Last week Alan Greenspan was back in D.C. testifying before Congress. I was most pleased to hear that the tone of the testimony had changed. The cowards who sucked up to him in the past were a little less friendly this time.

models versus reality

David Brooks had an interesting analysis on Friday (paraphrasing):

• Greenspan was a numbers guy. He took historical data and used his big brain to build a complex mathematical model of reality. And he had faith in the model to predict the future.
• Greenspan’s critics were students of human behavior. Instead of math, they looked at how people actually behave and they predicted problems long ago.

I think there is a lot to Brook's summary. A lot of people on Wall Street were math wizes. Enron-type geniuses that build mathematical models that could literally create wealth. Hmmm.

I would put it a simpler way: There are a lot of really smart (often arrogant) people who have no common sense.

Common sense tells us:

• There is a point at which the difference between home prices and incomes is so great, people cannot afford homes.
• Lending money to people who cannot pay it back is not a good idea even if you can sell the loan to a greater fool.
• Putting trillions of dollars into derivatives that are completely unmeasured will lead to problems.
• You cannot borrow forever.

Obvious signs were there for years. It doesn’t take a spreadsheet to realize there was trouble ahead. Making money is not a sign that everything is fine. Ignoring the signs because you are making money is simply a sign of greed.

The discussion of predicting the future from data brings up an interesting cultural issue.

Imagine a graph with three dots. Each dot goes higher as you move left to right.

An American looks at the graph and says the 4th dot will be higher and to the right. We predict linear trends that continue forever. Sort of like saying "Home prices never go down".

A Chinese looks at the graph and says 3 good years means a bad year soon. They predict cyclical trends that more closely resemble nature.

So common sense and nature agree -- good things dont last forever. Who knew this would be so shocking to Wall Street.

Greenspan: I was partially right!

Greenspan went on to say that there are always people who warn of danger and that these markets are just too complex to predict. Apparently after the dot-com crash, he also told Congress that these markets were just too complex to predict.

I call bullshit on that in two ways.

One, if markets are too complex to predict and there is nothing you could do to protect us from disaster… well then why did we PAY you? If the Federal Reserve bank and the SEC are powerless, why didn’t you shut them down and save the government some money?

Two, all it took was a little common sense to see this coming. When there was a push to regulate derivatives, you should have at least required companies to register them. If credit default swaps were registered we could at least have seen the storm brewing BEFORE it got up to $56T! That is hardly overbearing government regulation; it is just a little common sense.

Instead we paid the fox to build the henhouse. We gave the fox the key and then we kept replacing the missing hens with new ones. The “fundamentals were good” – until we were shocked to find that the hens were all gone.

There were a lot of people involved in this creating this crisis but Greenspan was one of the most powerful and definitely the most public. He deserves a HEAP of blame yet he still is not contrite.

Did he make a mistake? Greenspan says: “I was partially wrong”. The keyword is partially.

With all the obvious damage and more to come, I haven’t seen anyone in public that a) looks sorry, b) admits wrong, c) acts repentant. There aren’t any suicides. There doesn’t seem to be any guilt. There is a whole lot of “it wasn’t my fault” and “you just cannot understand how complex it all is”.

American values

I dont know if it is a cause or symptom, but there is another angle to this crisis that revolves around values and principles.

In the past 8 years there have been a lot of people in power who just have different values from the rest of us. I am not sure they are unethical or immoral so much as they just have different beliefs than average people about right and wrong.

The neocons thought we could free Iraq literally for free. Oops.

The Bush administration have made a concerted effort to combine Church and state. They have cut funding to programs on religious grounds and changed hiring in the justice department to put religious beliefs ahead of legal competence.

We created a private prison system outside of US jurisdiction -- a clear attack on the Constitution and the idea of inalienable human rights.

We have pursued "fiscal responsibility" by cutting taxes while greatly increasing spending to create huge deficits. Worse, instead of asking people to pitch in and share the burden of a needed war, we urged them to go out and shop! Support the war by buying yourself a plasma TV...

And we have pursued a so-called "free market" ideology that coddled some industries like defense and finance and encouraged government regulators to stop enforcing existing laws.

The list goes on and on as Im sure the number of books in the years to come will as we slowly learn about all the things that happened which we dont know about yet. There is no question that what we know is only scratching the surface.

But Bush was re-elected not impeached. There is a larger picture here about changes to our fundamental American values. There is probably also a story about how we make decisions that contradict our professed beliefs. These are messed up times.

For now the CEO's and leaders continue to testify as if they did nothing wrong. They clearly see the world in a different way from the rest of us and unless that changes, I fear for our future.