I'm in the "green room" at ABC News, waiting to
join a round table panel discussion on ABC's weekly Sunday news program,
Alan Greenspan is now being interviewed. He says he bore no
responsibility for the housing bubble that catapulted the nation into a
financial crisis in 2008 because no one could have known about the
bubble when he chaired the Fed in the years before it burst. Larry
Summers was interviewed just before Greenspan. He said the economy is
expanding, that the Administration is doing everything it can to bring
jobs back, and that the regulatory reform bills moving on the Hill will
prevent another financial crisis.
If any single person is most responsible for the financial crisis,
it's Alan Greenspan. He presided over a Fed that lowered interest rates
to zero (adjusted for inflation) but failed to prevent banks from using
essentially free money to speculate wildly. You do not have to be a
brain surgeon to understand that if money is free, banks will take it
and lend it out. And if oversight is inadequate, the banks will lend the
money to anyone who can stand up straight and to many who cannot. The
result will be a giant subprime lending bubble that will burst.
If any three people are most responsible for the failure of financial
regulation, they are Greenspan, Larry Summers, and my former colleague,
Bob Rubin. In 1999 they advised Congress to repeal the Glass-Steagall
Act, which since 1933 had separated commercial from investment banking.
By 1999, Wall Street was salivating over such a repeal because it wanted
to create financial supermarkets that could use commercial deposits to
place bets in the financial casino. That would yield the Street
At the same time, Greenspan, Summers, and Rubin also quashed the
efforts of the Commodity Futures Trading Corporation to regulate
derivatives, when its director began to worry that derivative trading
already was getting out of control.
Yet Greenspan continues to take no responsibility for what occurred.
In the interview he just completed he avoided saying anything about the
failure of the Fed under his watch to adequately oversee the banks, and
the absence of sufficient financial regulation to begin with.
I dislike singling out individuals for blame or praise in a political
system as complex as that of the United States but I worry the nation
is not on the right economic road, and that these individuals -- one of
whom advises the President directly and the others who continue to exert
substantial influence among policy makers -- still don't get it.
The direction financial reform is taking is not encouraging. Both the
bill that emerged from the House and the one emerging from the Senate
are filled with loopholes that continue to allow reckless trading of
derivatives. Neither bill adequately prevents banks from becoming
insolvent because of their reckless trades. Neither limits the size of
banks or busts up the big ones. Neither resurrects the Glass-Steagall
Act. Neither adequately regulates hedge funds.
More fundamentally, neither bill begins to rectify the basic
distortion in the national economy whose rewards and incentives are
grotesquely tipped toward Wall Street and financial entrepreneurialism,
and away from Main Street and real entrepreneurialism. It was just
reported, for example, that America's top 25 hedge fund managers last
year earned an average of $3 billion each. They continue to pay a
federal income tax of 15 percent on most of that, by the way, because
their lobbying efforts have been so successful.
Meanwhile, the so-called jobs bills emerging from Congress and the
White House are puny relative to the challenge of restoring jobs in
America. Last Friday's jobs report, read most positively, showed 112,000
private-sector jobs added to the economy in March. But that's below the
number needed simply to keep up with an expanding population. In other
words, we're actually worse off now than we were a month ago. At the
same time, the median wage of Americans with jobs keep dropping.
The American economy is seriously out of whack. The two people
interviewed this morning don't seem to understand how far.