On Fed Policy: Is Greenspan the Madoff of Bankers?

by: Igor Greenwald

The former Fed chairman criticizes as “activism” , the government’s effort to clean up the mess created on his watch, while con artist Bernie Madoff calls it a Ponzi scheme. Irony, anyone?

Alan Greenspan’s got some nerve.

The country is still cleaning up the mess he left behind, and now the former Federal Reserve chairman presumes to criticize the clean-up effort, arguing that it would benefit from an extra dash of laissez-faire, much like the one that caused him to miss all the warning signs of the catastrophe in the first place.

To misjudge a financial bubble is to be human. No one knows what the right asset price is at any given time, and prices can move sharply higher for all sorts of legitimate reasons. On the other hand, to miss widespread fraud in the industry you were supposed to regulate is to be blinded by the ideological blinders Greenspan donned when he left the private sector for public office.

The liar loans were supposed to be self-policed by an industry that was making a mint on them, you see. Risk was to be monitored by prudent private managers so much better versed in the arcana of finance than federal bank examiners. And so on.

Given that background, it’s more than a bit rich to learn that Greenspan is blaming “government activism” for holding back the recovery, especially considering how much of that activism was an emergency response to the collapse caused by his negligence.

I’d bet that General Motors (NYSE: GM) workers currently cranking out hot-selling cars don’t think the recovery would be doing better had Greenspan’s mortgage shenanigans put them on the dole. Maybe it’s because he no longer has the luxury of being incomprehensible. He uses lots of high-falutin’ math to suggest that government deficit spending is crowding out the neediest and shakiest borrowers.

Leaving aside the possibility that this might not be the worst thing in the world, has Greenspan not observed the steep slide over the past year in the yields of the junkiest bonds, despite ravenous government borrowing during this period?

His complaints about the government muddling the markets are laughable, if not criminal, coming as they do from the man who bailed out Long-Term Capital Management with much less provocation. And so it’s ironic, if not surprising, to find fraudster Bernie Madoff in Greenspan’s camp. In comments made toward the end of his recent interview with New York magazine, he opined that “The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”

Presumably, it takes a Ponzi schemer to know one. Madoff is right in the sense that the government will ultimately prove unable to deliver the benefits it’s promising. The government may even share a motivation with its prisoner: Like the former money man, it hates to disappoint.

But even if financial reform has proven to be a largely toothless exercise in self-deception, doesn’t Madoff understand that he discredits whatever viewpoint he expounds? That, even when he’s right, his opinions are not wanted because of the pain he’s caused? Of course he doesn’t. Bernie just knows he likes to talk. So does Alan.

Lucky for both of them then that the Supreme Court has just reaffirmed that even highly objectionable free speech is protected. But we’re still not constitutionally required to confuse celebrity with credibility.