Blog on the Run: Reloaded

Thursday, October 23, 2008 8:44 pm

And he was supposed to be the bright guy

Filed under: Sad — Lex @ 8:44 pm
Tags: ,

I suspect I’m even more surprised than Alan Greenspan was:

WASHINGTON (AP) — Alan Greenspan, the former Federal Reserve chairman, said Thursday that the current financial crisis had uncovered a flaw in how the free market system works that had shocked him.

Mr. Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proved to be wrong.

Mr. Greenspan said he had made a “mistake” in believing that banks operating in their self-interest would be enough to protect their shareholders and the equity in their institutions.

Mr. Greenspan said that he had found “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”

Mr. Greenspan, who headed the nation’s central bank for 18.5 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a “state of shocked disbelief.”

He said that the current crisis had “turned out to be much broader than anything that I could have imagined.”

Of course, I’m not going to sit here and tell you I could have imagined things would get this bad, either. But then, it’s not my job to know these things. It was Greenspan’s job.

However, knowing that “free-market” trading in securities in fact needs some kind of regulation and oversight to keep the players informed and relatively honest with one another — which is exactly why we have an SEC — I *did* figure that banks having a lot of unregulated trading in complex securities was probably going to lead to problems someday. I figured the problems would be fairly limited in the greater scheme of things, though.

I guess that’s why I’m not the one who spent 18.5 years as chairman of the Federal Reserve.

1 Comment

  1. I guess free markets aren’t so free after all. Seems like we’re paying a pretty high price right now.

    Comment by liz — Friday, October 24, 2008 8:05 am @ 8:05 am

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