Stephen Foley: For the wrong answers, turn to Greenspan

Perhaps it is impossible for someone as ideologically committed to unfettered markets as Mr Greenspan to break out of his flawed view of how the world works

Saturday 20 March 2010 01:00

It is always worth listening to Alan Greenspan, but not now – for the same reasons we used to. The former US Federal Reserve chairman, the wizened wiseman of laissez-faire economics, shocked us all – and probably himself – when he told a congressional panel in 2008 that he had found "a flaw in the model I perceived is the critical functioning structure that defines how the world works, so to speak". He meant that he had realised banks cannot be trusted to manage their own risks, and that markets do not smoothly self-correct.

But instead of taking that revelation and helping to point the way to a new, post-crisis financial world, he has shuddered to an intellectual halt. It is the same intellectual stop sign that Wall Street's bankers are at. The failure to move forward is regrettable, dangerous and more than a little self-serving.

In a widely trailed speech to the Brookings Institution in Washington yesterday, Mr Greenspan presented his definitive view of The Crisis (the title of his 48-page discussion paper). His conclusions are, in effect, useless.

Everyone might agree that a housing market bubble has inflated, but you shouldn't pop it, he says. Bankers' risk models might deliberately exclude the possibility of catastrophe but regulators are no better at judging these things. The current plans to create a "systemic regulator" in the US, responsible for curbing activities that could bring down the financial roof, are pointless.

And, finally: "Could the breakdown that so devastated global financial markets have been prevented? Given the excessive leverage and two decades of virtual unrelenting prosperity, low inflation and low long-term interest rates, I very much doubt it."

One is put in mind of Jamie Dimon, the boss of JPMorgan Chase, who told the Financial Crisis Inquiry Commission that when his daughter asked, "What's a financial crisis?", he replied, "It's the type of thing which happens every five to seven years."

Bankers, of course, get very rich in the gaps between financial crises, so no wonder they are flippant. Economists have to earn their reputations over the long duration. Perhaps it is impossible for someone as ideologically committed to unfettered markets as Mr Greenspan to break out of his flawed view of how the world works.

Nonetheless, if everyone agrees that a housing bubble has inflated, should we not discuss what tools can be used to cool it, rather than waiting the extra few years for the inevitably larger catastrophe?

Is the idea of a "systemic regulator" really ludicrous because of the "current sad state of economic forecasting", as Mr Greenspan says? Or are there, in fact, plenty of warning flags in data and anecdotal evidence on underwriting standards or the levels of debt in an economy – exactly the warning flags Mr Greenspan now claims to have waved while at the central bank?

If Wall Street risk models deliberately exclude the possibility of catastrophe, can't we change the habit of putting so much capital at risk on the basis of this pseudo-science? How do we rebuild banking around the Keynesian insight that risk, which is measured from the past, is not the same thing as uncertainty, the condition of the future.

The tyranny of maths continued at the Brookings yesterday, with the absurd spectacle of Mr Greenspan justifying his proposed four percentage-point increase in the capital requirements for banks on the basis of swings in the credit default swaps market on the days surrounding the collapse of Lehman Brothers.

So one final question: does this part of Mr Greenspan's speech strike you as odd? "A recent study indicates a pronounced above average rise in the salaries of those employed in finance, presumably reflecting the greater skills drawn to finance in recent years," he says. "By 2007, a quarter of all graduates of the venerable California Institute of Technology entered finance."

Why presume that salaries went up because skills went up? Perhaps they went up because the owners of firms lost control to their bonus-mad employees, because bankers became adept at hiding the negative long-term value of their work, and because a chairman of the Fed legitimised a culture of immoderation.

We used to listen to Alan Greenspan because we thought he had all the answers. Know we know he has none, he is more interesting than ever.

Zero hope for Palm, or can an OS save it?

You know something has gone disastrously wrong when analysts start putting a $0 price target on the company's shares. So it is at Palm, which once seemed to hold the world of mobile devices in the, er, palm of its hand, but which now finds itself an also-ran in the world of souped-up phones.

Trampled underfoot in the business market by Blackberry, and then trampled again by Apple in the consumer space, it seems that the company's launch last year of the Palm Pre could turn out to be its last big throw of the dice.

One month after a disastrous financial forecast came – another disastrous forecast. The Pre, and the newer Pixi, are simply not selling and it has shipped far more devices to retailers than have gone out the door. Analysts at Canaccord Adams are not the only ones asking how long Palm's cash pile of $592m will last, if the next quarter's outflow could be $150m or more. Yesterday, they suggested Palm shares could worthless.

While there are still plenty of true believers on the Palm share register, increasingly they seem to be putting their faith not in a turnaround but in the possibility of a takeover. That WebOS operating system, which makes the Pre a pretty decent alternative to the iPhone when it comes to games, must surely have some value, they insist.

Perhaps it does, but most manufacturers who want to be in the smartphone market already have their plans set. For those that might want the WebOS operating system, that $0 price target says one thing: might as well wait, and see if we can buy the thing out of bankruptcy.

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