“Grilling The Wrong Man”

Dolors & Sense

by Sanford Rose

KISSIMMEE, FL—(Weekly Hubris)—5/10/10—I must be hallucinating. It wasn’t Lloyd Blankfein, CEO of Goldman Sachs, who was excoriated by Sen. Carl Levin of Michigan on TV last month. Instead, I seemed to see Alan Greenspan, erstwhile Master of the Universe.

Sen. Levin appeared to demand of Blankfein: “How could you have asked your clients to bet on the very mortgages you and your advisor intended betting against?”

In my nubilous state, I heard him demand of Greenspan: “How could you have advised Americans, in your public capacity, to bet on the very mortgages the firm to which you went when you returned to the private sector was betting against?”

Not quite the same thing in the same time frame. But there is a parallel.

Goldman Sachs did indeed sell clients a long position in mortgage securities that it and its advisor, Paulson & Co., later shorted. Chairman Greenspan did indeed tout the virtues of adjustable-rate mortgages when in office and then offered his services to the self-same Paulson & Co., which had shorted these mortgages, when out of office.

There are some who argue that Greenspan is more culpable than Blankfein in creating the housing bubble, the bursting of which undoubtedly enriched the latter and appears suspiciously to have enriched the former as well.

The case against Greenspan revolves around both misfeasance and non-feasance. As head of the Fed, he is alleged to have held interest rates too low too long. He acted too strongly in “leaning against” the 2001 recession.

Also as head of the Fed, he did not act at all (or virtually not at all) to regulate the kind of predatory lending practices that mightily contributed to the 2007-2009 implosion.

The monetary policy case against Greenspan has been hashed and re-hashed ad nauseam. Greenspan and his successor, Ben Bernanke, claim theFed didn’t do it. It wasn’t too loose. And, in any case, the Fed had lost control of long-term rates and so couldn’t have been much tighter even if it had wanted to.

Who had control of these rates? The Chinese, of course. They got so rich so fast that they had to oversave, which led to lower long-term rates than anyone expected.

But few dispute that the Fed retained control of short-term rates. And these hugged the bottom for long enough in 2003 and 2004 to ensnare too many adjustable-rate mortgage borrowers.

It is interesting that Bernanke justifies Fed monetary policy in the Greenspan years in part by reference to Canada. It had the same monetary policy as the US; yet it did not undergo the same boom-bust housing cycle.

So something else besides monetary policy must have made the difference. That something was bank regulation, which was and is strong in Canada and lamentably weak in the US.

Thus, in defending the Fed from the charge of excessive monetary ease, Bernanke indicts it for lax regulation.

If Greenspan did not err in one key area, he clearly erred in another.

This indictment is made a fortiori by fellow regulator, Sheila Bair, the redoubtable head of the Federal Deposit Insurance Corporation.

In testimony before the US commission investigating the crash, she has argued that the Fed had authority under legislation passed in the 1990’s to remedy lax and predatory mortgage underwriting practices and that it did not use this authority, even when strongly urged to do so by other parts of the government in 2000.

So, perhaps I was not hallucinating. Perhaps the man Sen. Levin was excoriating was Alan Greenspan, for whom Lloyd Blankfein, in all frankness, seems a very poor proxy.