The danger of writing contemporary history is that between finishing the manuscript and the book’s publication, something will change that will make you look foolish. Just ask former Federal Reserve chairman Alan Greenspan, whose memoir hit the stores just as the United States entered one of the most perilous economic periods in decades.
The ex-chair’s very readable book is more than an account of his life. The second half is devoted to opining on every economic issue facing the world today. This is where Greenspan is most interesting, but also where he runs into trouble.
In discussing the globalization of financial flows, the emergence of private equity firms and hedge funds, he argues that financial institutions and transactions have become so complex and fast-paced that there no longer is any way government regulation can work.
The public need not worry, however, Greenspan says. He argues that players in the financial game have huge incentives to identify all the risks they face in each and every transaction and to closely monitor the actions of their counterparts in any deal. They also can move more nimbly than government regulators, hiring brilliant people to develop sophisticated risk evaluation and monitoring systems. Market forces will discipline firms. Resources will be used with utmost efficiency.
Merrill Lynch has blown that fantasy right out of the water. Merrill is not a dinky firm run by a couple of Wharton School dropouts. Its executives supposedly are some of the best in the business. They hired hundreds of bright people with advanced degrees in finance and mathematics. They paid these analysts, traders – and themselves – hundreds of millions of dollars in bonuses to reward the great job they all were doing.
And they obviously did not have the faintest idea of what the heck they really were doing. Something is rotten when a firm is sailing along in one quarter and then announces asset write-downs of $4.5 billion in the next. Oops, make that $7.9 billion. Or maybe that should be $12 billion, as some analysts have suggested.
It really would be funny if the underlying reality were not fateful. The depths of the financial problems touched off by subprime loans have yet to be plumbed.
The rub is that history shows it is very hard for a nation to weather a severe financial market crisis without that spilling over to the real economy. Add high and rising oil prices, geopolitical uncertainty and unsustainable budget and international payments imbalances and the outlook is even bleaker. Yes, an appreciation of historic irony always is a blessing in the real world. But it is hard to maintain when your job goes away.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.