Greenspan does not bear sole responsibility (no one does or could). But he,
along with many others simply had too much faith in markets to self regulate.
Markets, of course, DO self regulate - over time and sometimes with dire
consequences and collateral damage. One key purpose of appropriate regulation
is to help markets moderate their excesses and to prevent some of the worst
collateral damage.The man is far less important than the message.
We cannot simply hope and pray financial markets will do the right thing. They
need to be watched and carefully. Otherwise, we all bear the brunt of their
His appearance on the Daily Show was more mea culpa – he all but admitted
that his belief in the rationality of major economic actors, especially with
respect to risk, was misguided.That’s a big admission from a
guy who was once Ayn Rand’s close friend and admirer and a strong adherent
of the neo-classical economic model that assumes rationality as the core human
driver of economic behavior. Unfortunately these are exactly the
sort of outcomes we should expect when powerful people put the cart of ideology
too far ahead of the horse of reality. Economists have learned a lot since 2008
and the less ideological field of Behavioral Economics is informing an
increasing percentage of the discipline.Let’s hope we
won’t have to pay such a high cost in the future for their continuing
Counting on rationality of the private sector was a bad call. Hands off the
private sector caused the huge blowup.
Tyler D hits the nail on the head.The blind faith that individuals
and companies acting in their own self interest will always magically result in
greater good for society took a major hit after 2008. These players had
strong-armed government - Republican and Democrat, alike - to allow them to turn
Wall Street into a casino.Meanwhile, in Canada, the respect for the
proper role of government resulted in far less gambling, and nowhere near the
economic upheaval we saw.Today the Canadians, with significantly
higher taxes, and a single-payer healthcare system, are ranked as having greater
economic freedom than the US, with fewer of the corrosive effects for society of
that economic inequality brings.This is a stunning reversal of
fortunes for traditional economic thinking. Greenspan's admission of that
he had too much faith in markets to regulate themselves is a seismic event in
the history of economic thought.
Lest anyone give into the silly notion that Greenspan presided over an era of
the "free market run amok, " let's review at least 2 conditions
that MUST exist for a free market:1) There cannot be a legal
monopoly of money. That is, legal tender laws and free markets cannot coexist.
There can be no law prohibiting competing currencies. 2) Taxpayers
cannot be held liable for the mistakes of banks or any other business regardless
of their size. Contracts MUST be enforced (in other words, there can be no
"Greenspan put" or "Bernanke put" and NO bailouts).Greenspan abandoned any semblance of being representative of the free market
when he retracted his belief in the gold standard and became a central banker.
"It was the Great Moderation that gave us the financial crisis and Great
Recession." Baloney - The Great Recession was and is a product of the
instability of capitalism itself.
That's baloney, Marxist. The Great Recession is a result of central banking
run amok, not capitalism. Maybe you'd be right if you said
crony-capitalism. I'd agree with that.
Actually, SEY, Marxist is correct: One of the defining aspects of capitalism is
the business cycle. I don't think any economist would argue otherwise.
Cycles of boom & bust have been with us since capitalism emerged from
feudalism.The business cycles before 1930 were much more frequent
and more extreme. We've gotten used to more lengthy amplitudes between
boom & bust, post WW-II, but absent the Fed's attempts to ameliorate
the effects of the business cycle, there's every reason to believe that
simply returning to a market economy without fiscal and monetary policy to
moderate the cycle would result in more rapid and more extreme ups &
downs.My Libertarian friend agrees, and asserts that people should
simply modify their economic expectations downward and live in smaller houses,
have fewer cars, etc, and prepared for the down cycles, but (in his mind) this
would be preferable to dependence upon government. But at least the Libertarian
agrees that capitalism tends toward instability, left to its own internal self
correcting measures, alone.
Greenspan Headed the Fed for decades....BUT, it was GW Bush
that lit Rome on Fire, and played a fiddle watching to burn to the ground!
Actually, 10cc, both you and marxist are incorrect. You have to properly
understand the causes of booms and busts, recessions and depressions. While no
economic method can prevent at least temporary displacements, serious downturns
are the exclusive realm of government interventions. The so-called business
cycle is not a necessary aspect of capitalism. Those occur when government
suspends the rules of the market. Read your history a little more carefully. Do
should your "libertarian" friend. He's not reading his Mises.Show me any recession or depression and I'll show you how
government made a relatively minor incident into a major disaster. Capitalism is
by far the most stable economic system ever devised. As long as government does
its job of enforcing laws and contracts, capitalism needs no other government
SEY,You are not reading your Dickens.
@10CC – “Actually, SEY, Marxist is correct:”I have
to mostly agree with SEY here – the Great Recession was the result of easy
money from the Fed and the government can turn a recession into a depression
(see 1930’s), however they can also do the reverse (see 2008).And Capitalism has brought more people out of poverty (and released more human
potential & creative energy) than any economic system yet devised.But where he’s wrong is thinking laissez faire capitalism is innocuous.
But it’s not capitalism per se; it’s human nature - namely greed
& fear - that drives booms & busts. A cursory look at history from the
Dutch tulip craze to the many pre-Fed busts in our country supports this.Capitalism with proper rules-of-the-road can mitigate much of the damage
– everything from transparency laws to capital requirements – and
many of these rules have been put in place over the last century and have had a
far more positive impact than not.But SEY is totally off base
regarding currency and the gold standard (too big a discussion for 200 words).
SEY,I will show you the last recession where Greenspan and Bush let
the private sector create a monumentally serious downturn. Does communist China
run a capitalistic program without government intervention that is soon to be
the biggest economy?
Maybe there's hope for you yet, Tyler. I'll be happy to have that
discussion with you regarding gold and currency. History is on my side. Start by
reading about the Byzantine empire's economy and then the early American
economy before they started printing paper money. Well, that's my 4th
comment, so have at me.
There was one regulation that contributed greatly to the mortgage market
collapse, which cannot be ignored if one wishes to be an informed person,
legislation passed guaranteeing loans to, and requiring banks to loan to
minority people, regardless of ability to pay. That wasn't
de-regulation, that was disastrous over-regulation. And the scary thing is, it
is starting again.
Badgerbadger,No. It was a lack of regulation and oversight - not
over regulation. The requirements are fiction. There was money to be made.
The sharks started feeding in a frenzy.
To say capitalism or any -ism is the cause of the preventer of economic cycles
is pure silliness. The amplitude of these events may be impacted by the chosen
-ism, but in the end, simple supply and demand, with the added factor of human
emotion, which Greenspan says himself that was under represented in his models,
causes the fluctuations.This whole "gold standard" argument
is one that has no basis in historical fact. This country has endured many
recessions... this is nothing new under the sun. They have happened under
conservative administrations, and they have happened under progressive
administrations equally. To believe politics is either credited or to blame
under estimates simple market dynamics.... regardless of which ism is in play.
It's interesting to read the disparate analyses from us amateurs. From,
"It's all Bush's fault," to the over-regulation vs.
under-regulation, one thing we should all remember, it's the difference of
opinion that makes markets; without disagreement, the economy would stagnate. No
boom, no bust, and very little growth. Capitalism is only effective when
associated with an underlying moral civility. When that underpinning decays, no
economic structure can salvage society.
@SEY – “I'll be happy to have that discussion with you
regarding gold and currency.”The data is overwhelming that the
gold standard was/is a bad idea – from massive short term price swings to
actually causing panics & depressions (through deflation). Exactly zero
economists (who are not ultra-conservatives under the influence of Austrian
ideologues) think we should go back on it.In a global information
based economy (where not one country pegs its currency to any metal) it would be
like shooting your horse in the leg and then entering it in the Kentucky Derby.
I can think of few economic ideas worse than the gold standard. The
value of money is ultimately backed by the creative output of people, not some
arbitrary metal we dig out of the ground.@Badgerbadger –
“There was one regulation that contributed greatly to the mortgage market
collapse…”A minor contributor actually as evidenced by
the fact that the collapse was global. What do house prices in Norway have to do
with a poor American getting a home loan? The collapse was largely
the result of “creative finance” run amok.
It is interesting that all of the quotes extolling Mr. Greenspan were made prior
to the financial collapse.Tyler D is exactly right - the collapse
was due to unregulated "creative finance", in which bankers risked their
depositors' funds in ways that were not permitted before the 1999 repeal of
the Glass-Steagall act.
Are we, or are we not, the economic leader of the world? Oh wait,
let me rephrase that.Were we, or were we not, the economic leader of
the world?We were, and our housing market crashed first, which set
off panic in other housing markets around the world, which were patterned after
ours, and also spread panic about whether or not Americans would be able to
continue to consume everything every other country in the world produced.Deniers of the government involvement in the bad loans deal have their
heads in the sand. The whole purpose of Fanny Mae and Freddie Mac was having the
government cover the high risk loans the government pushed lenders to make. You
bet the lenders cashed in, because congress set them up to sell loans at a
profit and pass the risk on to the tax payers. TARP wasn't an afterthought,
it was the plan, from the 90's.We are no longer the economic
leader of the world. We are becoming the broke gluttons of the world.
'Consumer economies' die when the money runs out. 17 TRILLION in debt
means the money has run out.
@Badgerbadger - “Deniers of the government involvement in the bad loans
deal have their heads in the sand.”I don’t recall
denying this fact… I just said it was not the main driver.The
facts are many countries relied on the same Wall Street “geniuses”
to create all sorts of financial arrangements for not just their own housing
markets but all sorts of other investments, including public finance (hello
Greece).If 2008 taught us anything it is that government should not
be the only source of our concern. This is why I believe our country
needs both the Left and the Right to keep these powers in check – the
Right focuses on government abuses while the Left focuses on corporate abuses.
One or the other would run amok and create all sorts of problems if only one
ideology informed our views.
Tyler -I didn't address the comment to the specific people, but
part of it was a response to you and part was to Twin Lights. Read Twin LIghts
post and you will understand why I included that statement. It was in response
to her/him, not you.