Alan Greenspan’s broad confession before Congress yesterday brings to mind the parade in 1932 through those once hallowed halls of big brains from Wall Street and the Fed, all confessing their ideas were bankrupt and that they’d nothing left to suggest.
“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,” he told the House Committee on Oversight and Government Reform.
Do you feel that your ideology pushed you to make decisions that you wish you had not made?
Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”
On a day that brought more bad news about rising home foreclosures and slumping employment, Mr. Greenspan refused to accept blame for the crisis but acknowledged that his belief in deregulation had been shaken.
“This modern risk-management paradigm held sway for decades,” he said. “The whole intellectual edifice, however, collapsed in the summer of last year.”
As if in reaction, Asian and European stock markets went off the cliff overnight — Tokyo’s Nikkei 225 Index down 9.6%, Hong Kong’s Hang Seng down 8.0%, the Financial Times 100 down 5.0% — and the US markets are now following.
Sheer panic and forced selling (by margin callers) aside, the more slightly more concrete cause seems to be data and earnings reports indicating that the credit crisis that began 15 months ago has surely pushed the industrialized world into recession.
By the time FDR took office in March 1933, every bank in the United States was closed.
In general, however, the banking system then was much stronger than it is now.Â The crisis of the early 30s was largely a liquidity crisis created by bad austerity policy enacted post 1929 crash, which artificial austerity crushed the general economy.Â The crisis of today is an insolvency crisis created by a mountain of bad debt, crushing the finance sector first.
Opportunities and strategies for recovery, then, are likely to be different than they seemed to the bewildered owner-operators 76 years ago.Â Last week a bunch of Friedmanesque Chicago-School economists warned that today’s Fed and Treasury were fighting the last Great Depression (as if the crisis were merely a lack of liquidity in the credit system).
Into all this strides Barack Obama (it seems).
His entry brings to mind the early years of Bush-Cheney, when Secretary of State Colin Powell was repeatedly sent on foreign missions, including to East 42nd street in New York, to explain (as if it were possible) and take flack for the collateral damage of their radical policies.
Will the Obama movement and all its hopes for a new age get crushed by the economic misery that will characterize his four years?Â Or will the misery be so widespread that it serves to found and root that new age?