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.