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.
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The Maestro
Wow. You don’t hear admissions like this every day:
“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 don’t know how significant or permanent it is. But I have been very distressed by that fact.”
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
Greenspan is, of course, hardly unique in having been mistaken about some important public policy issues. He was, however, an unusually powerful official — arguably the second most important member of the government after the president — for an unusually long time. But beyond that, for a long time he managed to acquire an air of infallibility about him that was totally unique among political figures. He was treated as an oracle to be interpreted, not as an official to be scrutinized. It was, I think, a strange and unhealthy moment in the life of our country. At the end of the day, appointing people so brilliant that they’re never wrong about anything isn’t a real option in terms of thinking about ways to run the government.
Asset Prescience
Daniel Davies blogged way back in 2002 that the Fed’s most likely approach to boosting economic growth was to facilitate the creation of a housing price bubble:
Cleverer readers at this point will be formulating an objection. The objection goes along the lines of:
“Yeah, yeah, laughing boy, but what happens when the housing bubble bursts then?”
Which is a damn good question to ask, particularly since the official policy of the Federal Reserve appears to be “hmmm yeh, never thought of that, I suppose we’d be kind of fucked”. Looks like it falls to me to come to their aid, with a solution that smacks of genius.
For all the back-and-forth bluster about Fannie Mae, regulation, “Wall Street greed,” etc. there seems to me to have been remarkably little focus on policymakers decision-making with regard to this issue. One reason there hasn’t been a ton of focus on it is that a lot of smart, well-informed people saw this risk and thought the Fed was right to basically ignore it. But the very fact that the Fed had — or at least was widely thought to have had — good reasons to behave in this manner is all the more reason to shine some scrutiny. Since nobody ever says “my plan is to be corrupt and incompetent” there’s relatively little value in just saying over and over again that corrupt and inept public officials are undesirable. We do, by contrast, need to talk about how and why well-regarded public officials wound up making serious mistakes. There are, presumably, lessons to be learned here.
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