Greenspan’s Lament - Floyd Norris Blog - NYTimes.com: "Mr. Greenspan is right on one thing. The “whole intellectual edifice” collapsed. But he is wrong to blame it solely on the wrong inputs. It is too bad that Mr. Greenspan never appreciated the work of Hyman Minsky, who understood that stability is destabilizing, and that there will come times when the very calmness of markets, and lack of apparent risk, causes investors to take ever greater and greater risks.In a true free market system, everyone assumes every deal is corrupt or at least corruptible, because there is no big government to bail you out.
What was missing was a regulator who understood markets, rather than worshiped them."
It's just like the internet - you must assume you are always under attack; that all web sites are potentially infected; that all communication is potentially sniffed. Your only choice, if you want to use the internet, or the 'free market', is to take defensive measures that lower the risk of a successful attack. There are a number of ways of doing this in the market including insurance and credit and/or reputation monitors; requiring a certain amount of transparency and auditing; spreading risk among multiple vendors; creating public markets; and so on.
If history shows anything, it is that there is always someone out there trying to game the market. The federal government is not smart enough or adept enough to stop this level of attack and it is a bad idea to depend on them for that level of service. In fact, it is easy to con them into putting a rubber stamp on the latest scheme. It was a bad idea for the government to go "hands off" without replacing their regulatory authority with either a big sign that says "these bonds are risky" or enabling some third-party to properly judge the value of the bonds (possibly via a public market).
The problem we have here is that a lot of people were told that their investments were safe - AAA rated - when they weren't. How any credit reporting agency could certify a bond as AAA when the company issuing it was leveraged 30:1 is beyond me. The point we're at now is that nobody trusts anything - and guess what - there is no reason for them to trust anything. Pumping money into the economy may grease things - I don't know - but the fundamental problem that it was possible to create a huge number - 10's of trillions of dollars in the least - of falsely rated AAA rated bonds needs to be solved.
Right now, I haven't heard of any proposal to solve this problem - to get a proper, reliable accounting of what is really happening. Until that washes out, one way or another, uncertainty is the order of the day, and I suspect the markets will continue to bounce up and down.
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