Take Heart, Mr. Greenspan

From Reuters:

Greenspan, a proponent of self-regulation, said he was "deeply dismayed" when in August 2007 the premise that firms had the enlightened self interest to monitor their own risk exposure "failed."

"I see no alternative to a set of heightened federal regulatory rules for banks and other financial institutions," he said.

"Even with the breakdown of self regulation, the financial system would have held together had the second bulwark against crisis, our existing regulatory system functioned effectively. But under crisis pressure it, too, failed," Greenspan said.

I can almost see the wind coming out of his sails. He probably went straight from this gala event to go soak in his tub.

Take heart, good sir, not all is lost. While your (and your colleagues') fixation on the mathematical trees may have obscured the psychological forest, some of us have been thinking about forestry instead of botany. The current crisis has torched many of your favorite old-growth trees and people like me are going to take a chainsaw to a good deal of undergrowth before we're finished. But a few old chestnuts are going to survive and form the core of a restored - and hopefully better managed - forest.

The credit bubble of the last half-decade was the result of a philosophy strikingly similar to the forest management philosophy of the past half-century. In an effort to keep national forests "pristine" and "preserved," we've prevented logging and put out every fire we've known about. Back before Smokey the Bear was a national icon, frequent fires would burn forest floors to a crisp long before the tops of the undergrowth could reach the bottom branches of the old-growth trees. After years of unchecked undergrowth, wildfires now leap straight from the forest floor to the tops of trees. From there, they can catch unobstructed winds and blaze across hundreds of acres before the first responders can arrive.

My point: Like forests, you have to choose between "pristine" and "preserved" markets. If you want them neat and tidy and predictable - you're gonna have to go in there every so often and cull the underbrush. If you want them just as nature intended, then sometimes they have to burn.

There are those of us out here who still believe in the promise of free markets, but are fully aware of their limitations. One of those limitations is that they cannot be managed for all ends. We are going to have to choose which markets must be pristine, and which we would like to preserve.