Friday, October 24, 2008

Greenspan's Paltry Mea Culpa

Of all the public sector people who bear responsibility for the recent wave of failing financial institutions, and of course the coming depression, Allan Greenspan two days ago became the first one to admit some responsibility. (Among the many others who owe us an apology is Barack Obama, but don't hold your breath while waiting to hear it.)

As Ron Paul points out in this video, Greenspan is confessing to the wrong sin. Instead of saying that he should not have spent decades pumping money into the economy, fueling illusory pricing booms in the the stock market and housing market -- he says he should have proposed a regulation or two that would have enabled this system to go on forever.

Greenspan's regulatory proposal is to require institutions that repackage mortgages for sale to others to retain some of these mortgages themselves, giving them a little more incentive to know the level of risk these instruments involve. Don't the people to whom they sell these mortgages already have incentives to do that?

This sounds to me like putting a bandaid on a compound fracture. And the Democrats are no better. Their attitude is: You fool! You fool! The patient needs ten bandaids!! What the patient needs is surgery. The problem is -- and this is where we libertarians start sounding like Marxists -- that the system is fundamentally flawed. As long as the doctor is only going to reach for another bandaid, the patient is doomed.

The theory all these doctors agree on is this: We in the public sector create incentive structures that push the private sector to go where we want it to go. If that doesn't work, it's because some bad people in the private sector failed to make our structure work. At most, we are only responsible for not slapping on some new rules to stop them from failing to do the right things. Or maybe, worse yet, we took off some of these magic rules. Mea maxima culpa!

This is the mindset that says that the cause of all our troubles was deregulation. The last deregulation we did in this country was the Gramm Leach Bliley Act of 1999, which allowed the mortgage repackaging that Greenspan was talking about. That must have caused the banking crisis! It was all due to the guys who ripped off one of the bandaids!

If you think so, consider this: Ron Paul voted against that bill. Joe Biden and John McCain voted for it. That's the difference between someone who sees the system as a system, and people who are thinking about bandaids.


Anonymous said...

You may find this Bill Moyers Journal segment in which he initially talks about Ayn Rand and Alan Greenspan. The interview with James K Galbraith is interesting.

Lester Hunt said...


As I suspected from what I know of Bill Moyers, what he says there is almost the exact opposite of the truth. Greenspan's conduct as Fed Chair was a betrayal of his earlier expressed views when he was a friend of Rand's, which libertarians have complained about many times, and for decades. In the early sixties, he wrote an excellent essay, believe it or not, defending the gold standard, on the grounds that it would prevent precisely those policies that he did pursue as our monetary dictator. In fact, he quite explicitly said that these policies lead to stock crashes and resulting depressions. Which his policies have and will.

As brief account of what he said and how he has betrayed it can be found here.

Moyers' comments are one more example of the Big Lie that these events were caused by laissez-faire caplitalism, whereas they were caused by government intervention.

I probably should post about this.