Tweet
Tax cuts for the rich were the centerpiece of the republican financial plan for the nation. The idea is that we cut their taxes and they invest the money in wonderful new ventures that produce jobs and drive the economy forward. In the meantime, we borrow money from other people to pay our bills, running up huge deficits, which will be repaid from the new tax revenues from all the new investments. So, how did that work out?
This is from Greenspan’s prepared testimony today:
What went wrong with global economic policies that had worked so effectively for nearly four decades? The breakdown has been most apparent in the securitization of home mortgages. The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer. But subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. These mortgage backed securities being “subprime” were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates. But with U.S. home prices still rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, they were wrongly viewed as a “steal.”
The consequent surge in global demand for U.S. subprime securities by banks, hedge, and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem.
Greenspan thought that markets were acting wisely in allocating so much money into houses in the US, so despite having the authority to intervene, he did absolutely nothing. He didn’t demand transparency, he fought regulation, and he refused to use his consumer protection powers to protect borrowers.
Why exactly did he think investment in housing was going to create tax revenues? How was it going to drive the US economy? What it does do is create massive debt owed by citizens. That debt can only be repaid from their own income. But where will the jobs come from to create that income? The short-term jobs created by building those houses and furnish them with appliances vanish when we saturate the housing market. Where will those people find work and income to pay the debt when the jobs start disappearing?
Suppose the vast amount of capital Wall Street allocated to houses had actually been invested, in green jobs, drilling, infrastructure or biotechnology or any of the hundreds of other possible job-creating ventures. We would not be where we are today.
Republican ideology says markets will allocate capital wisely, and that government should keep away. Even Ayn Rand disciple Greenspan acknowledges that he was wrong about that. When will the rest of them?
12 Comments
Greenspan – trying and failing to save his legacy.
Duh! It’s not as if it hasn’t happened before. The problem is that Greenspan was a Randian ideologue. Clinton reined him in and he was forced to behave more or less rationally. Under Bush, he had no checks and balances. His behavior was the microcosmic, the economic collapse the macrocosmic effect of unchecked power. Absolute power corrupts absolutely.
greenspan might have believed it at the time and I actually believe that
but the rest of these neo cons do not believe it, they see deregulation and redistributing tax burden as free money
taxes are never lowered, they can only be redistributed
if they are lowered without the revenue being replaced then the infrastructure collapses and the costs are payed locally
the cost in covering the expenses tax reductions produces is always more then the tax decrease
the only way to actually reduce taxes is to eliminate programs the voters voted for
Actually, Greenspan was implementing a garden variety Fed strategy in response to the dot.com collapse at the end of the century. It was a strategy that had become antiquated in the new century. Typically, the policy had the effect of stimulating a housing boom based on quick and easy cash rather than economic growth per se. But the complexity of the financial markets in the new century produce the gigantic unintended consequences of Fed policy. The regulatory side of the Fed was not really equipped for the challenge in this new age of runaway finance.
This is the kind of story that when it’s reported, makes me so annoyed with the traditional media. I mean, what other response is there than to say “Duh!!!! How could Greenspan be so utterly stupid as to think markets were inherently self-regulating?!?!?” (They are, to a degree, but not that much)
Of course, to say that means one would also have to explain why economists like Dean Baker of CEPR weren’t on the teevee warning about precisely this eventuality and why the traditional media was depending on people who had enormous conflicts of interest (People who made money off of the housing market commenting on the housing market) to explain these things to Mr & Mrs Joe Average.
*Sigh*! We need to break up the media. There are far too few people in positions to make editorial decisions. That number should be increased through vigorous anti-trust enforcement.
Greenspan still doesn’t get it – this is what he said at Waxman’s hearing yesterday resisting the need for further regulation except that companies selling mortgage-backed securities be required to hold a significant number themselves:
“Whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets,” he said. “Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”
http://www.nytimes.com/2008/10…..ei=5087
Arguing that Wall Street has really, really learned it’s lesson from this bubble (despite all the bubbles and panics going back to John Law and the South Sea Bubble in 1720!) and doesn’t need regulation as a result of this very painful lesson is Randian delusion. This is like someone with a raging hangover swearing that he will never drink again….until next weekend anyway.
Amen. You do a lovely job of reducing it down too. When I try to get into the ez credit vs no jobs issues, I drone. But you did the best job of simplification and focus I’ve seen witht this one paragraph:
Why exactly did he think investment in housing was going to create tax revenues? How was it going to drive the US economy? What it does do is create massive debt owed by citizens. That debt can only be repaid from their own income. But where will the jobs come from to create that income? The short-term jobs created by building those houses and furnish them with appliances vanish when we saturate the housing market. Where will those people find work and income to pay the debt when the jobs start disappearing?
Good stuff – thanks much.
Furthermore, this strategy of hooking people (in this case an entire American population) on credit they clearly can’t afford to repay because the Rich have kept them from saving any money from their 3 jobs…this strategy is the same we’ve used to enslave other countries through the IMF.
Ask South American countries about their experience with easy credit and difficult repayment and attached strings. They could speak against America for years.
But, when you screw the golden goose you’re going far far too far.
Greenspan had to have seen this coming. People who weren’t even economists saw it coming. To come out at this late date and say “mea culpa” is too little, too late.
And to blame it all on Greenspan is to minimize the greediness that is Wall St. Greenspan couldn’t have done it all by himself.
The thing that bothers me is the bailout of these crooks. I am thinking that they knew this was going to happen…and they didn’t care because they knew the U.S. taxpayer, through the Federal Reserve, would come to the rescue.
And the attitude is that if you lost your home because of the job atmosphere created by NAFTA and outsourcing, rising costs, and perhaps health issues…well, tough…you’re out of luck…
I think America should be aware of just what Greenspan is investing in sure we think he is an economic moron but what if he shorted the market? What if he just pretended to be a moron to bet on a sure thing?
I wouldn’t put anything past any of them, TCU. They are clearly without ethics in their “I’ve Got Mine, Screw You” attitudes.
Clearly, Greenspan knew how many beans make five. He invested all his personal savings, in the millions, in Treasury securities.