Monday, September 15, 2008

The further advancement of advanced capitalism

Bear Stearns, Lehman, Merrill Lynch: Today, three major American economic organizations no longer exist

Let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event. . . . But in and of itself that does not need to be a problem. It depends on how it is handled and how the liquidations take place. And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers.

(Alan Greenspan, Sunday September 14th 2008, on ABC's 'This Week.' Source.)

I have a lot of respect for Chairman Greenspan. Though many did not, I loved his recent book, The Age of Turbulence. (Here and here are reviews.) I found the book helpful, intelligent, and forthright. Moreover, I understand that the practice of running capitalist markets is much more difficult than writing blog posts about capitalist markets. I get the difference.

But still. Please, Mr. Greenspan, what could you possibly mean by "the ordinary course of financial change"? I am looking specifically at the figure above, the one on the right. What it shows is that for almost three complete years (from the beginning of 02 to the middle of 04), under your control, the federal funds target rate was deliberately kept lower -- much lower -- than economic circumstances called for. In other words, your Fed kept interest rates far lower than conditions dictated, and you did so knowing that the result would be lots of cheap money, the creation of what the White House called at the time the 'ownership society,' and the formation of an enormous asset bubble in and around housing prices. This bubble has popped. The only thing "ordinary" is that, like always, it was not a self-regulating market that made the change, but particular human actions, your actions. What was new was that, this time, the human actions took place within a particular kind of capitalism in which credit/equity is the engine of economic growth.

Now, I believe Greenspan's mandate as a public official was in fact to grow the economy, and grow it he did. But I find disingenuous phrases like "the ordinary course of financial change." The housing bubble was deliberate:

"...if you own something, you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country." -President George W. Bush, June 17, 2004

From the 2004 White House press release:

Expanding Homeownership. The President believes that homeownership is the cornerstone of America's vibrant communities and benefits individual families by building stability and long-term financial security. In June 2002, President Bush issued America's Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade. Under his leadership, the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent. Minority homeownership set a new record of 51 percent in the second quarter, up 0.2 percentage point from the first quarter and up 2.1 percentage points from a year ago. President Bush's initiative to dismantle the barriers to homeownership includes:

American Dream Downpayment Initiative, which provides down payment assistance to approximately 40,000 low-income families;

Affordable Housing. The President has proposed the Single-Family Affordable Housing Tax Credit, which would increase the supply of affordable homes;

Helping Families Help Themselves. The President has proposed increasing support for the Self-Help Homeownership Opportunities Program; and

Simplifying Homebuying and Increasing Education. The President and HUD want to empower homebuyers by simplifying the home buying process so consumers can better understand and benefit from cost savings. The President also wants to expand financial education efforts so that families can understand what they need to do to become homeowners.

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