought them out and
> then another and another. About ten years ago, Bank of America consumed
> them. And look what has happened to it.
>
> I remember when Wachovia was a small bank in the South and was one
> of the healthiest banks in the nation.
>
> Just like governments, when they get too big, they get careless and
> try to please too many people.

Jun 20 10:42 AM

[ksmithdc:]

The country is in a much bigger mess since Mr. Obama took control. Can't blame Bush anymore for everything and anything.

Jun 20 12:31 PM

[Swiftcreek1:]

Arguably you are right, but the situation goes a little deeper.

Alot, if not most of the blame can be dropped right in the lap of the Democrats in Congress propping up Fannie and Freddie prior to Obama's election. You might remember all those hours of hearings on C-Span where you had the likes of Barney Frank, Chris Dodd, Maxine Waters and others defending Frank Raines and Richard Syron when the Government's own regulators said there were significant problems within Fannie Mae and Freddie Mac due to sheer dollar volume of high risk loans. Then we find out they were cooking their books to make things "appear" less bad than they really were.

Geithner talking about CDS's as being a good stablizer was a load and now everybody knows it. CDS's and Mortgage Backed Securities were just another way to play financial Russian Roulette, only this time with an automatic instead of a revolver.

Had the regulators been allowed to do their jobs in '03 and '04 much of this could have been avoided. Fannie and Freddie would have been tightened up and many people who NEVER should have been given a mortgage in the first place would still be renting. Housing prices would have risen at a more natural pace and $9-12 Trillion wouldn't have evaporated.

Hind sight is 20/20, we all know that, but some of us were predicting this as early as the day after Clinton changed the rules on "affordable housing", and non-brick-and-mortar mortgage lending institutions like Lending Tree started to flourish by catering to high risk clients.

"A fool and his money are soon parted".....We are the fools, if for no other reason than for not demanding accountability from the people we elect to serve us in Congress.....

We have always been a "Carrots and sticks" nation. Unfortunately the dynamic has changed. It used to be that the voters carried the sticks and public service to the citizenry was the carrot. Now, the Government has all the sticks, and the carrots go to special interests, and to certain voting blocks, so that those wielding the sticks can continue to do so.

Call me a cynic, but.....that's the way I see it.

On Jun 20 12:31 PM ksmithdc wrote:

> The country is in a much bigger mess since Mr. Obama took control.
> Can't blame Bush anymore for everything and anything.

Jun 20 01:30 PM

[1RuleNoRules:]

It seems to me that we are falling short on our attempts to see the big picture, except for some commentators. The 2 primary arguments against regulation are interference in the free market as an undesirable event and that the Government cannot arbitrate and regulate without becoming advocates for the industry and entities they are empowered to oversee. The previous argument has been proven by our recent experience, especially when the banking industry did it gallant best to absorbed junk debt generated by, more government, Sallie Mae and Freddie Mac. Perhaps now we need to see the main argument against Government regulation is incompetence. Government is not competent to oversee or regulate anything. It is the prevalence of this view compared to other countries that has helped provide us with our successes.
Bush Republicans (<-- interesting slang connotation arises here) are not competent to deregulate, and were unable to accept the Reagan arguments against big government but were able to at least see the selling features of low tax rates. And equally incompetent in claiming victory when those tax cuts generated higher tax revenues. Our liberal media ignores these facts as coincidental.
The constant theme of correcting what has gone wrong with banking is controlling banks. Very marketable idea and very wrong. We, as a nation, must see that the villain was and is government and its approach to providing a level playing field. Probably the most damaging effect of regulation was its probably unintended consequence of encouraging merger and acquisition and creating institutions that are too big to fail. Our tax system is a very strong incentive(or disincentive) to industry and should be used to encourage all large enterprises to spin off successful divisions and departments. Taxes should not reward or even mitigate failure, and easily could provide the means to guide corporate structures to enhance the public good while creating a level playing field which should be the extent and limit of government intervention and regulation.
To blame anything other than the philosophy of government on banking, finance and even auto industry problems is misguided and doomed to more failure both foreseen and unforeseen.
It seems odd, I hope not just to me, that blame is directed toward Greenspan when it was his lone voice was heard clearly complaining of Sallie Mae and Freddie Mac and without causing panic and sell-offs. It is unfortunate although not rare that the cure gets the blame in deregulation.

Jun 20 02:53 PM

[Windsun33:]

The problem for years has been political - what may need to be eventually done is to set up financial regulators something like the Supreme Court - where they are totally independent of political influence. That ain't gonna happen though, and of course then you would have the problem of who is watching the watchers.

The Obama Team has apparently learned nothing from the past, they are fixing old problems with bigger bureaucracies, which IS the problem. FNM had 200 people just to regulate it, and we all know well that worked.

Jun 20 03:20 PM

[Phil Trupp:]

Banks have created chaos from Day One. The wreckage they have brought us is plain to see. It's hard to know where to find the blame. Perhaps our concept of banking--the working model--is fatally flawed. Maybe those who run these institutions are just the wrong people. I suspect we'll never get to the bottom of it. But few will deny we have a problem. Thomas Jefferson famously remarked: "I believe that the banking institutions are more dangerous to our liberties than standing armies." That's a radical statement. Why did Jefferson believe this? Answer: He possessed an uncanny knowledge of human greed and how greed turns into a weapon of social destruction: "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (the banks) will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Jefferson's solution: "The issuing power should be taken from the banks and restored to the people, to who it properly belongs."

Jun 20 03:28 PM

[Jimbo:]

Both political parties have been on the take for decades. The hydrogen sulfide odor emanating from Washington is suffocating. The Democrats lost the House after 50 years or so due to corruption in 1994. The Republicans lost the House in 2006 for the same reasons.Nancy Pelosi and company are drinking the spiked Kool Aid now. In the meantime, the big money center banks have bought significant people in both parties. Milton Friedman wanted abolish the Fed and I bet Andrew Jackson would also. I suggest we abolish the Fed and institute term limits for Congress with felony penalties for any former government officer or employee to lobby. The Augean Stables are in deep doo doo.

Jun 20 04:56 PM

[Northstar10000:]

I blame bush
for not pointing out all the stuff the dubocrats did on his watch. He just took it and still does. All he had to do was play back their own words.
If I were president would have a press conference a week using vidio tapes of the dumbos in action. HOw come no one holds them responsible?

Jun 20 06:27 PM

[Steve Soden:]

Greenspan, Bernake and President Obama continue to do what they have to, to keep our ship afloat.
The question is, is there enough money to be made by the banks between getting free cash and a 6% spread?
I don't think so, but I've never seen any guesses from anyone on this.
I know they got me for about $12,000 last year alone.
Happy Days, NOT!

Jun 20 08:15 PM