Alan Greenspan Was the Cause of the Financial Meltdown - Essay Example

The warning The financial meltdown that occurred later in 2007 was as a result of policies and the lack of the regulation of the financial market. Alan Greenspan was the cause of the financial meltdown. Alan grenspan was a respectable individual in the American government, and he was praised for his ideologies that later were to be detrimental to the lives of the American public. Alan Grenspan was a respected economist, and he had a huge following from the president and also the congress. His career era began in the 1970s to his retirement in 2006. He worked under various presidents, but the highlight of his career occurs during the Clinton leadership. Alan Greenspan was a greater believer of the free market and was a strong supporter of Ayn Rand philosophies that the market should not regulate. Greenspan believed that the involvement of the government in the country’s economy was to be blamed for the economic problems. He believed that the forces of demand and supply would act on the economy to ensure there would be equilibrium in the long run. Alan Greenspan had a way with his words he easily convinced the doubters of his ideologies and very few dare to question his ideologies. Therefore based on this, the government played no role in the oversight of the financial markets particularly the Wall Street. Simply Greenspan assurance and a good track record provide no reason as to why the government would in any way doubt him. Therefore based on this, there were no regulation policies on the performance of the financial markets. Based on this the Clinton administration appointed him to head the enormous federal reserve. Greenspan was firm in his philosophies, and this was clearly brought when he had a conflict with Brooksley Born, who was at the time the head of the Commodity Futures Trading Commission [CFTC]. Both had different ideologies as Greenspan advocated for the deregulation of the financial markets and born propagated for the government regulation. The main source of conflict arose as a result of the Over the counter OTC derivatives that were private contracts between major players on the Wall Street on particular bets. Born cited a high likelihood of fraud taking place. But based on Greenspan he believed that the market would identify the frauds and corrects itself. These sentiments were in line with his core principles of a free market. The assumptions of a free market commonly no government intervention, free flow of information of information, the actions of an individual have no effect on the market and finally there are no barriers to entry and exit the market. This was the principles that Greenspan stood by up to his retirement but later confessed that the philosophy had major drawbacks. The hedge fund long term capital management was characterized by large banks secretly investing large amounts of money on the over the counter derivatives at the Wall Street. The hedge fund was additionally invested by a majority of the in the know investors. These dealings were shrouded in secrecy and the government didn’t have any clue about them. They were as a result of the wall stock brokers setting complex mathematical formula that guaranteed the investors of a significant return on their investment. Finally, there was a meltdown as the Wall Street brokers were unable to handle the situation causing a collapse. Before the actual melt down occurred Brooksley Born had suspected that there was deep fraud within the Wall Street and her efforts to try and get to consensus with Greenspan bore no fruits. Greenspan and board of directors cited her as an impediment to the overall system. Therefore based on the lack of understanding of Brooksley Born and Greenspan she decided to publish a concept release which would outline the regulations of the over the counter derivatives. This move was quickly countered by Greenspan and his colleagues as they felt she had became too involved with the dark side running of the Wall Street. Therefore as a result of the concept release a committee of the senate was convened and both parties presented their case. In the meeting, there were other regulators just like her. In the end, she stood no chance against Greenspan and other regulators word to the committee. Barely a week from the ruling of the committee the long term capital management melt down occurred and based on this major banks were the verge of collapse and the entire American economy was on its knees. It took the intervention of President Clinton and Greenspan to force the Wall Street banks to step in and raise over 3.5 billion for the purpose of preventing the various institutions plus the economy from collapsing. The long-term capital management melt down brought out the issue of deregulation impact on the financial markets. Based on this Brooksley Born warning hypothesis was clearly seen. Brooksley Born didn’t approve the fact that the market could regulate itself. The occurrence of the long term capital management melt down clearly highlighted the lack of the government knowledge of the under dealings occurring in the Wall Street. The same regulators that had staunchly criticized Brooksley Born during the senate committee lacked knowledge on what was going on in the Wall Street. Basically, even president Clinton had no knowledge. He relied on Greenspan views and suggestions of the economy. Therefore based on this occurrence the senate members felt that it was the high time the government to over the regulation of the financial markets. However the assurance they received from Alan Greenspan that regulation in no way could prevent the occurrence of such a crisis. Greenspan had a way of convincing every one of his ideologies and therefore based on this and his previous experience the senate sided with him. Brooksley Born was therefore sacked as her independent commission was abolished. The senate had decided to ignore the clear warning signs of the occurrence of a financial crisis. It took eleven more years for Brooksley Born’s warning hypothesis to occur. The OTC derivatives had grown to over 500 trillion and Wall Street had invested heavily in the real estate only for the occurrence of the real estate bubble burst. Banks had taken big positions in the derivatives markets and its toxic assets were tied down on the OTC derivatives. Therefore based on the financial most Americans lost their jobs, banks become bankrupt, individual long term saving and investment were lost only because of the government of the day failure to hid to Brooksley Born evident warning signs. The government up to date has still not regulated the derivatives and Brooksley Born warns that a second big financial crisis will occur in the near future. Works cited Pbs.org,. Watch The Full Program Online | The Warning | FRONTLINE | PBS. N.p., 2015. Web. 10 Nov. 2015. Read More