Waxman: “Do you feel that your ideology pushed you to make decisions that you wish you had not made? . . . You found your view of the world…was not right?”
Greenspan: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact . . . that’s precisely the reason I was shocked.”
Chairman Greenspan, I’m shocked that you’re shocked.
I’ve followed Greenspan for 40 years, from when he sat at the feet of Ayn Rand at her salons, to Townsend Greenspan, his consulting firm, to his chairmanship of the Fed, to retirement and the inevitable autobiography.
Alan, I thought I knew you.
I thought he was a libertarian, a believer and theorist of the free market who applied this background to his acts as Fed chairman. Well, I guess I’m not so naïve that I wouldn’t understand that he operated within a framework that was not of his making, but . . . I think he drank the Kool-Aid.
Greenspan is wrong and he did have a great deal to do with the housing bubble. I would say that monetary policy was the fundamental cause of the bubble. And that current regulation actually did cause the blow-up.
I’m of the Austrian School of economics which argues for a gold standard of currency rather than our current system of fiat money. This differs in many ways from the Monetarist School founded by Milton Friedman. I respect Milton Friedman greatly in all respects except for his advocacy of fiat money monetarism. Uncle Milton argued that you really shouldn’t mess with the money supply because it can cause great dislocations in the economy, such as business cycles. Instead, just pump in money at a fixed rate, say 4% (which is what he thought was the natural growth rate of the economy) and you’ll be fine. All true up to the control of the money supply which is where Austrians and Monetarists part company.
I’m going to guess that Alan Greenspan was firmly in the Friedman Monetarist School, but without the restraint on what the Fed would do with the money supply. He used quantitative analysis to fine tune his tinkering. He was mired in the research and failed to see the obvious.
When you are given great power such as Greenspan was, with all the prestige that goes with his office, it may affect your self esteem. In fact you may believe that you are at the top of the food chain and are correct in all of your thinking. His insistence on combing through the minutiae of data on all subjects could lead one to believe that he thought his actions as Chairman would affect the outcome of the economic affairs that he studied.
What a powerful thought. We all know that power corrupts.
In fact it was power that lead him astray. Or, a lack of hubris as revealed in his comments to the House Oversight Committee. Meddling with the money supply only caused cycles and didn’t cure them. Ben Bernanke, a fellow traveler, is now sowing the seeds for the next cycle of boom and bust.
It’s a sad thing to see a great man be humbled in his retirement. And it’s a blow to capitalism to see him shrink from responsibility and blame the mess on a lack of regulation.
Jeff,
I believe what AG was referring to in his “shock” was a flaw in his belief not so much in his economic philosophy, but rather the human condition. I believe the whole quote goes onto say something like he’s shocked regarding the decision making of the corporate organisms in a free market. That a fundamental base for all his theory is that when left to do the best for themselves, the corporation (and presumably it “elected” leaders) would not make decisions that would destroy themselves in the long run. Without going back and listening again, I don’t think he said, “I’m shocked that tinkering with the money supply was bad.” Which then begs the question whether AG was actually wrong or did these companies believe while there would be maximum pain, the government wouldn’t actually allow their failure? The millions in campaign baksheesh and time will tell.
Next up- GM. Make crappy cars and ugly trucks for 20 years and get a pay day.
The problem with Greenspan is that he never saw the connection between his monetary policy and the results. You may be correct regarding his comments, but what I think is the root of his complaint is that “this shouldn’t have happened!” according to him. I.e., monetary policy couldn’t have caused this to happen. In his biography he consistently denies any responsibility for the bubble. According to him it was out of his hands because of the globalization of monetary action and that the Fed really doesn’t have that much power any more. So he looks elsewhere for the causes. He’s scapegoating the financial operators for the boom-bust cycle he created.
As to GM, you are absolutely correct.