Dropping the ball in the worst way - Alan Greenspan isn't all that smart

Being a kid in the 1980's, I grew up as a "Reagan baby." Back then, you couldn’t have convinced me or any of my friends at Weston High School that we weren’t going to make our first million by 30 and be retired by 40.

It wasn’t a regional phenomenon, either. One of my best friends grew up in Berkeley and after seeing how Dan Akroyd lived in "Trading Places," he and I both knew we wanted to become commodities brokers. The point is that for a lot of us, growing up in the ‘80s meant believing in American capitalism and its power to provide the lifestyle to which we aspired.

But American capitalism died last week and I found it poetic that Alan Greenspan, the man whose supposed brilliance helped it thrive for the better part of two decades, drove the stake through the heart of the beast he helped create.

Greenspan was a believer in markets and he hated inflation. He was the main reason a steady supply of cheap money was available.

In practical terms, if you bought a house, a car, a boat, new furniture, a walk-in freezer, or anything else that required financing, this man (more than your FICO score) determined how much you’d be paying every month. And he always wanted you to pay less. He made credit so easily available that going into debt almost became fashionable.

Can’t afford the payment to buy a new Mercedes? Lease it instead.When the lease is up you’ll have nothing to show for all that money you spent, so just lease another one. Can’t get your customers to pay you for the goods and services you’ve already provided? Just borrow the money to make payroll. You’ll make back whatever you have to pay to service that debt.

Need to get out from under the credit card bills you’ve been racking up over the years? Just re-finance your house and pull some cash out. Home values have been climbing steadily since the Great Depression, so there’s no way your house won’t appreciate.

It was that last one that caused the economic crisis we now find ourselves in. With a lame-duck Congress about to break for Christmas recess in December of 2000, Senate Banking Committee Chairman (and fellow free marketeer) Phil Gramm pushed through the Commodity Futures Modernization Act, which prohibited the federal government from regulating “banking products” like mortgages.

At the time, there was $5.5 trillion in outstanding mortgage debt.With the tech bubble bursting and investors looking to put their money into something "safe" like real estate, that number doubled to $11 trillion by 2006.

Lenders unbound by federal regulation were writing bad loans, bundling them, and selling them as securities to investors as fast as they could, with the whole process divorced from any risk because companies like AIG were insuring the
transactions.

Being a Kool Aid-drinking disciple of the semi-delusional Ayn Rand, Greenspan figured markets would regulate themselves, so he never saw this crisis coming.

He confessed that, "those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief...I still do not fully understand why it happened."

He also admitted he "found a flaw in the model that I perceived is the critical functioning structure that defines how the world works." That "model," of course, is American capitalism, and that "flaw" has proven to be fatal.

When you’re an academic, it can be tough to see what’s really going on — even for a smart guy like Greenspan. So I’ll explain it: Since the Reagan Revolution, senior management hasn’t really cared about shareholders’ equity. They only care about booking profits (not actually making profits) to meet their quarterly numbers and earn their bonuses. If a person has the chance to make $80 million in bonus checks in a single year, you shouldn’t be surprised when that person doesn’t care about the long-term health of the company cutting those checks.

These people are corporate raiders. They invented the concepts of "F-you money" and "F-everybody money" and I find it hard to believe that the brightest economist of our time didn’t see them coming. Oliver Stone laid it out perfectly in "Wall Street" when Gordon Gekko said, "Greed, for lack of a better word, is good. Greed is right, greed works."

If only Greenspan didn’t have his head up Dagny Taggart’s butt for half a century, the concept of greed wouldn’t be such a "shock" to him.

Then he could have aborted this capitalist spawn of Satan (Phil Gramm’s CFMA) in the womb before it had the chance to grow up and swallow our economy at a rate of 10,000 foreclosed homes every day.