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What Price “Experience”? March 25, 2008

Posted by davidzweig in economics.

Senator Hillary Clinton makes much of “experience.” And her process-debacle in attempting to reform health care 15 years ago has made her quick to create commissions to deal with major problems. One of the quadrennial problems in promising “change” in Washington is the unchanged network of experts there, none less than the erstwhile Maestro Alan Greenspan. COnsider these two passages, one from the Financial Times, and the other from the New York Times.

Clinton proposes Greenspan lead foreclosure group | U.S. | Reuters/http://www.reuters.com

Former Federal Reserve Chairman Alan Greenspan and other economic experts should determine whether the U.S. government needs to buy up homes to stem the country’s housing crisis, Democratic presidential candidate Hillary Clinton proposed on Monday, March 24. Clinton said the Federal Housing Administration should “stand ready” to buy, restructure and resell failed mortgages to strengthen the ailing U.S. economy.Clinton threw her weight behind legislation proposed by Democrats Rep. Barney Frank of Massachusetts and Senator Chris Dodd of Connecticut that would “expand the government’s capacity to stand behind mortgages that are reworked on affordable terms.”

But she said a bipartisan group should determine whether that approach was sufficient or whether the U.S. government should step in as a temporary purchaser.

The working group could be led by bipartisan economic heavyweights such as Republican Greenspan, Democratic former Fed Chairman Paul Volcker and Robert Rubin, the treasury secretary under President Bill Clinton.

From the NY Times of March 23:

Speaking in Boca Raton, Fla., in March 1999, Alan Greenspan, then the Fed chairman, told the Futures Industry Association, a Wall Street trade group, that “these instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it.”

Although Mr. Greenspan acknowledged that the “possibility of increased systemic risk does appear to be an issue that requires fuller understanding,” he argued that new regulations “would be a major mistake.”

“Regulatory risk measurement schemes,” he added, “are simpler and much less accurate than banks’ risk measurement models.”

This puts me in the mind of those trite Hollywood plots wherein the police must call in the bombmaker to defuse his own bomb. Banks’ risk management models were not, and are not up to the task. The Maestro could have known. After all, he has all that experience.



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