The headlines chortled around the world: “Greenspan at the Capitol: A hero no more” -- “Greenspan takes a hit” -- “Greenspan: I was wrong about the economy, sort of…” -- “Ex-Fed chairman concedes ‘mistake’” -- “House panel heaps blame on Alan Greenspan for financial crisis” – “Greenspan ‘shocked that free markets are flawed.”
Representative Henry Waxman (D-Calif), chairman of the House Committee on Oversight and Government Reform, managed to sneer, drool and look sanctimonious at the same time. “My question for you is simple,” he asked a subdued Alan Greenspan, former head of the Federal Reserve. “Were you wrong?”
Greenspan answered meekly, “Well, partly.”
Greenspan was interrogated by the House committee on October 24. He said he was wrong that deregulation and free markets were the most efficacious means of sustaining a viable economy.
Badgered by lawmakers, the former Federal Reserve chairman found himself denying the nation’s economic crisis was his fault on Thursday but conceding the meltdown had revealed a flaw in a lifetime of economic thinking and had left him in a ‘state of shocked disbelief.’The question is: How would he know that free markets and deregulation of them would be the most efficacious means of sustaining the economy? He abandoned the free market when he became head of the Federal Reserve. Perhaps when he chose to accept that job, he imagined he could save free enterprise from the depredations of the government. Now he knows the consequences of compromise.
Greenspan, who stepped down [as Federal Reserve chief] in 2006, acknowledged under questioning that he had made a ‘mistake’ in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions….Greenspan called the role of self-interest and rationality “a flaw in the model…that defines how the world works.”
He said the boom in subprime lending occurred because of the huge demand for investment opportunities in a global economy, and he blamed the crash on a failure by investors to properly assess the risks from such mortgages, which went to borrowers with weak credit…On the billions of dollars of losses suffered by financial institutions because of their investments in subprime mortgages, Greenspan said he had been shocked by the failure of banking officials to protect their shareholders from bad loan decisions.
’A critical pillar to market competition and free markets did break down,’ Greenspan said. ‘I still do not understand why it happened.’
The true “flaw” in Greenspan’s thinking is that it was not a “free market” he and Congressional policies were “managing” or “mismanaging,” but one defined by government intervention. The government decided that individuals with weak credit should be able to borrow money to buy homes. The only way it could persuade banks and other private institutions to loan that money was with force or the fear of it. Reason and rationality flee when force becomes a factor in men’s decisions, to be replaced with the pragmatism of punishment-avoidance or a risk-free shot at easy money.
The “critical pillar” that Greenspan claims broke down was missing from in foundation of the subprime lending house of cards: the principle of the trader.
Writing about the dangers and mechanics of the welfare state, Ayn Rand, Greenspan’s former protégé, noted in The Ayn Rand Letter, in her article, “A Preview,“ [Vol. 1 No. 23: 14 August 1972] that
…Altruism feeds the first need [in this instance, the need of the poor for subprime mortgages], statism feeds the second [in this instance, the need of power-seekers, such as Paulson, Bernanke, Waxman et al.]. Pragmatism blinds everyone -- including victims and profiteers -- not merely to the deadly nature of the process, but even to the fact that a process is going on.Which would explain why Greenspan was so “shocked.”
As Fed chairman, Greenspan defended subprime mortgages from regulation or oversight. He should have been the first to oppose the idea that the government should make them possible. Chickens are not coming home to roost on Greenspan’s shoulder, but turkey buzzards gathering to pick at the corpse of free markets. And the most gleeful buzzard was Henry Waxman.
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?Not a word was whispered by any of the Committee members on the possibility that perhaps the government should not have been encouraging and guaranteeing bad mortgages to any private financial institution, and that if any blame for irresponsibility is to be assigned to any quarter, it should be to the ideology subscribed to by a multitude of Congressmen, including Waxman, who endorsed the policy. Their statist ideology has “pushed” them to regulate the economy for the past century. While looking for a scapegoat or someone to blame, Congress, a succession of presidents, and innumerable bureaucrats and regulators will search everywhere but in their own houses and their own ideologies.
Greenspan, in the past, and while being given the third degree by the House committee, forgot that ideologies that are “partly” right and “partly” wrong must be, in practice, entirely wrong, and that, in the long run, the ”wrong” premises will become the leitmotif of that ideology.
During that interrogation, Greenspan recanted his belief in free markets:
…[H]e defended the Fed’s ability to detect economic trends, saying it was better than that of the private sector. ‘If all those extraordinarily capable people were unable to foresee the development of this critical problem…I think we have to ask ourselves why is that?…And the answer is that we’re not smart enough as people. We just cannot see that far in advance.’That lack of omniscience is the practical reason why he should never have accepted the job of chairman of the Federal Reserve. And, apparently, all throughout his career, he either never made the connection between the moral and the practical, or he discarded the connection as mere “ideology” because it stood in the way of his “good intentions.”
Thus, Greenspan handed the Democrats and sundry statists of all persuasions what they need to impose more government controls on an economy already crippled by their past policies. What Waxman asked was what Ayn Rand might have called a “package deal” question, which Greenspan failed either to detect, question or qualify in his answer. Waxman, a career statist and point man in the House for the total welfare state, got what he and others on the House committee sought: a putative repudiation of free markets, and, by necessity, of freedom.
No sympathy should be wasted on Greenspan. He did what John Galt in Atlas Shrugged refused to do even at the point of a gun and under physical torture: he agreed to become an economic dictator of the country. Nor was he threatened with torture or death as Galileo was when he was forced by the Church to recant his theory of the solar system. Of all the economists who have advised various administrations over the last century, Greenspan had the least excuse for advocating statist economics.
When he accepted the appointment by President Ronald Reagan in 1987 to become Chairman of the Federal Reserve, Greenspan “legitimatized” or sanctioned the idea that the government should “manage” the economy with “rational” interventions. Now he may see the true “flaw” in his “good intentions” and what those intentions have inexorably wrought: a greater destruction of freedom and wealth than he admits he could have imagined.
Now he may understand how and why it could have happened.
Crossposted at The Dougout
Great post, Grant.
A friend of mine, who is a conservative who works in the banking business, wrote this to me last night:
"... on some level, the whole mortgage-backed bond business looks like it's not a business per se, it's more like a (a) distribution system for (essentially socialist) government housing subsidies, in which (b) the participants get to skim off the top.
It seems like left and right converge in a case like this; lots of socialism but also lots of businessmen getting rich off it.
Greg Nyquist did an entire series of posts on this subject over at his Ayn Contra Human Nature Blog.
By the way, he just finished, Part_5
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