A Hard New Look at Greenspan Legacy

In the aftermath of September 11. I was astounded as everyone, endlessly looking at the videos of the jumbo jets collapsing into the WTC, the twin towers crashing down etc …

I was quite petrified. The thing that started to relieve me was a TV show me with a french geopolitics researcher (whose name I can’t recall – sorry – I didn’t have a blog back then to classify all ideas and thinkers). Anyway : he said something in the vincinity of :

What we need at this point is to stop getting emotional with all these images and start to make some sense.

This article from the New York Times is the first I’ve read in the last few weeks providing me with the same sort of relief. Just because it gives some clear explanations together with an historical perspective on the current situation.

I’ve kept hearing for the last 20 years about things such as derivatives, low interest rate strategy, house market inflation etc … without really understanding how these elements are intertwined and how they affect our everyday’s life. All of a sudden they all fit together and start making sense.

Excellent read if, like me, you’re tired of journalists panic and want to understand the situation with a cooler head.

In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.

Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.

“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”

In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.

“There is nothing involved in federal regulation per se which makes it superior to market regulation.”

Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.

But he called that possibility “extremely remote,” adding that “risk is part of life.”

via The Reckoning – Taking Hard New Look at a Greenspan Legacy – Series – NYTimes.com.

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