Thursday, October 23, 2008

Closer and Closer to a Full Mea Culpa

Alan Greenspan may be growing increasingly concerned with his place in history. He is beginning to admit that his low-interest rate bias wasn't a good idea, although not in so many words:

Greenspan told the House Oversight Committee that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had been proven wrong by the current crisis. He called this a "mistake" in his views and said he had been shocked by that.

The trouble with economists is that their models take all of the emotion out of economic behavior, which is still ultimately a competition for resources driven by an evolutionary bias for reproduction. Behavioral finance is beginning to account for this gap, but Mr. Greenspan is still bewildered by it in his testimony (end of article):

"It was the failure to properly price such risky assets that precipitated the crisis," Greenspan said.

No, it wasn't a failure of pricing! Easy money drove risky pricing when the Greenspan Fed kept short term rates artificially low after the dot-com blowout. He must be aware of this criticism of him by now, but he wouldn't even address this line of questioning during his testimony.

Give him a few more months. He'll come around when people start calling this "Greenspan's Depression."