Saturday, October 25, 2008

Greenspan Recants

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....

"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.'"
Greenspan called the role of self-interest and rationality "a flaw in the model...that defines how the world works."

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" Greenspan claimed broke down that was missing from the foundation of the subprime house of cards was 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," 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 about 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 in 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.

10 comments:

Burgess Laughlin said...

Thank you for a clear, informative, and impassioned indictment of Greenspan.

I hope that you or another writer will someday provide a chronology of Greenspan's philosophical and professional relationship with Ayn Rand and with her philosophy. It might be interesting to see, in a strict chronology, the process of degradation.

P. S. -- You said: "Ayn Rand, Greenspan’s former protégé . . . ." Perhaps you meant "mentor."

Anonymous said...

Burgess: Re "protege" vs. "mentor." I used "protege" because I gather that AR learned quite a bit of economics from Greenspan, and that they filled reverse roles when it came to philosophy, ethics, etc.

Ed

Mike said...

As someone was saying on one of the other Objectivist blogs... Alan Greenspan is Robert Stadler made flesh.

Anonymous said...

further to Burgess' proposal:
this is what a proper critical biography ought to do, among other things. One can only hope...

Anonymous said...

A reader found the Ayn Rand article I quote in the piece, "A Preview," which number of the AR Letter I was missing (I quoted it from the Lexicon):

""A Preview" on the Democrap 1972 convention is a three part essay. It runs from Vol. 1, No. 22 to Vol. 1 No. 24 during the summer of 1972." My quote comes from the second of the three parts.

Ed Cline

shahnawaz said...

he is worse than the brandens and kelly.he is worse than even stadler because stadler was aphilosophical whereas grennspan was ayn rand's prized student for many many years.
this is what happens to those who betray their egos.

shahnawaz said...
This comment has been removed by the author.
Andrew E. said...

"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."

Terribly accurate. The blow this has dealt to the future of free markets cannot be overstated.

I imagine all my future arguments will go something like this, "What do you mean 'free markets work,'?? Hell, even Alan f*cking Greenspan has admitted that free markets are flawed and need regulating, so don't give me that nonsense. What's that, you say he's not a true capitalist? Well, how convenient."

Wow, am I wrong to feel like we're doomed?


-Andrew

Anonymous said...

You’re not wrong to feel it, Andrew, but you would be wrong to let it get you down.

Greenspan’s total collapse is not what the statists need to make their case. It is more evidence with which to decisively refute it. If someone throws Greenspan at you, it only need be pointed out that appeal to authority is a fallacious way of arguing. What Greenspan did or does say about capitalism has no bearing on what the truth is about capitalism---which truth may be independently demonstrated. If they continue to throw him at you, have them consider that ad hominem is also a fallacious way of reasoning. Just because Greenspan himself is a disgraceful failure, does not imply that the system he may once have defended, or with which others may associate him, is a failure.

Still assert yourself; still defend your rights; still live your life at every moment in the best possible way.

As for me, what I have to say to the corrupt and broken power-grabbers is: Don't tread on me.

Anonymous said...

All I want know is why? Why did Alan Greenspan capitulate in front of Waxman and hand statists a victory they could only have dreamed of. I always thought of Greenspan and as a believer, one who thought like an objectivist. I understood that as Fed Chairman he couldn't change everything the statists had busily constructing for over 60 years, by law he couldn't roll back statism. But his position gave him a pulpit no other defender of economic and political freedom could have. It was painful to watch his fumbled responses (very unlike him) and finally felt like I was thrown under the bus. I'm clinging to my beliefs now more than ever as capitalism is under assault, I'll go read "The Ominous Parallels". Dr. Greenspan if you are reading these posts: Why?!!