The Financial Times’s Gillian Tett sits down with Alan Greenspan for a two-hour interview and gets some eye-opening admissions from the fallen “Maestro”:
What also worries Greenspan is that this swelling size has gone hand in hand with rising complexity - and opacity. He now admits that even (or especially) when he was Fed chairman, he struggled to track the development of complex instruments during the credit bubble. “I am not a neophyte - I have been trading derivatives and things and I am a fairly good mathematician,” he observes. “But when I was sitting there at the Fed, I would say, ‘Does anyone know what is going on?’ And the answer was, ‘Only in part’. I would ask someone about synthetic derivatives, say, and I would get detailed analysis. But I couldn’t tell what was really happening.”
This is simply outrageous. As Tett notes, Greenspan, who we now know didn’t understand them at all, touted the risk-dispersing benefits of derivatives as Fed chairman and fought those who would regulate them.
Here’s Greenspan in 2002 in a speech in London:
Financial derivatives, more generally, have grown at a phenomenal pace over the past fifteen years. Conceptual advances in pricing options and other complex financial products, along with improvements in computer and telecommunications technologies, have significantly lowered the costs of, and expanded the opportunities for, hedging risks that were not readily deflected in earlier decades. Moreover, the counterparty credit risk associated with the use of derivative instruments has been mitigated by legally enforceable netting and through the growing use of collateral agreements. These increasingly complex financial instruments have been especial contributors, particularly over the past couple of stressful years, to the development of a far more flexible, efficient, and resilient financial system than existed just a quarter-century ago.
Perhaps we should have known that in oracle-speak, “increasingly complex” meant “I can’t understand them.”
The same day, he attacked regulation of derivatives, saying “regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure and forced disclosure of proprietary information can undercut innovations in financial markets just as it would in real estate markets” because it would undercut their “quasi-monopoly rents.”
Even requiring disclosure on a confidential basis solely to regulatory authorities may well inhibit such risk-taking. Innovators can never be fully confident, justly or otherwise, of the security of the information.
In other words, Greenspan said you couldn’t regulate the risk-taking because it would inhibit the risk-taking. Would that somebody had inhibited AIG’s innovative risk-taking. “Maestro,” indeed.
But the big news from this piece is that Greenspan comes out in favor of breaking up the too big to fail banks, joining Sandy Weil in Least Likely TBTF Opponents territory—though in the meekest way possible. Greenspan was against breaking up the banks before he was for breaking up the banks—in the same sentence:
“I am not in favour of breaking up the banks but if we now have such trouble liquidating them I would very reluctantly say we would be better off breaking up the banks.” He also thinks that finance as a whole needs to be cut down in size.
Alan Greenspan ran the economy for two decades.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at firstname.lastname@example.org. Follow him on Twitter at @ryanchittum. Tags: Alan Greenspan, Federal Reserve, Financial Times, Gillian Tett, regulation