Alan Greenspan's "The Age of Turbulence" provides an in-depth expose on many economic issues of our time. (David Noell/MEDILL)

With crisis comes blame. Despite being retired since 2006, former Federal Reserve Board Chairman Alan Greenspan has taken his punches as one of the main culprits of the recent financial meltdown, with some [...]]]>

Alan Greenspan's "The Age of Turbulence" provides an in-depth expose on many economic issues of our time. (David Noell/MEDILL)

With crisis comes blame. Despite being retired since 2006, former Federal Reserve Board Chairman Alan Greenspan has taken his punches as one of the main culprits of the recent financial meltdown, with some even claiming he is the third most blameworthy. His stance against regulation and his trust in the free market have some critics calling foul on his time in office this decade.

One needs to look no further than Greenspan’s “The Age of Turbulence,” released on September 17, 2007 somewhat ironically close to the beginning of the crisis, to understand Greenspan’s thought process about the market and the role of regulation.

“Markets have become too huge, complex, and fast-moving to be subject to twentieth-century supervision and regulation,” Greenspan wrote. “Since markets have become too complex for effective human intervention, the most promising anticrisis policies are those that maintain maximum market flexibility – freedom of action for key market participants such as hedge funds, private equity funds, and investment banks,” he continued.

Greenspan knew even before the crisis this position would be attacked by his detractors. “Many critics find this reliance on the invisible hand to be unsettling,” he wrote. Despite admitting some blame for the crisis, Greenspan has stuck to his trust in laissez-faire capitalism.

In the book, Greenspan backs his viewpoints admirably and starts with a biography of his life that helps the reader understand how Greenspan shaped his viewpoint about the market. The compelling opening to the book describes Greenspan’s life as he dealt with 9/11, and should be read by anyone interested in how the markets react to a disaster.

Along with reflecting on his story, Greenspan sets out to explain some of the key economic stories of our time, writing on many relevant topics for today’s news cycle.

Greenspan deftly summarizes the housing boom of this decade, even describing the risks of subprime mortgages. Did he see the risks as a real threat?

“But I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support,” he wrote.

Another way Greenspan trusts deregulation is his opinion on hedge funds. Greenspan believes that “the marketplace itself regulates hedge funds today through what’s known as counterparty surveillance,” he wrote. Counterparty surveillance, Greenspan explains, involves investors keeping a close eye on their money that is invested in hedge funds. This will keep hedge funds in check.

Hedge fund regulation is a hot topic in Europe right now, as the European Union ponders reform.

Greenspan does, however, seek more government intervention in a different matter – fraud. “An area in which more rather than less government involvement is needed, in my judgment, is the rooting out of fraud. It is the bane of any market system,” he wrote.

With current fraud accusations against Goldman Sachs swirling, the American public is becoming even more aware of the perils of fraud that Greenspan points out.

The book should be read by anyone interested in the economy. Despite a bad habit of long-windedness, Greenspan explains and expounds upon economics 101 very skillfully. Whether or not one agrees with Greenspan’s opinions, his expose on how human nature and capitalism interact are extremely enlightening.

“Capitalism creates a tug-of-war within each of us. We are alternatively the aggressive entrepreneur and the coach potato, who subliminally prefers the lessened competitive stress of an economy where all participants have equal incomes,” Greenspan wrote.

Greenspan’s powerful description of the dichotomy between people’s desire for job security and the necessity of creative destruction for the advancement of society shows his expertise not only of economics but also of human nature. And the more one reads Greenspan, the more one comes to understand how much economics really is a social science and not a hard science.

Whether or not one agrees with Greenspan’s views, and certainly many are being disillusioned with his line of thinking with recent events, his knowledge of economics and the markets is astounding. Even though Greenspan tends to ramble in his written words like he rambles when he speaks, this book captures his life, giving the reader a great understanding of the economic world in which we live.

Panelists discuss the need for regulation during "Systemic Risk: Advances and Challenges in the Wake of the Crisis" at the ISDA General Meeting. (Alexandra Harris/MEDILL)

While President Barack Obama castigated Wall Street from New York City’s Cooper Union, the International Swaps and Derivatives Association’s annual general meeting kicked off in San [...]]]>

Panelists discuss the need for regulation during "Systemic Risk: Advances and Challenges in the Wake of the Crisis" at the ISDA General Meeting. (Alexandra Harris/MEDILL)

While President Barack Obama castigated Wall Street from New York City’s Cooper Union, the International Swaps and Derivatives Association’s annual general meeting kicked off in San Francisco.

And the word buzzing around was regulation.

The consensus in the Bay area is that while regulation is needed, there’s a concern that there could be too much regulation, which could harm more than help.

According to ISDA Executive Vice Chairman Robert Pickel, there’s a flawed notion that exchange trading will create liquidity and better pricing for markets.

And while Obama spoke about the financial reform bill that’s heading to the U.S. Senate floor, Deputy Treasury Secretary Neal Wolin made the case for Washington’s version of financial reform.

This was an exercise in amusement, especially when an audience member told Wolin that he “may make his trip worthwhile.”

“We see that pricing is fair,” said ISDA CEO Conrad “Connie” Voldstad. “None of the end users are squawking.”

“It’s a group of people trying to be protected from something they don’t want to be protected from,” IDSA Chairman Eraj Shirvani added.

After acknowledging the damage derivatives caused during the financial crisis, Voldstad said in prepared remarks that “much of the debate over the causes of the financial crisis has so far been based more upon rhetoric and less on facts. There has been no estimate made as to the economic benefits, or, more appropriately, the economic costs of regulation. There has been misguided belief that exchange trading will bring more liquidity and better pricing to one of the most liquid and efficient markets in the world.”

Even though ISDA executives like the less-is-more approach to derivatives trading, there was some push-back during the session titled “Systemic Risk: Advances and Challenges in the Wake of the Crisis.”

In fact, when moderator and ISDA board member Stephen O’Connor fielded a question regarding ISDA’s “abstract” position on regulation, O’Connor jokingly “asked Connie and Bob [Pickel] to step forward.”

The annual meeting continues Friday with Stanford professor and Hoover Institution Fellow John Taylor—best known for the creation of the Taylor rule, which determines how much a central bank should change interest rates—addresses members.  There will also be a panel, “The Future of Credit Derivatives and Structured Finance,” which, at this point, is just about anyone’s guess.

(www.aig.com)

BY JOE FREEMAN — MEDILL NEWS SERVICE

Rene M. Stulz, professor of finance at The Ohio State University’s Fischer College, wrote an op-ed in the Wall Street Journal today entitled: “In Defense of Derivatives and How to Regulate Them.”

Peculiarly, the article had little to do with how to regulate them and almost [...]]]>

(www.aig.com)

BY JOE FREEMAN — MEDILL NEWS SERVICE

Rene M. Stulz, professor of finance at The Ohio State University’s Fischer College, wrote an op-ed in the Wall Street Journal today entitled: “In Defense of Derivatives and How to Regulate Them.”

Peculiarly, the article had little to do with how to regulate them and almost everything to do with the defense of derivatives.

Stulz’s main argument can be summed up in one word: liquidity. Namely, that capital constantly flowing through the system is an undeniable asset to the economy and provides businesses and investors ways and means of hedging risk. Agreed.

But what if this system is abused, as it clearly was? What if liquidity turns into leveraging and weirdly packaged products and this all happens to coincide with a bursting bubble in, shall we say, housing?

Not to fear, says Stulz, all we need is a “systemic risk regulator” that will place participants under “federal regulatory oversight.” It’s strange to read a proposal for federal regulatory oversight of derivatives and not see any mention of the Commodity Futures Trading Commission, the federal regulator of exchange-traded derivatives.

Speaking of regulation, let’s not overextend ourselves, Stulz continues, claiming that we should leave “participants in capital markets free to engage in bilateral contracts for derivatives that fulfill specific needs as well as for new products.” Specific needs? New products? You mean like investors hedging their risk in mortgage-backed securities with credit-default swaps? Oh dear.

Stulz continues by allaying our obviously mounting concerns. “Derivatives are not the culprit,” he asserts near the end of the piece. Sure, liquidity is key, we need strong regulation, and there are many culprits (overreaching homeowners, predatory lenders).

But to free up blame and propose regulations that either already exist or won’t get the job done is futile at best and hurtful at worst. To say credit default swaps aren’t at all responsible for the meltdown, that they are “not the culprit,” is like positing that guns don’t kill people, bullets do.

The opinions expressed are those of the author and do not necessarily represent the views of medillmoneymavens.com, the Medill School of Journalism or Northwestern University.

Yesterday evening investor and philanthropist George Soros spoke about his new book, The New Paradigm for Financial Markets, on The Newshour with Jim Lehrer. Soros has recently been making the rounds on shows like BY FRANK N. CARLSON-MEDILL NEWS SERVICE

Yesterday evening investor and philanthropist George Soros spoke about his new book, The New Paradigm for Financial Markets, on The Newshour with Jim Lehrer. Soros has recently been making the rounds on shows like Charlie Rose, The Newshour and NPR’s Morning Edition, arguing that financial markets cannot self-regulate, and that the “let the free market work” principle of market fundamentalists, and particularly those under the Bush administration, is essentially flawed. He draws on the recent failures of investment banks, bond rating agencies and mortgage companies to make sound investments as evidence of this conviction

It is not particularly surprising that Soros, a Democratic activist, is in favor of more government regulation. But in the wake of the scandalous mortgage lending practices that greased the wheels of speculation in the housing market, the ensuing credit crisis and the likelihood of a Democratic president and Congress, Soros’ push for regulation may represent a shift in philosophy about the way Americans think about the economy, a new paradigm, as he calls it.