From TMQ's weekly diatribe on ESPN Page 2
"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," Alan Greenspan told Congress last week. Greenspan devoted much of his career as Fed chair to fighting the very regulations that might have prevented the 2008 financial meltdown and saved taxpayers $1 trillion; few high-and-mighty persons have ever been discredited more thoroughly. TMQ proposes that in slang, "greenspanning" should mean "putting a pompous dupe in charge of something" while "a greenspan" will mean "a colossal screw-up" and "to greenspan" will mean "to say in full seriousness such utter nonsense you should giggle." Comparisons to Captain Renault being "shocked, shocked" to discover gambling in the casino in Casablanca are not apt, because Renault knew exactly what he was doing. Greenspan, we now learn, had no idea what he was doing. In 2003 Greenspan fought to prevent regulation of credit derivatives, which in 2008 caused the collapse of AIG; in 2004 he fought attempts to impose stricter credit monitoring rules on commercial banks, investment banks and mortgage brokers, saying "the financial system as a whole has become [so] resilient" that a meltdown was impossible. Despite these vastly wrong views, Greenspan was treated reverentially by Congress, the White House and the media as a super-ultra-genius.
Greenspan's excuse to Congress last week was that he believed executives of banking and Wall Street firms would not take crazy risks with debt because market forces would pressure them to protect their shareholders. There's a small problem and a big problem with this flimsy excuse. The small problem was that in 1998, Greenspan arranged a bailout of Long Term Capital Management, a hedge fund that took crazy risks in order to run up bonuses for its executives. Market systems respond to incentives, and Greenspan's message to top executives of the financial markets via the LTCM bailout was -- no matter how poorly you perform, there will never be any consequences. Now Greenspan is "shocked" to discover the result was that financial executives took more crazy risks to enrich themselves, confident they personally would never face any consequences. Which, so far, they have not.
The big problem is that Greenspan, the uber-guru of market economics, seems to have little grasp of what actually happens in many modern businesses. According to econ textbooks, top corporate managers are employees of shareholders, serving the shareholders' interest, while boards of directors are the watchdogs that make sure top managers aren't cheating. In well-run companies with corporate-governance standards, this does occur. But Greenspan seemed to think the entire economy operated according to the textbook model, despite extensive evidence (LTCM, Enron, Tyco, WorldCom) that top managers routinely lie to shareholders in order to justify management bonuses. Human beings respond to incentives. Dishonest CEOs realized that if they lied about earnings or took crazy risks, they could use phony numbers to award themselves hundreds of millions of dollars. What they were doing was stealing from shareholders, who would eventually lose equity when the truth was revealed. But by then top managers would have their bags of gold and, experience shows, never be required to give the money back.
The chair of the Federal Reserve had no idea that top executives and fund managers would game the system to their own personal financial benefit? He feels "shocked disbelief" they would care more about stuffing their own pockets than protecting shareholders? And Greenspan's contention that boards of directors should have stopped fraud or crazy risks strains credulity. Well-run companies have active boards of directors, but in many firms, the board is strictly a rubber stamp. Many corporate board members are paid huge sums for virtually no work -- when Lawrence Small was head of the Smithsonian Institution, he earned $89,000 a day for sitting on various corporate boards. Board members know they will be lavished with money only if they are lapdogs who wag their tails for management on cue. If Greenspan had said to Congress, "I was a fool and I apologize," the public might respect that. Instead he greenspanned.
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