accountability

In my posting entitled, “changes,” I stated the conditions that needed to be present to know definitively that a market bottom had been reached. Because this information is so important, I want to reiterate the conditions and also to provide an update that affirms that progress (thankfully) is being made.

• The reason that there is so much uncertainty is that we are confronted with problems right now that: our old ways of solving problems cannot correct; our old institutions cannot resolve; and our leaders cannot solve.
• For certainty, trust and faith to be restored the above three institutions have to be changed and improved.
• At that point, you know that a “bottom” has been reached in financial markets and you can feel safe about investing again

Today’s Wall Street Journal has an article entitled, “Greenspan Admits Some Mistakes Amid Grilling by House Lawmakers.”

In my opinion, Alan Greenspan is one of the leaders whose poor decision-making has led us into our current financial crisis.

• First, he held interest rates far too low, for too long after the dot-com bubble burst and consequently, moved the market bubble from technology to real estate
• Second, he also allowed hedge funds to fly under the regulatory radar for too long. This led not just to myopia, but blindness in the Fed’s ability to have transparency into financial markets. This was one of many obvious causes for our meltdown
• Third, Greenspan pushed for financial deregulation that our financial institutions were only too happy to exploit for profit and…ruin

Anyhow, from today’s Journal come the following quotes:

“Grilled by lawmakers examining the causes of the financial crisis, former Federal Reserve Chairman Alan Greenspan on Thursday admitted some mistakes in assumptions about deregulation while rejecting the idea that he is personally responsible for what he termed a ‘once-in-a-century credit tsunami.’ ”

Commentary: This is exactly the sort of thing that needs to happen for a true market bottom to be reached. Greenspan has always been an honest person and here he is contrite. Wonderful.

” ‘Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief,’ according to Mr. Greenspan.”

Commentary: In other words, he is saying, “I screwed up because I thought that the risks of deregulation would be lower.” Again, wonderful.

“The panel chairman, Henry Waxman (D., Calif.) criticized Mr. Greenspan’s approach to mortgage regulation while he was Fed chairman. The Fed “had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market,” Mr. Waxman said, but Mr. Greenspan “rejected pleas that he intervene.”

“Mr. Greenspan said he raised concerns about the dangers of the “underpricing of risk” as early as 2005.

“But when Mr. Waxman pressed “were you wrong” about the benefits of deregulation, Mr. Greenspan responded, “partially.” The “flaw” in the assumptions he had over four decades, Mr. Greenspan said, was that lending institutions themselves were best able to protect the interest of their shareholders.

“Thus what looked like a solid edifice to his thinking broke down, Mr. Greenspan said.”

Commentary: Good for Henry Waxman pressing Greenspan for his failings in helping to create the conditions that were necessary for this crisis to unfold. However, Waxman, a long-time Congress-person, is also somewhat responsible for the crisis. After all, it was only with Congressional authority that our Depression-era regulations were slowly rolled back. Note also Greenspan’s efforts to change the subject to his warnings of “the underpricing of risk” in 2005. This is a subject that I have addressed in previous postings, however this is a separate issue from creating a regulatory environment that did not put reins on bad lending practices. The necessary capitulation from Greenspan comes when he admits to flaws in his assumptions about banks best being able to take care of their shareholders and that the apparent solid edifices, were not solid.

All of this is wonderful progress. Accountability of Congress will hopefully come on November 4th, with staunch members of the old Congressional guard being either voted out, or humbled enough to stake a claim in renewed efforts at regulation. While we are not through the woods yet, the great news is that we are in the midst of the period of reckoning that must occur for faith to be restored in our financial institutions.

I’ll keep you posted!

Jason