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Spitzer: “I Don’t Think Greenspan Really Understood Markets”

Question: Are any particular firms or individuals to blame for the market meltdown, or was the system as a whole rotten?


Eliot Spitzer: Well, the answer is both. I shy away from either/or questions or answers. I think there would be a simplicity and a desire to say, “Ah ha, we found the one person whose grievous errors in judgment caused this entire cataclysm.” Let’s begin it at a different level.


There was an ideological framework that began – politically began with the election of President Reagan and grew in power, and gained its greatest strength perhaps in Alan Greenspan as the Chair of the Federal Reserve Bank. A belief that deregulation of markets would create greater wealth. Now, those that believed this worldview are not evil, they’re not bad people by any stretch. They simply embraced an ideological framework that certainly, I think, is wrong. And I think most of the world now having seen where it took us, would agree that it was wrong. And they fundamentally misunderstood how markets work. That’s sort of a broad statement, and yet I think it’s accurate. I don’t think Alan Greenspan really understood markets. He didn’t understand human behavior. He didn’t understand the drive and urge on the part of market participants to play games, to over-leverage, to cheat, to break the rules that are essential for a market to work, and therefore he and those who were participants in this world view did not believe in either parameters for leverage, or enforcement when it came to principles of integrity and transparency.


We could have a more complicated discussion of externalities and how you can get to systemic risk, but there was that ideological backdrop. There were also individual malefactors who committed outright fraud. You have Bernie Madoff at one extreme, you have people who were marketing mortgages that they knew were not real, in the sense that the borrower could not repay. You had people who were putting triple A ratings on debt that was not good. You had people who were lying about the value of the house; you have people who were lying about their income. So, across the spectrum, you had individual acts of deceit and lies and criminal conduct, but you also had this systemic failure that derived from an ideological perspective that needed to change.


Question: What legal or institutional safeguards should have been imposed to prevent the crisis?


Eliot Spitzer: Well there should have been many things that could have been done from the regulation of derivatives, which I think is everybody’s favorite example of where a financial product was created that permitted enormous wealth to be generated for investment bankers. This buying and selling of a financial instrument, about risk related to something you don’t even buy that really didn’t add a great deal, if anything, to the valued – underlying value of our economy. And there was absolutely no regulations of the leverage that attached and that was existing in some of the institutions that were buying and issuing these derivatives was astronomical. Of course, the AIG Financial Products Division being the, sort of the final straw that when it broke the camel’s back, is the old cliché, we saw that there were hundred of billions, if not trillions of dollars of guarantees backed up by no capital. And you say to yourself, “How can that happen?” This was crazy. So that was one example of fundamentally misguided economic structure that needed to be addressed.

Recorded January 21, 2010
Interviewed by Austin Allen

As Alan Greenspan defends his role in the financial meltdown, the ex-Governor of New York argues that he blundered badly in his understanding of human corruption.

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