Alan Greenspan appeared on CNBC’s Squak Box this morning. Here is a recap of what he said. Personally, I am glad I went for a run rather than listen to his drivel. But, it just seems that the Costanza principle applies to Greenspan. For those who never watched the show about nothing, George Costanza experimented by saying and acting in the exact opposite way that his instincts told him. He concluded that if every instinct or thought he had was wrong, then the opposite must be correct. It landed George a date with a hot blonde and a job with the New York Yankees.
I think the same applies for Easy Al Greenspan. If he had acted in the exact opposite fashion to what he actually did, we would be in a much better position right now. Most people assume I am merely pointing out the common argument that Greenspan left interest rates too low after the 2000 tech bubble. He certainly did that, and it led to excessive debt consumption and the housing bubble. However, Greenspan’s entire resume wreaks of faulty decisions. He was quick with the bailouts after the Asian currency crisis, Russian currency debacle, and Long Term Capital Management fiasco. Rather than letting the market rid itself of these inefficiencies, Greenspan kicked the can down the road. Of course, the press lauded him for these “decisive” actions.
Even beyond that, he is the sole reason Glass-Steagall died. As you can tell from reading this blog, I am not a huge fan of regulation. However, I feel Glass-Steagall was common sense. For those who don’t know, Glass-Steagall was implemented in the 1930s, and it separated the depository banks from the investment banks. When you hear depository bank, think George Bailey. It is where Mom and Pop put their life savings, which are eventually loaned to mortgagees and businesses. Investment banks should bring to mind Gordon Gekko. These are the Wall Street hot shots that raise capital for companies and take risks with their own portfolios. In the 1930s, the government separated those two. This gave the depository banks that store Mom and Pop’s life savings the backing of the Federal Reserve in case the bank ran into trouble. The investment banks were on their own to suffer the consequences if their risky behavior backfired.
Starting in the late 1980s, the banks wanted to merge those functions. The depository banks wanted the huge profit margins of the investment banks while the Gordon Gekkos wanted the backing of the Federal Reserve should they get into trouble. So the banks worked on Greenspan for years to overturn this law. At first, the Greenspan Fed allowed the depository banks to earn 5% of their revenues through investment banking activity. Then this got upped to 25%. Finally, in 1997, Greenspan felt the banks were managing their risk well so he tore down the wall that separated the two. In 2008, we, the taxpayers, were bailing out the banks who took massive risks thanks to Greenspan.
So Greenspan essentially screwed up every major decision he made while serving as the Fed Chairman. Maybe he should have spent some time watching Must See TV on Thursday night. He may have caught the Costanza Principle episode.