Friday, October 24, 2008

Some Concession

One of the bigger financial stories of yesterday and today is Alan Greenspan’s appearance before the professional jobholders who make up what is called Congress.  Bloomberg’s reporting on this event is headlined Greenspan Concedes to `Flaw’ in His Market Ideology, and The New York Times headline for the story is Greenspan Concedes Error on Regulation.

But what, exactly, has Alan Greenspan conceded?  Only this.

Mr. Waxman noted that the Fed chairman had been one of the nation’s leading voices for deregulation, displaying past statements in which Mr. Greenspan had argued that government regulators were no better than markets at imposing discipline.

“Were you wrong?” Mr. Waxman asked.

“Partially,” the former Fed chairman reluctantly answered, before trying to parse his concession as thinly as possible.

This partial concession is not a wholesale endorsement for excessive state regulation of financial markets, but simply an acknowledgement that the individuals (the human factor) playing in the market were focused on the dollars being generated by the subprime mortgage paper market rather than the soundness of the investments being traded (the derivatives market).

The collapse of the derivatives market is not so difficult to understand.  Here is the definition of a derivative, but from the definition here is the key to understanding why the financial markets have collapsed.

In finance, a security whose price is dependent upon or derived from one or more underlying assets.

And we all understand what the underlying alleged assets of the derivatives were, now.  Subprime mortgages.  Which I have stated from the beginning of this fiasco are the root cause of the financial woes now assailing the markets, as I noted in a post I titled Self Inflicted, and which even Alan Greenspan now is also conceding.

“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower,” he said.

Think about it.  You cannot expect to miraculously turn a crappy underlying asset (the individual subprime mortgage) into a sound asset (the derivatives sold by the pooling of crappy subprime mortgages).  It just does not work, and seining crappy mortgages through excessive regulation will still result in crap coming out, no matter how small the seine holes are.

Posted by John Venlet on 10/24 at 07:22 AM
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