Alan Greenspan and the Financial Black Hole
October 30, 2008
As the Large Hadron Collider in Geneva was about to become operational, dire warnings appeared on the internet. Scientists had been salivating about their Collider for the longest time. At last they’d be able to simulate conditions from the Big Bang and learn…..well, all kinds of things about physics. But worrywarts fretted that these wise ones would instead open up black holes right here on terra firma….and swallow up everything! Two fellows in Hawaii even filed a “cease and desist” lawsuit, but the far away European scientists pooh-poohed it all. Not to worry, they said, any results of their tinkering would be at the subatomic level. Nonchalantly, chuckling at these unscientific nutjobs, they flipped the switch….and half the world’s wealth promptly vanished into a financial black hole! The week ending Oct 10 was the worst week for U.S. stocks since 1914 [!]
SIR - Can it really be a coincidence that within weeks of the Large Hadron Collider being switched on for the first time a financial black hole has appeared in the universe? - Barclay Price, Edinburgh (letter to editor: Economist)
And from the Yahoo question board:
How did the Large Hadron Collider cause the biggest stock market crash in History?
Apparently taking this for a serious question, people wrote in to say that 1929 and 1987 had seen larger single day crashes, that the market slide had begun a year ago, and that real estate and bank shenanigans, not physics, has caused the meltdown. And besides, like all new projects, the Collider didn’t go online as scheduled, but glitches and difficulties kept it under repair from the start.
But let these apologists say what they will….it was those infernal scientists! They can’t leave well enough alone. Always have to mess with things. Just like when my son used to work the car window up and down, up and down, and I’d tell him not to because he was going to break it. And do you know what happened? Exactly…..and I was out the cost of a new window motor. Of course, breaking a car window motor is not as serious as destroying the entire worldwide financial system, but the principle is exactly the same and I wasn't happy.
In the aftermath, Alan Greenspan testified before Congress:
“We are in the midst of a once-in-a-century credit tsunami. Central banks and governments are being required to take unprecedented measures. You, importantly, represent those on whose behalf economic policy is made, those who are feeling the brunt of the crisis in their workplaces and homes. I hope to address their concerns today.”
This is the same Alan Greenspan whose voice to the financial community used to be like that of God, the only difference being that God knew what he was talking about. Not that Mr. Greenspan wasn’t bright and competent and all…..it's just that it took only a single flaw to bring down a whole lifetime of work. As chairman of the Federal Reserve Bank, he’d issue statements at least once a month when setting interest rate policy. He’d make the statements incomprehensible….it was almost a game. He’d rehearse them in his head. If they could be understood, he'd rework them. Finance people would strain to discern his real intent, but of course, the task was impossible….by design. Far from becoming fed up with such obscuration, they took it all for brilliance! I mean, any street person would recognize a con-job in two seconds flat, but the bankers hailed it as wisdom from on high. After all, they were making tons of money. Did anything else truly matter?
Mr. Greenspan’s successor, Ben Bernanke, is more straightforward. Mr. Greenspan himself became that way addressing Congress. He dropped the smart-alecky double talk. His words were clear. And not very pretty.
“Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment. Fearful American households [not to mention….which he didn’t…the rest of the world] are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds, and increased job insecurity. All of this implies a marked retrenchment of consumer spending as households try to divert an increasing part of their incomes to replenish depleted assets, not only in 401Ks, but in the value of their homes as well.”
No more smug cuteness building indecipherable word castles. For, alas, “those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself particularly) are in as state of shocked disbelief.”
Then Mr. Greenspan discusses what triggered the collapse: factors involving CDOs, already discussed here.
“It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria.”
Note the absolute failure of the best and the brightest - the cream of the crop of human experts. A Nobel Prize was awarded, for crying out loud, for the economic model that would subsequently ruin us all! This was the not work of con men, but of the most learned, the most highly educated (the most profit-driven?) persons of society. And the final admission is staggering: nobody thought to test the model outside of partytime - “a period of euphoria.” Nobody thought that the real world might be different than the party world!
Isn’t there some scripture somewhere about how you can’t trust “nobles” as far as you can spit?
Do not put your trust in nobles, nor in the son of earthling man, to whom no salvation belongs.
His spirit goes out, he goes back to his ground;
In that day his thoughts do perish. Ps 146:3,4
And doesn’t this validate how Jehovah’s Witnesses don’t bow and scrape and slobber over today’s higher education?Instead they extract from education the ability to make a living, while drawing on other sources for wisdom.”
After his statement, the House Committee grilled Mr. Greenspan for awhile, forcing him to admit:
“I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works. That’s precisely the reason I was shocked…I still do not fully understand why it happened, and obviously to the extent that I figure it happened and why, I will change my views.”
I was going to offer up some feeble joke about how the flaw he didn’t reckon on was the Hadron Collider. But I won’t do it. The whole mess is too serious and sad.