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When historians want to mark the moment the hyper-libertarian economic philosophy died in America, they might take this morning’s appearance by Ayn Rand’s disciple, Alan Greenspan before the House Oversight Committee.

Mr. Greenspan said he had made a “mistake” in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Mr. Greenspan said that he had found “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”

Mr. Greenspan, who headed the nation’s central bank for 18.5 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a “state of shocked disbelief.”

It is perhaps a marker of how far we have traveled in five weeks that when I proclaimed the end of the Uber-Libertarian on September 12, there was still a lot of push back from the community. For the leader of the libertarian philosophy to now proclaim he was wrong, seems to be the nail in that coffin. As Jacob Weisberg points out, libertarians have an excuse for every failing of the last few years, but they all ring false. Read more…

I must say it takes a lot of nerve for SEC Chairman Chris Cox to write an Op-Ed calling for better regulation of the Derivatives Market. As I have pointed out recently, Cox’s appointment to head the SEC was part of a clear Bush/Cheney plan to neuter any enforcement of bad actors in the market. Cox looked the other way when his subordinates told him Bear Stearns was way overleveraged and continued to abide by his voluntary enforcement plan of reserve limits. Now he has the balls to say we should be regulating derivatives, when Phil Gramm , john McCain and other Republicans like Cox fought tooth and nail to keep derivatives unregulated.

Even more indicative of the Bush Administration view about law enforcement and the financial industry is that repeated requests from the FBI to restore some of the 1800 agents that were moved from the white collar crime division into counter-terrorism, were denied by the White House.

Interviews and internal records show that F.B.I. officials realized the growing danger posed by financial fraud in the housing market beginning in 2003 and 2004 but were rebuffed by the Justice Department and the budget office in their efforts to acquire more resources…

Several former law enforcement officials said in interviews that senior administration officials, particularly at the White House and the Treasury Department, had made clear to them that they were concerned the Justice Department and the F.B.I. were taking an antibusiness attitude that could chill corporate risk taking.

A little chilling of corporate risk taking might have been a good thing in 2003 and 2004. In fact it might have prevented the current crisis.

Somehow Alan Greenspan has been able to escape blame for the mess we find our selves in today. But as Peter Goodman points out this morning, the fingerprints of Greenspan’s radical Ayn Rand libertarianism are all over the Credit Crisis.

Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.

“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.

Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.

“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”

Levitt’s comments that the man who ruled our economy across four administrations had “a fundamental disdain for government”, sums up the Reagan/ Milton Friedman / Ayn Rand legacy of the last 30 years. Perhaps restoring that trust in government may be one of the biggest tasks facing Obama in the next four years.

Somehow Alan Greenspan has been able to escape blame for the mess we find our selves in today. But as Peter Goodman points out this morning, the fingerprints of Greenspan’s radical Ayn Rand libertarianism are all over the Credit Crisis.

Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.

“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.

Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.

“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”

Levitt’s comments that the man who ruled our economy across four administrations had “a fundamental disdain for government”, sums up the Reagan/ Milton Friedman / Ayn Rand legacy of the last 30 years. Perhaps restoring that trust in government may be one of the biggest tasks facing Obama in the next four years.

Last month I wrote about the fateful decision of the SEC to free the big investment banks from fixed leverage ratios. This morning, The New York Times catches up and writes a good piece on that little known decision.

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

As I said before, this was the moment when the government outsourced the regulation of the banks–to the banks themselves.

After that, it was only a matter of waiting for the train-wreck to occur.

John McCain just published an article in a health care magazine. Here’s his money quote.

Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.

I bet he wishes he could have a do over on that one.

The fall of the insurance giant AIG is perhaps the most dangerous of all the financial shocks that have hit us so far. Michael Lewitt explains why.

A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size.

Nobody knows this market’s real size, or who owes what to whom, because there is no central clearinghouse or regulator for it. Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss. The insurer (which could be a bank, an investment bank or a hedge fund) is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small.

As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized. But even worse, many of the insurers are grossly undercapitalized. In one case in the New York courts, the Swiss banking giant UBS is suing a hedge fund that said it would insure nearly $1.5 billion in bonds but was unable to do so. No wonder — the hedge fund had only $200 million in assets.

One more example of the foxes guarding the chicken coop in this Bush era deregulatory era.

This seemingly innocuous power point slide from the Securities and Exchange Commission (SEC) was used in June of 2004 to explain to market participants a new ruling on how broker dealers could compute their “net capital”. Instead of the previous fixed limits on leverage of 10:1, broker dealers like Lehman Brothers could use their own “internal models” to determine how much leverage they could put on their capital. As we saw with the crash of Bear Stearns and now Lehman Bros., both firms were leveraged more than 30:1.

When you combine this ridiculous willingness to let broker dealers determine their own leverage with the decision three years later to alter the short selling rules to make it easier to short a stock, you have a recipe for financial chaos. These are both Bush administration SEC moves. They stem from a idealogical hatred of regulation. They cannot be blamed on Democrats. This needs to be stated clearly by Obama and Biden.

Hillary Clinton and Bob Rubin are a matched set. They were always at the table when the great decisions were made, but they are never accountable for the mistakes. Here’s former Clinton Treasury Secretary and Citibank Exec Rubin on his role in Citibank’s recent credit meltdown.

“People know I was concerned about the markets,” he says. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”

“I don’t feel responsible, in light of the facts as I knew them in my role,” he adds.

As I have said before, Rubin’s fight to deregulate the banking industry while he was at Treasury has a direct link to the financial crisis we face today. in 1998, Brooksley Born, the chairwoman of the commodities commission, tried to push through a more stringent regulation of derivatives. Rubin went ballistic.

Mr. Rubin made no secret of his feelings about her proposal. “It was controlled anger. He was very tough,” Mr. Greenberger recalls. “I was at several meetings with him, and I’ve never seen him like that before or after.” Ms. Born didn’t return calls for comment. Mr. Rubin says he was against the proposal because he feared it could create chaos in the markets, rather than actually improve oversight of derivatives.

But during his time in Washington, he says, “the politics would have made this impossible. Even if I’d taken a placard and walked up and down Pennsylvania Avenue saying the financial system would come to an end without strict regulation of derivatives, I would have had no traction.” Read more…