The First Disaster Of The Internet Age

Alan Greenspan lit the fuse of the credit crisis when he extolled the revolutionary virtues of the 'Net—and redefined risk and responsibility.

Published Oct 18, 2008

From the magazine issue dated Oct 27, 2008

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Sometimes a brief exchange can capture an essential truth better than reams of explanation. That happened recently when a Financial Times reporter suggested to an investment banker that the credit crisis had snuck up on investors and regulators because of how hard people like him made it to get good information. The banker, with evident irritation, pointed out that all the information you needed was widely available. Why should he be blamed if nobody paid attention?

It was an eye-opening comment. Financial mavens have long had access to comprehensive data on credit markets and subprime mortgages. It apparently didn't cross this banker's mind that the average LCD-TV-buying consumer can't afford to shell out $1,700 a month for a Bloomberg. But in a sense, he was right. The information is out there—free, on the Internet.

The Internet has broadly delivered on its promise to bring information to the masses. All the information needed to diagnose the current credit crisis—the latest and best information about the collapsing prices of mortgage securities, ballooning numbers in the subprime mortgage market, bizarre behavior on the part of bond rating firms and so forth—has been freely available to anybody who knows how to use Google. But what good is it all if the data went unnoticed?

For more than a decade the Internet has been hailed as the great democratizer of information. It was supposed to empower individual investors, make murky financial markets more transparent, and create a new generation of citizen investors who were free to put their savings in everything from the S&P 500 to palm oil futures. It was supposed to shrink the world and turn it into a village, where everything happened in the public square and corruption and greed would have no place to hide. As the 1990s mantra goes, "information wants to be free." The 21st century was supposed to be the culmination of this philosophy.

One of the biggest proponents of this view was Alan Greenspan. Most economists now agree that Greenspan, as chairman of the U.S. Federal Reserve, kept interest rates too low for too long. What's less widely appreciated is his role as a technology booster. In March 2000, at the peak of the dotcom bubble, he gave a speech about a revolution being built on the Internet. It was transforming finance, he said, making it possible to "reallocate risk" via the "creation, valuation and exchange of … complex financial products on a global basis." In short, Greenspan saw that the tandem of the Internet and fast computers were perfect for splitting mortgages into tiny pieces, repackaging them and then shunting them to yield-hungry investors across the country and around the world. But he should have known it would create what his fellow economists call an "agency problem": Remote owners of teensy mortgage pieces didn't police loans, didn't worry enough about loan quality, and were impossible to negotiate with should a loan become troubled. They just wanted cash flow. And so the fuse for a future credit crisis was lit.

To be clear, the Internet has done many important and useful things for the world financial system. Earnings calls are available to all comers, not just analysts; electronic trading has driven commissions to near zero; trading can happen wirelessly from anywhere at any time. Investors can track stock picks and stock pickers on Web-based scoreboards. These innovations were long overdue. But by accident, the Internet was also an enabler of the current credit crisis. It brought us together, but it also did the reverse, creating communities with narrow affinities. These are often echo chambers where people can find others like themselves—scrapbook makers or train-spotters or builders of exotic new products for the now $668 trillion (not a misprint) derivatives market.

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Posted By: koppany varga @ 12/06/2008 12:30:42 PM

http://koppanyvarga.wordpress.com/2008/12/02/financial-system-fix-it-with-empowering/

How to fix the financial system by introducing radical openness?

Poor Alan Greenspan - he seems to be the dumbest person on the planet. To trust that the Internet would make the financial markets safer and more transparent? What a naïve idea!

Yet, he is right. The Internet is capable to make the world safer. It can bring more transparency, but can't chase away the shadow of secrets alone. And that is exactly why he is wrong trusting the Internet to do the job alone.

However, strengthening the regulatory structure, introducing tons of new legislation, setting up new monitoring agencies is the wrong answer to our problems. It does nothing more than slowing the economy even more down.

Is there a way out?
Yes, and Paul Kedrosky is very close in this article. He suggests, we should have some more light on the scene. We need a financial dashboard, and access to the IMs between the traders. That is right. But we need much more.

Radical openness

What we really need is wiping out alltogether the secrets in the financial system. You can not build a healthy industry on secrets. It only helps to hide incompetency, hybris and greed.

So what next?

Obligate the financial service providers to make ALL relevant information generally available, real-time. Things like the IMs (even better: send them on twitter); all data they give to rating firms, auditors and state agencies; minutes of board meetings (even broadcast them online); all background studies and calculations.

While legislation takes some time, this policy can be introduced instantly at companies bailed out.

This would lower the barriers of entry into the industry of analyzing and rating financial products. Empowering startups to proliferate in this field will - in turn - change the behaviour also the incumbent players. And this would reinstate trust and sincerity in the financial system. Funny words? Yes, and this one shows again, how ill our system really is in its present form.
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Posted By: Nowforthetruth @ 10/27/2008 9:16:24 AM

http://www.youtube.com/watch?v=iivL4c_3pck

Hear Obama in 2001 Chicago Public Citizen Radio Interview criticizing the Warren Court as not radical enough for not pursuing redistribution of wealth.

Obama Says that community organizing is for the purpose of assembling the political power to force redistribution of wealth.
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Posted By: Nowforthetruth @ 10/26/2008 9:39:35 PM

The Kennedy tax cut.

http://www.heritage.org/Research/Taxes/bg1765.cfm

About half way through the article.

"President Kennedy proposed massive tax-rate reductions, which were passed by Congress and became law after he was assassinated. The 1964 tax cut reduced the top marginal personal income tax rate from 91 percent to 70 percent by 1965. The cut reduced lower-bracket rates as well. In the four years prior to the 1965 tax-rate cuts, federal government income tax revenue--adjusted for inflation--increased at an average annual rate of 2.1 percent, while total government income tax revenue (federal plus state and local) increased by 2.6 percent per year . In the four years following the tax cut, federal government income tax revenue increased by 8.6 percent annually and total government income tax revenue increased by 9.0 percent annually. Government income tax revenue not only increased in the years following the tax cut, it increased at a much faster rate.
The Kennedy tax cut set the example that President Ronald Reagan would follow some 17 years later. By increasing incentives to work, produce, and invest, real GDP growth increased in the years following the tax cuts: More people worked, and the tax base expanded. Additionally, the expenditure side of the budget benefited as well because the unemployment rate was significantly reduced.
Using the Congressional Budget Office's revenue forecasts (made with the full knowledge of the future tax cuts), revenues came in much higher than had been anticipated, even after the "cost""of the tax cut had been taken into account. Additionally, in 1965--one year following the tax cut--personal income tax revenue data exceeded expectations by the greatest amounts in the highest income classes.
Testifying before Congress in 1977, Walter Heller, President Kenned''s Chairman of the Council of Economic Advisers, summarized:
What happened to the tax cut in 1965 is difficult to pin down, but insofar as we are able to isolate it, it did seem to have a tremendously stimulative effect, a multiplied effect on the economy. It was the major factor that led to our running a $3 billion surplus by the middle of 1965 before escalation in Vietnam struck us. It was a $12 billion tax cut, which would be about $33 or $34 billion in today's terms, and within one year the revenues into the Federal Treasury were already above what they had been before the tax cut.
Did the tax cut pay for itself in increased revenues? I think the evidence is very strong that it did."