Greenspan Concedes Error on Regulation - NYTimes.com: "“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.Even so - he's not admitting that he helped change the rules on the amount of leverage investment banks could take on. So his 40 years of evidence was useless in the face of the new rules.
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”"
At one point, Mr. Greenspan appeared to question the efficacy of increased oversight over the financial system, noting, “I think that it’s interesting to observe that we find failures of regulation all the time.”
“If we are right 60 percent of the time in forecasting, we’re doing exceptionally well,” Mr. Greenspan said. “That means we are wrong 40 percent of the time. We at the Federal Reserve had a much better record forecasting than the private sector, but we were wrong quite a good deal of the time.”
Mr. Greenspan is confusing active regulation with setting the rules. He actively promoted the idea that these banks could overleverage. So he changed the rules, and then told everyone to go for it! When did the real rules about leverage change? As a matter of fact, never, but he convinced himself that with computers and computer modeling that these investment banks would not fuck it up. But what is missed was that with all the leveraging, is that if they did fuck it up, the results would be devastating. So, sure, you can fly your kite next to the powerlines and hope it all works out, but the fact is, if you make one mistake, you're dead.
That's why, after hundreds of years of experience, the amount of rational leverage was set fairly low. (Some would argue we shouldn't allow it all - they might be right.) But certainly a change from 3:1 to 33:1 is just begging for trouble.
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