Ah Alan Greenspan, your life reads like a tragedy. Bright young man, graduates summa cum laude from NYU, goes on to receive a Ph.D. Befriends a prominent philosopher and proponent of the free market ideology and writes articles in her books singing the praises of capitalism and the gold-standard. Subsequently awarded a Ph.D in Economics from NYU and then a successful career as an economic advisor, all the while slowly moving away from his free-market friend and mentor. Changing course, following a more political career, beginning to accept a level of government influence in the free market, being appointed as Chairman of the Federal Reserve, controlling the money supply, the interest rates. Compromising, following political expediency, admitting that one can’t be an idealist, all the while espousing free-market ideals. Setting up and presiding over a housing bubble, allowing easy credit, forcing the market to accept it, in diametrical opposition to his professed ideology. Then, passing the reigns over to a new chairman and a few years later seeing the fruits of his meddling come to fruition, with the full knowledge that it was his failed machinations which got them there. Even so, I might have let the old guy retire in peace.
And then he had to open his mouth and say this:
“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.
Referring to his free-market ideology, Mr. Greenspan added:
“I have found a flaw. I dont know how significant or permanent it is. But I have been very distressed by that fact.”
He goes against the free market then has the nerve to blame his mistake on the free market. If the free market had been allowed to work as it should, those loans would never have been made. It was precisely the compromise and eventual abandonment of his principles that was the problem. As his former mentor said “In any compromise between food and poison, only death can win.” This current financial crisis will be his ultimate legacy, and so the tragedy goes.
But when all these bad policy decisions were being made, when Washington was encouraging the Fed to keep interest rates low and to put more people in houses, were there voices of reason to be found? Yes, though no-one seemed to pay any attention. The very same person who ran for President this year and whose economic advice was resoundingly rejected as being “way out there” had this to say in 1999 over a piece of banking legislation that would supposedly deregulate the industry:
Today we are considering a bill aimed at modernizing the financial services industry through deregulation. It is a worthy goal which I support. However, this bill falls short of that goal. The negative aspects of this bill outweigh the benefits….
The growth in money and credit has outpaced both savings and economic growth. These inflationary pressures have been concentrated in asset prices, not consumer price inflation–keeping monetary policy too easy. This increase in asset prices has fueled domestic borrowing and spending.
Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average–and reduce risk for individual institutions while increasing risk for the system as a whole.
The rapidity and severity of changes in economic conditions can affect prospects for individual institutions more greatly than that of the overall economy. The Long Term Capital Management hedge fund is a prime example. New companies start and others fail every day. What is troubling with the hedge fund bailout was the governmental response and the increase in moral hazard.
This increased indication of the government’s eagerness to bail out highly-leveraged, risky and largely unregulated financial institutions bodes ill for the post S. 900 future as far as limiting taxpayer liability is concerned. LTCM isn’t even registered in the United States but the Cayman Islands!
…My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill.
In other words, if a company knows that the government will be there to bail them out if they screw up and everyone else is making money while they can, you can’t blame them for taking full advantage of the opportunity. Blaming the free market for the favoritism of Washington all the while making the average taxpayer pay for this favoritism again and again is just too much. Are the right people being punished? No, once again it’s the free market run wild which is to blame.
What will inevitably follow this crisis is more regulation leading to more screw-ups down the line. But it’s not the screw-ups which are the biggest concern. It’s the systemic corruption that comes with regulation, for with restriction comes profit. Tie one side’s hands and the other is free to prosper. What we need is more education on what a free market really means, that money can’t be created out of thin air and that the market can’t be duped forever. Alan Greenspan had the opportunity to come clean and return to his roots, but instead opted to shift the blame, as so many douchebags have done before him and will do again. While the free-market (not so) gently crashes.
Update: It seems that Ron Paul had a comment or two to make on Greenspan as well:
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