[발췌] Greenspan 'shocked' that free markets are flawed (October 2008)

자료 1: Testimony of Dr. Alan Greenspan, Committee of Government Oversight and Reform (October 23, 2008)

( ... ) We are in the midst of a once-in-a century credit tsunami. Central banks and governments are being required to take unprecedented measures. ( ... ) 

In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences. This crisis, however, has turned out to be much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount. Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment. Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds, and increased job insecurity. All of this implies a marked retrenchment of consumer spending as households try to divert an increasing part of their incomes to replenish depleted assets, not only in 401Ks, but in the value of their homes as well. Indeed, a necessary condition for this crisis to end is a stabilization of home prices in the U.S. They will stabilize and clarify the level of equity in U.S. homes, the ultimate collateral support for the value of much of the world’s mortgage-backed securities. At a minimum, stabilization of home prices is still many months in the future. But when it arrives, the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards reengagement with risk. Broken market ties among banks, pension, and hedge funds and all types of nonfinancial businesses will become reestablished and our complex global economy will move forward. Between then and now, however, to avoid severe retrenchment, banks and other financial intermediaries will need the support that only the substitution of sovereign credit for private credit can bestow. The $700 billion Troubled Assets Relief Program is adequate to serve that need. Indeed the impact is already being felt. Yield spreads are narrowing.

As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked

disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state

of balance. If it fails, as occurred this year, market stability is undermined.

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. Demand became so aggressive that too many securitizers and lenders believed they were able to create and sell mortgage backed securities so quickly that they never put their shareholders’ capital at risk and hence did not have the incentive to evaluate the credit quality of what they were selling. Pressures on lenders to supply more “paper” collapsed subprime underwriting standards from 2005 forward. Uncritical acceptance of credit ratings by purchasers of these toxic assets has led to huge losses.

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It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivat[iv]es markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.

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When in August 2007 markets eventually trashed the credit agencies’ rosy ratings, a blanket of uncertainty descended on the investment community. Doubt was indiscriminately cast on the pricing of securities that had any taint of subprime backing. As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue. This will offset in part market deficiencies stemming from the failures of counterparty surveillance.

There are additional regulatory changes that this breakdown of the central pillar of competitive markets requires in order to return to stability, particularly in the areas of fraud, settlement, and securitization. It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.

The financial landscape that will greet the end of the crisis will be far different from the one that entered it little more than a year ago. Investors, chastened, will be exceptionally cautious. Structured investment vehicles, Alt-A mortgages, and a myriad of other exotic financial instruments are not now, and are unlikely to ever find willing investors. Regrettably, also on that list are subprime mortgages, the market for which has virtually disappeared. Home and small business ownership are vital commitments to a community. We should seek ways to reestablish a more sustainable subprime mortgage market.

This crisis will pass, and America will reemerge with a far sounder financial system.

자료 2: The whole intellectual edifice (New Yorker, October 23, 2008)

자료 3: Greenspan's Lament (The New York Times, October 23, 2008)

자료 4: Notes from the Editors (Monthly Review, December 2008, Volume 60, Number 7)

자료 5: Neo Liberalism's intellectual edifice by Gunnar Tomasson (January 2009)


자료 6: The New York Times, Thursday, October 23, 2008

※ 발췌(excerpt):

Facing a firing line of questions from Washington lawmakers, Alan Greenspanㅡthe former Federal Reserve chairman once considered the infallible "maestro" of the U.S. economyㅡadmitted Thursday that he was wrong to trust free markets to regulate the financial system without stronger government oversight.

A fervent proponent of deregulation during his 18-year tenure at the Fed's helm, Greenspan has faced mounting criticism this year for having adamantly resisted efforts to rein in credit derivatives, an unchecked market whose excesses partially led to the current financial crisis.

"I have found a flaw" in free market theory, Greenspan said ( ... ) "I don't know how significant or permanent it is. ( ... ) But I have been very distressed by the fact."

In his testimony, Greenspan rejected the notion that he was personally responsible for what he called a "once-in-a-century credit tsunami." ( ... ) Pressed by Waxman, Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy.

"I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Greenspan said. Waxman pushed the former Fed chief, who left office in 2006, to clarify his explanation. "In other words, you found that your view of the world, your ideology, was not right, it was not working," Waxman said. "Absolutely, precisely," Greenspan replied. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Waxman challenged Greenspan's approach to regulating the mortage industru while he was Fed chairman, saying that the FEd "had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market." But Greenspan, Waxman said, "rejected pleas that he intervene." ( ... )

Saying that his thinking "has evolved" in the past year, Greenspan also defended his record. "In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences, " he said. "This crisis, however, has turned out to be much broader than anything I could have imagined." ( ... )


자료 7: International Herald Tribune, Thursday, October 23, 2008.

( ... ) As far back as 1994, Greenspan staunchly and successfully opposed tougher regulation on derivatives. But on Thursday, he agreed that the multi-trillion-dollar market for credit default swaps, instruments originally created to insure bond investors against the risk of default, needed to be restrained.

"This modern risk-management paradigm held sway for decades," he said. "The whole intellectual edifice, however, collapsed in the summer of last year."

Waxman noted that the Fed chairman had been one of the nation's leading voices for deregulation, displaying past statements in which Greenspan had argued that government regulators were no better than market at imposing discipline. "Were you wrong?" Waxman asked. "Partially," the former Fed chairman reluctantly answered, before trying to parse his concession as thinly as possible. ( ... )

But as the Fed slashed interest rates to nearly record lows from 2001 until mid-2004, housing prices climbed far faster than inflation or household income year after year. By 2004, a growing number of economists were warning that a speculative bubble in home prices and home construction was under way, which posed the risk of a housing bust.

Greenspan brushed aside worries about a potential bubble, arguing that housing prices had never endured a nationwide decline and that a bust was highly unlikely. Greenspan, along with most other banking regulators in Washington, also resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages that allowed people to borrow far more than they could afford.

The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act. But it took little action during the long housing boom, and fewer that 1 percent of all mortgages were subjected to restrictions under that law. This year, the Fed greatly tightened it restrictions. But by that time, the subprime market as well as the market for other kinds of exotic mortgages had already been wiped out. ( ... )