Alan Greenspan, Socialist
Krugman talks about Alan Greenspan:
What was the problem with Greenspan, and where and when did he go wrong?
Greenspan is the real thing. He believes the Fed can be the designated driver, the one who takes you home safely after the party has gotten crazy. So he brushed aside any worries about regulating and taking precautionary measures. His belief in the perfection of free markets led us into the ditch we’re in now.
The interesting quirk in the fabric, though, is that it isn’t really free markets as such that Greenspan believed it. Rather, it was belief in the combination of free markets and central banking. He didn’t believe that the free market would operate uncorrected and flawlessly, he believed that the Federal Reserve’s central planning functions could be done so effectively on a post hoc basis that there was no need for any form of preventive regulation. Real market fundamentalists go in for a lot of goldbug nonsense. Fundamentally, the Greenspanist combination of massive skepticism of government intervention with overwhelming confidence in the power of the all-knowing and benevolent masters of monetary policy seems strange and unsustainable. But it is, of course, easier to sustain if you yourself are the central planner.
36 Responses to “Alan Greenspan, Socialist”
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December 4th, 2008 at 8:58 am
You’re right about Greenspan. I’ve always noted with interest that while many on the left see him as dangerously “Randian”, Objectivists (those who believe in Ayn Rand’s philosophy of truly completely unfettered free markets) see him as a betrayer of her legacy.
December 4th, 2008 at 9:09 am
When I refer to people like Greenspan (or the Reaganites) as “market fundamentalists,” it has to do mainly with the ideology they propagated to justify their policies. No, of course they don’t believe in actual “free market” dogma, and they just believe in the sorts of massive state intervention to protect the sort of ultra-wealthy interests they value.
What they did believe in, and practiced heartily, is using the language of ‘free market’ nonsense to justify each and every one of their assaults on the economy, thus winning most arguments of the past 30 years by basically suggesting that anyone who disagreed with their attacks on rational economics was basically a communist or close enough.
December 4th, 2008 at 9:22 am
The combination that you call “strange and unsustainable,” they call monetarism. I think there are very good arguments against it, and it’s not as if economics hasn’t debated them. But somehow the idea that it’s a contradiction in terms shouldn’t be one of them, unless you’re a libertarian, and what libertarians call “consistency,” the rest of us call a wacko religious sect.
December 4th, 2008 at 9:30 am
The DeLong post you link to makes not a single salient point against Mises’ actual arguments against central banking. Here’s an incredibly simplified argument for the book: marginalism and subjective value theory apply to money. Money’s a private good like any other, and so interfering with market regulation of the good will only lead to informational distortion and inefficiency. But it’s a little worse than that with money, because a central planning board monitoring and controlling supply will create the business cycle.
I guess that’s *insane* to think. Oh well.
December 4th, 2008 at 9:56 am
Yes, it is insane to think that money is a “good” like soap cakes and sheet steel.
Yes, it is insane to think that central banking creates business cycles.
December 4th, 2008 at 10:02 am
Rather, it was belief in the combination of free markets and central banking.
That’s like saying “a combination of Nazism and philosemitism.”
Yes, it is insane to think that money is a “good” like soap cakes and sheet steel.
Why?
Yes, it is insane to think that central banking creates business cycles.
Obviously, because the business cycle is actually caused by – what, exactly?
December 4th, 2008 at 10:02 am
+1 for Khaled’s point. A lot of the criticism of Greenspan as having been some sort of uber-Objectivist “free market radical” in his position as Fed chairman reveals more about the critics’ ignorance of both Objectivism and lower-case “l” libertarian economic thinking than it does about Greenspan.
December 4th, 2008 at 10:34 am
I think this is mistaken in that as Greenspan recently testified, it was not that he thought the fed could rectify any problem the unregulated markets got themselves into, it was that he thought there were some problems that the free market would not allow to occur. He acknowledged this as a flaw in his ideology. He did not think regulation was necessary to prevent managers from doing greedy destructive things to their companies.
How much Greenspan renounced the merit of “goldbug nonsense” is an open question too. Here is a little snippet of testimony from 1997, with Ron Paul, of course:
Dr. PAUL. A very quick question. …
It seems that there is a welcoming effect to the fact that the Southeast Asia has tampered-you know, price pressures. Couldn’t we make a case that the free market would operate a lot better than the market we use today?
Mr. GREENSPAN. I think you have to define what you mean by a ”free market.” If you have a fiat currency, which is what everyone has in the world–
Dr. PAUL. That is not free market.
Mr. GREENSPAN. That is not free market. Central banks, of necessity, determine what the money supply is. If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.
The reason there is very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.
Greenspan appears to be taking the position that society has embraced central planning of the money supply in order to smooth out the business cycle and its ill effects, and that he is somewhat reluctantly along for the ride.
December 4th, 2008 at 10:50 am
File this under “Court Gossip,” but I have heard tell that Mr. Greenspan and his wife, Andrea Mitchell are quite the dashing figures on the D.C. cocktail party circuit. With his term about to expire under W’s administration, Greenspan was desperate to curry favor with him and gain reappointment. As a result, he chucked any fiscal prudence out the window and became a pawn of the Cheney “deficits don’t matter” economic team.
December 4th, 2008 at 12:00 pm
Regarding free marketers, at the time I was glad they let Lehman brothers fail but now they are saying that got the ball rolling after the housing bubble burst.
Also it was funny to see Bush listen to and believe Bernanke and Paulson who were saying they needed to do something or there would be another Great Depression (”the fundamtentals of the economy are sound!” said McCain) and then you have the House GOP in full revolt. No bailout for fancypants Wallstreeters!!!
December 4th, 2008 at 1:56 pm
Greenspan supported the Bush tax cuts even in a time of war. That hurt us, too.
December 4th, 2008 at 7:23 pm
Joe from Lowell,
“Yes, it is insane to think that central banking creates business cycles.”
… but that’s not what Mises believes. He believes that fractional reserve banking causes business cycles. Central banks only exacerbate the problem.
All a central bank adds to the mix is that it enables the banks to lower their reserves more heavily and in unison. Since the lowering and raising of reserves is what increases and decreases the money supply, and that is what drives the boom and bust, the central bank serves to make the cycle more severe.
This is not to the exclusion of other mechanisms that could also accomplish the same thing. The monetary expansion caused by a sufficiently successful counterfieter could cause a business cycle, as could a large influx of gold into a country on a gold currency.
You can also cause a business cycle by holding interest rates below market. I don’t think it would matter how either.
Do you hold that the above belief is also a mark of insanity?
December 4th, 2008 at 7:47 pm
Delong had to start “pruning” comments at that article because he couldn’t handle the economic arguments he was getting. He removed every comment I made and any responses by commenters that left a trace of that. One guy referred to me as “smart guy”.
He doesn’t even understand Says Law. Which is pretty sad for someone with a degree in economics.
I have to say Brad Delong is one of the more dishonest bloggers on the internet.
December 5th, 2008 at 2:33 am
Matt: “goldbug nonsense”.
Meanwhile, the goldbugs are riding high and Matt’s riding a bicycle (for environmental reasons, so he claims.)
This is another one of Matt’s stupid polemics against libertarianism. I still want to know what libertarian skewered his ass in philosophy class one day at Harvard and he never forgave the guy.
Or why he thinks he’s so low on the philosophy totem pole that only libertarians are below him – which is basically true.
Matt is a chimpanzee who beats on people who are below him and tries to drag down people who are above him. Which pretty well makes him human – unfortunately.
Numbnuts.
December 5th, 2008 at 4:52 am
Fundamentally, the Greenspanist combination of massive skepticism of government intervention with overwhelming confidence in the power of the all-knowing and benevolent masters of monetary policy seems strange and unsustainable. But it is, of course, easier to sustain if you yourself are the central planner.
Matt, while you correctly capture the hubris of the central planner (the “Knowledge problem”, as the Austrians call it), you and Krugman both miss Greenspan’s role in inflating the credit bubble at the start of Bush’s term. Greenspan should have known there would be hell to pay later, but thought he could handle it.
One of the reasons Greenspan thought he could handle it is because he completely misunderestimated the vast socializaton of risk that was taking place throughout the economy – but particularly in the increasingly highly-leveraged investment banks, which were no longer risking their own capital but shareholders’, for the sake of immediate large bonuses. The same mentality of executive greed at the expense of shreholders was visible elsewhere.
December 6th, 2008 at 10:45 pm
TokyoTom,
Greenspan was holding interest rates below marked well before Bush. That’s what triggered the Clinton internet bubble.
There seems to be no economic measure that the central planner can use to determine the correct rate, as the Austrians predict. It also seems that an attempt to “stablize” prices during a productivity driven deflation causes asset bubbles, as the Austrians predict.
The Reagan/Thatcher revolution lead to a worldwide increase in productivity. Had Greenspan just let that productivity driven deflation occur we would not have seen the asset bubble in stocks and housing. Then US citizens would not have been tricked into thinking that the were “making” money on our assets. We wouldn’t then have ratched up our borrowing against asset increases. Our savings rate would have been higher too. We wouldn’t be suffering from a large trade deficit, and offshoring of industry would have happened at a slower pace.
Keynesianism failed first by prolonging the Great Depression, and causing the inflation of the 1970s, and now monetarism has failed. Austrian Economics is the only plausible theory, and the only one that matches the empirical history.
Too bad Obama just announced that he was going to go nuts with public works projects. That is going to ruin the economy. The worst possible thing you can do when you are in debt and the wife has lost her job, and your income is down, is to decide to make large renovations on the house.
December 17th, 2008 at 11:38 pm
Well the myth of laissez-faire capitalism mixed with a bankster community high on lies , under the regulation of the blackbox (central bank) and its ugly child the SEC has resulted in with consumer and trust abuse as primary prerogative…”irrational exuberance”???? It is obvious multiple regulatory circles knew of this time-bomb…the guillotine was invented under similar circumstances.
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