Re: Alan Greenspan (1926-2026)

Re: Alan Greenspan (1926-2026) 

By M.B.O Owolowo 

Personally, the global financial crisis affected my business and investments, though it affected other people in more devastating ways. There were thousands of economic suicides during this period. Depression was rife and the crisis became known as the credit crunch! Coincidentally, the 2008 global financial crisis and its immediate aftermath occurred around the time I was doing my MBA at Imperial College London, so it was a topical issue, with Alan Greenspan at the very heart.

In this regard, my MBA thesis concentrated on a dissective analysis of the issue and proffering solutions to such financial crises. 

I will quote some excerpts from my MBA thesis below that summarise the genesis of the policy lapses that lead to the global financial crisis. Whilst addressing regulatory ineffectiveness, I highlighted the role of Alan Greenspan in the economic bubble - the boom and bust cycle. 

“The financial regulatory cartwheels have been ongoing for decades, yet the economic crisis persists. There’s a limit to what regulations can do within a system, if those being regulated persist with unregulated activities – it's a systemic contraction. There may be intrinsic motivational reasons behind certain actions of players within financial institutions, which ought to be examined. I suspect there are underlying socio-psychological factors causing these frequent artificial bubbles – then the consequential boom and bust.   

In behavioural finance terms, it's the herd mentality that leads to such groupie styled behaviour, or in more extreme cases kleptomaniac oriented reasoning.   

For example, how does the concatenation of these regulations effectively regulate psychologically motivated avidity or ebullience?  

A similar financially related motive is the “irrational exuberance” (Greenspan 1996), coined by the former Chairman of The U.S Federal Reserve, Alan Greenspan. Irrational exuberance can be described as investor enthusiasm that drives asset prices up to unsustainable levels. Furthermore, such speculative activities contradict financial fundamentals of qualitative and quantitative economic analysis, that assist in the financial valuation of a company. 

Ironically, even Greenspan's regulatory measure had counterproductive implications. The Greenspan Put can be perceived as another example of inherent systemic risks within the financial system. The term was coined in 1998, following the lowering of interest rates by the Federal Reserve, in response to the collapse of the hedge fund Long-Term Capital Management - which involved a $3.5 billion bailout supervised by the Federal Reserve.  

The implication of the interest rate reduction by the Federal Reserve was that investors could borrow funds cheaper and increase cash flows into the securities market, through investments. It was basically the propping up of the securities markets – the bubble. 

The general assumption of investors was the ability to liquidate their stocks at a specified price or before a future date as a put option. Also, the investors assumed Greenspan would manipulate monetary policy to maintain market stability. The eventuality was an inevitable financial calamity –  the bust.   

In view of these events, Alan Greenspan was transmogrified from the “hero” of the “Great Moderation” to the “villain”...”.

Interestingly, during Greenspan's grilling by a US congressional committee in 2008, Greenspan admitted making a “mistake” by “presuming” financial organisations were self-regulatory. That's coming from the regulator! 

In conclusion, a candid description by the Chairman of the Financial Crisis Inquiry Commission (FCIC), Phil Angelides stated Greenspan “had his foot on the gas pedal as we drove over the cliff, and now he wants to give the nation driving lessons once again.”

*Originally published in 2018.

© M.B.O