GREENSPAN’S LAMENT: INCENTIVE MECHANISMS AND THE CONTAMINATION OF THE SAFETY AND SOUNDNESS OF DEPOSITORY INSTITUTIONS FROM RISKY DERIVATIVE SECURITIES

​On October 23, 2008, economist and former Federal Reserve Chief Alan Greenspan lamented, “[t]hose of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” noting further that, “[t]his modern risk-management paradigm held sway for decades,” and “[t]he whole intellectual edifice, however, collapsed in the summer of last year.”1 Greenspan’s lament was not well received,2 least of all by those of us who behaved in our borrowing practices but found ourselves underwater on our mortgages, found our retirement account values dwindling, and even found our money market funds frozen. Indeed, the well had been poisoned by the errant behavior of others. 

Read full article here