Economics is like actuarial science: Voodoo predictions based on a set of assumptions and mathematical models. The thing is, none of those models work when behavior is erratic, rules broken and and focus put on the quick buck rather than true growth. If no other lesson from the financial meltdown resonates, let that one ring.

Alan Greenspan knows it too. That's why he came before Congress on October 28, 2008 and told them he was wrong:

He was wrong, yes, but now he's not willing to blame the Wall Street moguls for everything. In March, he gave this gem of an interview to Bloomberg News. Here are some of the mind-boggling parts:

HUNT: Right. Let’s talk about the subprime a little bit. You said in your Brookings speech, I’m going to quote you, “We at the Federal Reserve (this was a footnote I think actually) were aware -

GREENSPAN: I’m impressed.

HUNT: - (inaudible) as early as 2000 of instances of some highly irregular subprime mortgage underwriting practices but regrettably viewed it as a localized problem subject to standard prudential oversight, not the precursor of what was to happen.”

Is that saying you saw instances of highly irregular underwriting, but you didn’t dig deeper?

GREENSPAN: No, we knew that there was a lot of egregious underwriting going on. The critical issue is that it wasn’t subprime per se that created the triggering of the crisis. It was securitized subprime. And securitization didn’t happen until mid-2003, 2004 in the volume, including not only securitization but essentially adjustable rate mortgages - subprime adjustable rate mortgages

I had to read that twice, but I think I understand it now. My interpretation: "We knew there were a lot of toxic assets being created, but it was ok because at that point they weren't carved up and bundled as securities."

This happens after the S&L mess, Orange County, California's bankruptcy after a $1.6 billion dollar loss on derivatives, and the failure of Long Term Capital Management in 1998 due to a huge derivative loss.

If there was a lesson to learn from those three events it is this: Bad loans make bad investments. If that has the ring of truth, how on earth can Greenspan sit and admit with a straight face that he knew bad loans were being made?

Of course, Greenspan loves hedge funds now, especially since he consults for one of the biggest ones, and has since January, 2008. They love him too. Digby points out that the guy who loves him best is John Paulson. THAT John Paulson. The Goldman-Sachs-is-in-very-deep-trouble John Paulson. Let that deep conflict of interest sink in.

His next tidbit made my head explode. In a discussion about the deficit, the current recovery, whether it's sustainable, and whether a value-added tax makes sense he says this:

GREENSPAN: The problem, however, is very much the type of issue that Greece has got. We can find money to bail them out in the short run. But unless the underlying system contracts, the deficit contracts, it’s just delaying the problem.

So I’m not convinced by any means that we can succeed in stabilizing this long term outlook strictly from a value added tax because unless we come to grips with the fundamental issue, which is the fact that we have promised in the ways of benefits for Medicare, for Social Security physically more than we have assets to deliver with.

So the economy can only grow so far and right now the claims on the real economy, forget finance, are getting larger and larger. And it is not an issue just in Social Security I might add, its money. You can always print money and solve it.

Medicare is a defined - is not a defined benefit program. It is one based on the physical needs of the population.

Those darn American people again. Sitting around on Main Street, getting in the way of the economic recovery with their health care and retirement needs. Those entitlements.

This is the same guy who gave away the Treasury to the rich guys by green-lighting Bush tax cuts. The same guy who testified that cutting the deficit and creating a surplus was the way to economic growth in the 90s before he said if the deficit got too low and the US got too solvent, it could cause economic problems in 2000. The same guy who let John Paulson endow a chair in economics in his name at NYU so he could leave a legacy of inconsistent, erratic, self serving conservative monetary policy to students in perpetuity.

If you're in the mood for some common sense abuse, read the whole thing. He'll explain why big banks shouldn't be broken up but why they shouldn't be bailed out, why regulators missed the warning signs of the meltdown (I'd argue they ignored them, didn't miss them), why Fannie and Freddie were good before they were bad, and more.

It would be so nice if something made sense for a change. - Alice in Wonderland