So Many Miscreants . . .

This week’s Barron’s has Randall Forsyth going a bit postal on the Usual Suspects:

“With so many miscreants participating in arguably the biggest financial catastrophe in history, it’s all but impossible to point to the chief perpetrator.

In truth, there was a suspension of disbelief all down the line: by mortgage brokers who arranged loans for delusional borrowers who bought houses they both knew they couldn’t afford; bankers who collected, pooled and sliced and diced the junk mortgages into triple-A securities; ratings agencies who provided that Good Housekeeping Seal of Approval to those defective products; investors who credulously bought these mortgage-backed securities with gilt-edged ratings and junk-bond yields; sellers of credit-default swaps who never thought they’d have to pay off on the insurance they’d written. And don’t forget Fannie and Freddie, which leveraged the implicit (and later explicit) backing of Uncle Sam to use cheap credit to balloon their balance sheets. And it was all fine, of course, because house prices never went down.

No less an authority than Alan Greenspan, the former Federal Reserve chairman, saw no problem with this because, firstly, scattering all these loans to the wind meant the risk was dispersed and therefore nobody needed to worry about the all these dubious loans threatening the financial health of any one institution. Moreover, there was no need to worry about bubbles; though they inevitably burst, the damage can be contained by reinflating a new one.

In that, Greenspan had empirical evidence on his side, after having reflated successive burst bubbles over his tenure. The Fed had done just that after the 1987 stock-market crash, which led to the commercial real-estate and junk-bond booms and busts of the late ’80s. And after the dot-com bust of 2001 (which was helped importantly by Fed pumping to stave off the supposed Y2K threat), Greenspan countered by slashing rates to 1% by 2003 and leaving them at preternaturely low levels for a couple of years, which inflated the housing bubble.”

Note what Forsyth writes: Not that there are no villains, but that its hard to pick the worst of the bunch out of all the miscreants involved. Still, it seems he is nominating Greenie as the front runner.

And yet some other people continue to think there were no villains in all of this. Some folks have suggested its simply a case of defining deviancy down, but I believe the more likely explanation is that its yet another Atlas-addled brain unable to process evidence that conflicts with now hard-wired ideolology.

Call it yet another case of cognitive dissonance . . .


It’s Good to Be Goldman
Randall Forsyth
Barron’s, JULY 20, 2009

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