Remembering The Confession of Alan Greenspan

Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief. 

—Alan Greenspan, October 23, 2008

As we ponder the strange fact that rich folks are winning the war on poverty—the ratio between the income of the richest and poorest Americans has doubled since 1968, the widest disparity on record—we should also ponder an event almost two years old now.

Alan Greenspan’s now famous “I Found A Flaw” confession is still fresh in my mind.  Appearing before the Oversight and Government Reform committee in the House of Representatives on October 28, 2008, here is the exchange between the committee’s chairman and Mr. Greenspan:

REP. HENRY WAXMAN: The question I have for you is, you had an ideology, you had a belief that free, competitive — and this is your statement — “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. None meaningfully worked.” That was your quote.

You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price.

Do you feel that your ideology pushed you to make decisions that you wish you had not made?

ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.

And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.

REP. HENRY WAXMAN: You found a flaw in the reality…

ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

When Mr. Greenspan explains that he “bad been going for 40 years or more” with his ideology, he means of course his faith in laissez-faire economics, in unfettered free markets.  His love affair with laissez-faire began in the 1950s, when he struck up a relationship with Ayn Rand, the Russian-born philosopher and still fashionable darling of libertarians everywhere.  Her extremist views on limited government and her fierce hatred of regulations of any sort sound a lot like what many Republicans are saying these days—even as they seek government jobs via the November elections.

Greenspan was once considered a “rock star,” whose opinions were unassailable and whose mere intonations could send shockwaves up and down Wall Street.  And by all reports, Greenspan was an accomplished clarinet and saxophone player, who never blew more loudly, if not more competently, than he did when he was blowing about Ayn Rand’s hands-off economic philosophy.

Up until his admission to America that there was a “flaw” in his ideology, he consistently opposed government regulation of all kinds, especially in the financial industry.  Arguably, for more than thirty years, measured from the time he was sworn in as chairman of Gerald Ford’s Council of Economic Advisers in 1974 (with Ayn Rand at his side) until his term at the Federal Reserve ended in 2006, Greenspan’s flawed ideology and his misplaced faith in unregulated markets influenced our nation’s economic policies more than any other player in Washington.  Ronald Reagan appointed him chairman of the Board of Governors of the Federal Reserve in 1987, where he stayed for almost 19 years.

Famously, during the Clinton administration, when Brooksley Born tried to warn us about the then-$27 trillion dollar OTC derivatives “dark market,” which was a wonderful example of Randian principles at work, Greenspan, along with Robert Rubin, Arthur Levitt, and Larry Summers, three high-profile Clinton officials, essentially shut her down because she expressed the need to bring regulatory light to derivatives trading. 

By 2007, the OTC derivatives market was reportedly around $600 trillion (yes, that’s right), and no laissez-faire-loving economist apparently had an inkling that economic disaster was just a swap away.

That all changed, of course, in the fall of 2008.  And with Greenspan’s confession—and that confession has been underplayed by liberals and Democrats—the limpness of laissez faire logic was exposed for all to see.  It’s as if Moses had come down from the mountain with the news that God was not there, not anywhere. Unfortunately, not enough people were paying attention, or if they were, they soon turned away, unwilling to abandon their philosophy.

Because today we hear the same calls for deregulation and free markets that characterized Greenspan’s career, before his once-invincible faith in laissez faire was sent reeling by the blows of betrayal that his banker friends dealt him in their self-mismanagement of the unregulated, unfettered OTC derivatives market.

In some odd way, it was kind of sad to watch Greenspan confess to a crack in is ideological armor, a crack wide enough for an economy to fall through.  But it is even sadder to contemplate the casualties of his—and many, many others’—misplaced faith in an ideology that portrayed—and still portrays—government as the enemy of Wall Street moneymaking rather than a friend of America’s larger interests.

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11 Comments

  1. ansonburlingame

     /  October 2, 2010

    duane,

    Room for agreement here in part. I agree with Greenspans perspective in 2008. Lending institutions failed miserably in providing loans to the “unqualified”. Wall Street compounded it by developing insurance for “packaged” and bad loans. Thus the GR.

    I am still not sure if “bad regulations” were a fundamental contributor to the GR or simply “lousy regulators” not doing their job with the tools at hand. That can be argued from both sides. “Typical bureaucratic bungelling” or insuffcient tools in the hands of those regulators. Probably was a lot of BOTH.

    Then of course there is the whole concept of GREED. Greedy lenders, greedy Wall Street AND greedy borrowers wanting to make a “quick kill” or simply live beyond their means in a style not achievable over any long run; ALL contributed to the housing crisis which is still going on.

    What I did not hear Greenspan say in any way that MORE, a lot MORE regulations alone were the “fix”. I also hear Congress now agreeing with that assessment in their passage of what now seems to be a pretty enemic finacial reform bill. For sure such a bill was not the slam dunk called for by the left. It seems more “little half steps” towards a solution.

    At least so far federal regulations can NEVER fix greed. Actually, while one of the 7 deadly sins, greed itself is not a crime. Criminal actions result when means to satisfy greed become illegal. Now figure out how to pass a law that prevents someone’s definition of “unqualified’ from seeking a loan or a lender providing one to them.

    And by the way, WHICH lending institution lead the way in encouraging “bad” loans? Did the “Macs” have a role in such???? And that my friend is a GOVERNMENT lender thanks to our friends on the left.

    Now go read that part of the pledge and write on that topic for a while.

    Anson

    Like

  2. Juan Riingen

     /  October 25, 2010

    For me the main reason why our economy failed is caused by Greenspan’s philosophy. The market will never correct itself, we need sound govt regulations, and fair-minded regulators, so they can control WallStreet’s and banks’ greed.
    I’m also extremely worried once republicans dominate congress. Wallstreet and banks will revert to self-regulations and this will lead our whole country to a deeper hole. I’m also worried many, if not most, of our big business owners will take jobs overseas, thus unemployment in the US increases tremendously.

    Like

    • Juan,

      I wrote a piece on Greenspan and his “confession” you can find here.

      You are right that he and his hands-off philosophy formed the basis for much of the mischief at the heart of the financial crisis. At least Greenspan had the courage to admit his mistake:

      REP. HENRY WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made?

      ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.

      And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.

      REP. HENRY WAXMAN: You found a flaw in the reality…

      ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

      REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

      ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

      And you’re not the only one who is worried about more Republican governance. Fortunately, there will still be a strong Democratic presence in the Senate, and, of course, there is the president’s ability to veto onerous legislation. And as for big business shipping jobs overseas, I’m afraid that was part of what happened during Bush’s eight years in office.

      Duane

      Like

  3. juan riingen

     /  April 5, 2011

    Duane,
    It’s almost a year since we talked about Alan Greenspan’s confession. Do you have any new development you can share me? I know the republicans and tea partyers are working together now. I also know most of them are neoconservative. Can you update me what the banks and Wallstreet are now doing? How bright is the future of democrats in 2012 elections? Can you also comment on Jesse Ventura’s “conspiracy theory”? Is he telling the truth? Are some of our developed countries trying to establish a new world order?

    Like

    • Juan,

      To answer all your questions:

      The Tea Party has hijacked the Republican Party and is holding it hostage. The ransom demanded is the end of American socialism.

      The banks are a) making more money than ever and b) helping stifle economic growth by vigorously and in many cases unlawfully foreclosing on homeowners who have been victimized by past GOP economic policies and are having a hard time making their payments.

      Wall Street banksters now officially have more money than God.

      There is simply no way of forecasting the Democrats’ future without knowing the outcome of the upcoming budget battles and who will be the GOP presidential nominee. Much, if not all, of next year’s election hinges on those two factors.

      As for Jesse Ventura, he’s right. I don’t’ believe what I don’t know. I don’t trust anyone who starts off by saying, “I’ve heard things that will blow your mind.” Reminds me of Charles Manson’s ramblings. In any case, while I’m sure there are lots of true conspiracies out there, I would like to hear about them from someone other than a guy who has “concerns” over the 9/11 attacks. And did he ever move back to the U.S.?

      A New World Order? Heck, if it’s anything like the Old World Order, we’ve got nothing to worry about. Not much will change. In the end, people with money will still run the world.

      Duane

      Like

  4. When I was younger, I was more driven by a presumption that government solutions or intervention don’t work.

    Now, I’m more look at things carefully case by case, and sometimes more government may be in order. I lean toward our largest banks are simply too big and the solution would be to break them up till any one failing doesn’t bring the entire financial system down.

    That said, I think excessive enthusiasm and faith in government also may not work as expected. Government officials are humans. They are motivated often do what best for them selves, lack perfect information, and just make mistakes.

    Overall I don’t blanket oppose government, but I think skepticism that the cure might be worse than the disease is always in order, and everything the same: I prefer as small a state as possible.

    Like

    • Bruce,

      I don’t think I disagree with your points. I, too, have a healthy skepticism of government. And I certainly agree that no private institution capable of bringing down the economy ought to exist in such a form.

      We will, though, probably disagree with what “as small as state as possible” means in many circumstances. But I’m in basic agreement with your sentiment. I’m only a fan of “necessary” government, but I believe that the scope of government has grown as society has become more complicated. An 18th century government is not suitable to a 21st century world.

      Duane

      Like

  5. Greenspan should have commited suicide if he had any honor or courage. He’s an arrogant shill, liar, and a crook!

    If anyone believes it was a mistake that they sucked their companies dry by selling poison investments while betting on them to fail, then demanding trillions in bailouts, you are just too gullible!

    BTW, What is the TOTAL BAILOUT in dollars exactly (within $1Billion) anyone…?

    How did they figure the amount of the Bailout?…
    -“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”-

    We are truely a nation of idiots!

    Like

  6. Hi! Duane Graham,

    It’s been sometime we chatted.
    Now that we got the Romney-Ryan Tandem, what’s your take as to their politics and economics, taking into consideration the state of our economy?.

    Like

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