The Money View

Greenspan Calls for New Economic Thinking

But not by him

“Unredeemably opaque”, so Alan Greenspan terms the operation of the invisible hand that guides international financial markets.

He means this literally. “The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems.” If he had said “hardly ever get” rather than “can never get”, I think we could all agree.

Indeed pretty much every economist I know thinks that a big part of the road forward is a much enhanced effort at data collection, so that in future we do get more than a glimpse. That is the whole point of the Financial Stability Oversight Council and the Office of Financial Research.

But Greenspan also thinks that, even if we do manage to get a glimpse, it would not help us much, because the system is “more complex” than we contemplate, on account of “the degree of global interconnectedness of recent decades.” Why collect data, if you will never be able to understand it?

To which I, and again pretty much every economist I know, would answer, What else is science but the possibly quixotic belief that application of effort and reason will eventually be sufficient to unlock the mysteries of the universe? Even if some mysteries remain beyond our ken, we can never know that in advance. If it looks like a big job, then best to get started, and if it is too daunting for you, then please step aside and give others a chance.

No question about it, Dodd-Frank is a patchwork product, a list of fixes for a list of dike-busting leaks. For lack of any overarching intellectual framework, there is no guarantee at all that the resulting regulatory structure will be internally consistent, and every expectation that it will provide ample scope for regulatory arbitrage of various kinds.

No question about it, Dodd-Frank is a product of Old Economic Thinking. Over the last 30 years, the U.S. has moved from a bank lending-based credit system to a capital market-based credit system. Dodd-Frank focuses its attention on the old system, with only a nod to the new one.

No question about it, Dodd-Frank is as much a political Act as it is economic. Like all epochal financial legislation, it was thrown together in a hurry in an attempt to show that our leaders are in charge. The real devil will be in the details—and very likely in a second legislative effort, if past history is any guide—to be worked out in the years to come.

We will of course have to understand the new system before we can properly regulate it. The place to start is by realizing that what others call “the shadow banking system” and I call “the dollar cross-border funding system” is not an aberration but the very heart of how the new system works. Data lags behind, and understanding lags even farther behind. Old intellectual habits continue to organize our conversation, but only for the time being, not forever.

One is tempted to turn the tables on Greenspan, noting the “unredeemably opaque” prose for which he was famous as chairman of the Fed. But I don’t think it is opaque, and certainly not unredeemably so, as I hope I have demonstrated. The author understands all too well the stakes that are in play at this epochal moment.

Put simply, the central issue is financial globalization. Complexity mostly arises from the cat-and-mouse game between bankers and regulators—the parallel construction is intentional—where bankers are global while the regulators are national. It follows that if the regulators were to stop regulating, the system would be a lot simpler.

But would it work better?

Greenspan concludes: “The vexing question confronting regulators is whether this rising share of finance has been a necessary condition of growth in the past half century, or coincidence. In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.”

Good question. Let’s address it. As I say, Greenspan calls for new economic thinking, but not by him.




New Economic Thinking from Alan Greenspan??  You mean the guy that sat before Congress and admitted for 17 years he didn't know what he was doing???  Why would anyone give him any credibility for anything!!!.  He couldn't lead a horse to water!!!  I can already see where this conference is going.  If you really want to get some expert speakers, then why don't you get a group of house wives and homemakers that know how to balance a checkbook.  You know those people that know you can't spend more money than you earn.  That is if there are any left. Lord help us all.....


How about some old economic thinking. Hopefully, not from the guy that sat before congress and admitted that for 17 years he didn't know what he was doing, but you know the kind, like not spending more than you earn or what every homemaker knows, like balancing a checkbook.  Perhaps going back to the small local banker, you know, the guy in the Sears and Robuck suit that wants to know if you can pay back the money you borrow, as in, do you at least have a job?  And finally, maybe, heaven forbid, we should revisit term limits again for obvious reasons. Can anyone do any worse that what we have now?  And for an energy policy, does anyone remember the word "conservation" a novel idea and not a bad place to start!   


New Economic Thinking is sorely needed and soon. Credit scores are destroyed and many cannot work, much less pay bills or balance a checkbook. Mortgages are owned by unknown entities.  Hidden unchecked speculators (not supply and demand)  are driving up oil and food prices worldwide. If a job is obtained, it is at half the previous salary. Job productiovity is at an all time high and net worth at an all time low. American conservative legislators are fostering union busting, attacks on education grants and women's medical services, and fostering decreased public revenues by lowering taxes on wealth and income and corporate profits and sales or ravaging of public assets. So much for old fashioned economics where we have labored and had decent educations, living wage jobs, worked hard, paid nonregressive taxes and bought health care and paid for retirement security. Even Credit Scores (which are fairly new ) are based on past history which now includes widespread personal financial collapse. The right questions need to be asked. Should credit scores even be considered when most have been destroyed? Who does the scoring? Triple AAA ratings brought about financial disaster. Low credit scores immobilize personal financial progress. Since economics is simply how much we trust each other, how do we build trust?  Money is just energy, so how do we increase energy or energy sources? Cooperation can be forced or voluntary--the same for trust. Which components of trust can be cultivated? Which can be compelled or mandated--a red traffic light,for example. Is trust a value? Or is trust a necessity? Is trust value laden or value free?  What would a world with just roundabouts look like? Would we learn to take turns? Would we trust others to wait their Turn? New Economic Thinking means understanding the need for trust and formulating the foundations for trust.  And it means asking the right questions.


"To which I, and again pretty much every economist I know, would answer, What else is science but the possibly quixotic belief that application of effort and reason will eventually be sufficient to unlock the mysteries of the universe? Even if some mysteries remain beyond our ken, we can never know that in advance. If it looks like a big job, then best to get started, and if it is too daunting for you, then please step aside and give others a chance."

I don't know if I would entirely agree with the first part of this blanket statement of "every economist you know" in that it implies that nearly all economists are concerned with furthering useful knowledge.  I think many economists are far more concerned about showing completely markets are the ultimate allocative tool and that everything we do detracts from the optimal outcome.   They have little or no interest in anything but writing paper after paper on how we cannot ever be able to decide what might be in our best interest better than the invisible hand.  I don't find this kind of thinking even remotely useful - its like proving that mountains are beautiful, so therefore building cities is folly.  And yet you'll find hundreds of papers that have this idea that we are making things worse by appling rules and regulations to markets.  

Even if it were 100% undoubtedly true that a complete free market was the best possible allocation system, we rarely encounter such markets.  Pining for a golden age through unreasonable assumptions and complex math is still a religion, no matter what vestments the priests wear.  

Also, I think that many economists have a skewed idea of optimal results and have never even considered the idea of risk adjusted returns.  


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