The Federal Reserve’s issuance of rules Tuesday to prevent further mortgage lending abuses makes it abundantly clear that Alan Greenspan could have done the same years ago and refused to, despite ample warnings that the practices were dangerous. It will be interesting to see if the revered AG, who spoke only with gods and presidents during his excessive tenure, will now get a sound licking for his responsibility in the current credit mess that has drilled a hole in the U.S. economy.
Greenspan has been so slavishly lathered in the press for so long that one could be forgiven for not knowing that some economists think his reign was perfectly appalling. They point at the total abandonment of the Fed’s regulatory role, and even the Dec. 18 flip-flop doesn’t really mean all that much given that the industry already realized that it had shot itself and not just in the foot. So much of what Bernacke’s team is proposing is already being done—a day late and a dollar short.
Ideology rules our lives today, ironic since the Cold War was fought partly over its oppressive role in the enemy camp. But according to marketplace econ 101, the mere thought of restraining the cash-handlers in any way is nanny-statism and party-pooping. So the standard response is to give the financiers (or the industrialists or the traders) free rein to do whatever makes short-term sense, and that’s a pretty good recipe for catastrophe given the inherent, periodic irrationalities of markets, of which the latest meltdown is a fine example.
Given the hysteria about ‘aliens’ and illegal immigration these days, I have been surprised to see so few references to the seizure of the commanding heights of U.S. capitalism by foreign communists and Islamic fundamentalists. The Chinese government’s investment vehicle took a $5 billion piece of Wall Street firm Morgan Stanley today due to that entity’s huge losses after being suckered by the subprime mortgage market just as badly as Aunt Myrtle and Uncle Ed. This follows the November news that a 4.9 percent equity stake in Citibank was snapped up by the Abu Dhabi Investment Authority, i.e. a couple of guys in long gowns. As long as they don’t try to do our yard work!