and the first cause of all this was the wrong passage taken by Mr. Greenspan and arguably, many other before him.
I certainly agree with that sentiment, and many others do as well. Much has been written regarding Greenspan's insouciance in the face of all the warnings and reports he had at his disposal. He did not act, and his inaction was the major factor leading to the crisis. Had he clamped down on mortgage industry fraud and demanded reasonable underwriting standards, there would have been, most likely, a real estate/construction fueled recession. There would have been no way to correct the situation without some fall out. But he did nothing and that inaction eventually resulted in a banking breakdown and crisis.
I believe his inaction was rooted in his economic philosophy , a philosophy now thoroughly discredited.. (There are volumes posted on this topic.) To Greenspan's credit he has, finally, admitted he was wrong to not act. And he has made it clear that his inaction was rooted in his steadfast belief that Bankers would not act against their own self-interest. That I think is not quite a correct assessment, and it suggests to me that Greenspan still has not properly analyzed the defects in his personal economic views. Whereas personal liability might have given them pause, Bankers near the top of the offending institutions walked away with millions of ill begotten gains because the were protected from liability by the corporate structure. The reason we have Corporate structure in the first place is to protect against personal liability. Green span has not thought this through to the level he should have.
Underlying Greenspan's economic philosophy was his unshakable belief in classical, textbook, equilibrium theory. Namely, that markets left alone will spontaneously return to equilibrium. The implication is that the further they get from equilibrium the more likely they will return. However this is far too simple a view, and quite wrong. Real markets don't act in this way. Real markets out of equilibrium are just as likely to continue moving away from equilibrium as toward it. Some would say that in the earlier stages of disequilibrium they are much more likely to move further out of equilibrium. I find myself in this camp because it nicely explains bubbles -- but it is not the fundamental cause of bubbles. Furthermore, markets spend far more time out of equilibrium then they do close to equilibrium. And when bubbles finally burst and the market tries to "spontaneously return to equilibrium,"
it doesn't do so harmlessly. It is then a question of how much harm will result. The reality is very far removed from the classical, Adam Smith view of market equilibrium being driven by supply and demand. The reality versus the simple theory accounts for the inevitable failure of laissez faire government policy --something Greenspan, at one time, firmly believed in.
It seems to be the best course of action that the Fed be dissolved and the workings behind monetary policy be given light of day by members of Congress wisely trained in economics and coming from all economic schools of thought.
Here we would strongly disagree. Members of Congress are political animals, I wouldn't want them anywhere near monetary policy or banking regulation! The Fed, among its hundred or so PhD. economists, incorporates by far the most expertise, and differences of opinion, on economics that is available in any one place. Though the Fed, particularly the Branch Banks, are not as isolated from potential conflicts of interest as we might like to see, our U.S. Fed system works better than any other method of banking regulation and monetary policy setting than we have enjoyed in our brief history as a nation. The Fed today is more open, much more! Today every transaction that can be posted on the internet is posted, much of it in almost real time. Transactions that can't be posted immediately are eventually posted. Though the Fed is, by law, somewhat isolated from political interference, as I believe it should be, the Fed is not protected from FOIA challenges via the courts, as I believe it shouldn't be. The Fed lost an FOIA challenge to Bloomberg. In that case, the Fed had what I thought was a reasonable reason for wanting to delay the disclosure of some transactions. (Virtually all of the day to day transactions carried out by the Branches, particularly the New York Branch [ See NYfed.org.] are disclosed. You will probably be amazed at the detail of information on bond transactions that is available to you. Similarly, U.S. Treasury transactions are transparent . See Treasury.gov, and look up the TARP account, for example.)
See also, federalreserve.gov, the parent sight of the entire system. It's
very informative.
