Greenspan Points Finger

What? Me? I did it? No, it was "global forces beyond... control" that did it.

In a Wall St. Journal op-ed this morning, Alan Greenspan tries to protect/resurrect his reputation by telling us whom we should blame for the current economic crisis:
How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.

Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical. And on rare occasions it can break down, with consequences such as those we are currently experiencing. It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently. [emphasis mine]
Things just spun out of control. The global forces were so, um, global, and complex that "domestic monetary policy makers" (read... Alan) couldn't handle them. (Note: he's right. No one could, or should.) But it is clear, Greenspan notes, that the "market practitioners" and "players" were euphoric -- recalling his "irrational exuberance" quote from long ago -- and risky and it's all their fault.

So what should be done? Cast off all regulation, finally, and let loose the free market? Or plunge the country (further) into statism? No. We don't need more or fewer regulations, Greenspan says. We need the right ones.
Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions. [this sounds so pleasant and helpful! - c.a.]

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows.
Wait. Is he going to say that government should leave the markets alone, that it can't "manage" the economy? Of course not. Alan giveth, and he taketh away...
Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.
The old dog is back to his old tricks. The right regulations are the ones that Alan thinks are right, and despite his and statism's (not the free market's) spectacular failure, he clings to the idea that if someone is just smart enough, with enough data, they can "fix" everything. And it sounds like Alan thinks he still has the right stuff. I'm sure Geithner has him on speed-dial for when things get really tough.


Galileo Blogs said...


Very nice summary of Greenspan's erroneous (and felonious?) thinking. In particular, the last paragraph really captures his mentality, the mentality of the "planner":

"...if someone is just smart enough, with enough data, they can "fix" everything."

Yes, things will work out right if only someone as smart as Greenspan is in charge... if only he has enough power.

It becomes ever more clear that the face that stares back at Greenspan in the mirror is that of Dr. Robert Stadler.

Burgess Laughlin said...

> "Things just spun out of control."

In your clear and admirably concise formulation, you have captured the metaphysics of pragmatism: Reality is ever changing. Or as Heraclitus said 2500 years ago: All is flux.

What a contrast this metaphysics is to the one that pro-capitalist economist Ludwig von Mises assumed -- for example, in his 1950's essay, "Monetary Reconstruction," which is an intellectual activist's analysis and plan for returning to a gold standard.

That essay will be the subject of a three-week study group in late July in Study Groups for Objectivists:


C. August said...

Galileo, thanks for the comment and the reminder about the Dr. Stadler parallels. You're right that he seems to have made a total transformation. Almost like Smeagol-to-Gollum in the presence of The Ring, Greenspan has transformed into Dr. Stadler in the presence of Power. (I just saw LOTR again recently.)

Burgess, thanks for the pointer about the Mises essay. I found it online and have printed it for reading later.