Greenspan Shrugged: shocked disbelief

It has been said: blessed is the man proven right in his own lifetime. What, then, do we say about Alan Greenspan, a man who has watched his legacy as a financial "maestro" and reputation as an intellectual mastermind crumble with the tumbling economy. Summoned before Congress yesterday, Greenspan faced the scorn of Democratic leaders, harsh questioning, and admitting to making "a mistake" when it came to guiding the economy into our troubled times.

Even the New York Times could barely contain its contempt for the man, beginning its headline article about the hearings like this:

For years, a Congressional hearing with Alan Greenspan was a marquee event. Lawmakers doted on him as an economic sage. Markets jumped up or down depending on what he said. Politicians in both parties wanted the maestro on their side.

But on Thursday, almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

Greenspan, 82, is now blamed by critics and many economists, for the financial crisis sending the economy into depression. They say he encouraged housing bubble prices by keeping interest rates too low for too long and failed to support regulation which would have curbed fraudulent lending practices.

“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

Greenspan conceded: “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.”

The ideology in question was Greenspan's zealous adherence to Ayn Rand's Objectivist philosophy. In 1963 Greenspan wrote: Capitalism is based on self-interest and self-esteem; it holds integrity and trustworthiness as cardinal virtues and makes them pay off in the marketplace, thus demanding that men survive by means of virtue, not vices. It is this superlatively moral system that the welfare statists propose to improve upon by means of preventative law, snooping bureaucrats, and the chronic goad of fear.

Or, to strip the rhetoric away and put it into working-class terms: the markets regulate all. The markets are their own highest form of ethics. Thus, what do we need regulation for? The markets regulate themselves.

It is the writing of a naive fundamentalist, one who happily believes one system can solve all problems, even the problems it creates, written by one who would become the most powerful figure in modern economics.

In the 1950s Greenspan found his way into Ayn Rand's inner circle, a group known ostentatiously as The Collective. It was a group who fancied themselves intellectuals, discussing and dreaming up financial utopias that would also free people of old moral and ethical constraints. Rand's book "Atlas Shrugged" was published in 1957. The book grandly suggests that man's highest virtue is the morality of self-interest. Capitalism, built on self-interest, had long been criticized for being uncaring and selfish. Here was a book that confidently posited that capitalism was its own grand morality. It quickly, masterfully, bridged the gap between being selfish and being ethical. It has been bedtime reading for executives ever since.

But concepts dreamed up over martinis in Manhattan high-rises sometimes have a tricky way of being falling short in the real world. In the real world greed drives banks to sell fraudulent mortgages at low introductory rates to potential home owners, then repackage them as complicated mortgage-backed securities, and sell the securities to other banks. What are they really worth? No one really knows.

This was one thing when Greenspan's housing bubble was inflating, and everyone was winning and trying to get in on the action. But once people got stuck in their ARMs at higher levels, once the housing bubble cooled and deflated and they couldn't get out from under their homes, owners began to default in large numbers, and the banks who bought the mortgages faced huge losses.

For years Greenspan argued successfully against government regulation on the market, insisting that the markets themselves were the best regulators. Greenspan also seemed to be the last person aware that a housing bubble was occurring--citing no evidence in the past that housing prices had ever declined--an explanation which can only be read as shockingly lazy. That is the problem when you replace common sense with blind faith in an ideology.

As Greenspan told Waxman: "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."

Last year at this time I wrote of Greenspan's new book "The Age of Turbulence":

The problem with people like Greenspan and Bush is not necessarily what they believe, but that they believe their point-of-view can't possibly fail. There is no stopping someone like Bush because he has the power of religion and an almost childlike faith in America to filter his decisions. Greenspan, on the other hand, uses reason and the computational power of economics. Two very different methods of induction, yet the results are the same. Groups of power, like the Collective, like Washington think tanks, are nothing more than self-serving entities wrapped in a philosophy. It does not take long to see their morality when it comes to using other people's lives.

Greenspan slouching his way up Capitol Hill, to face an angry mob of Democratic leaders representing an American public thirsty for blood, had an almost Biblical feel. Oh, it must have been hard for the "maestro" to concede failure, and he chose his words very carefully, lest what he clothed himself in would be stripped in an afternoon.

But at the end of it all, the great man was revealed to be just a man behind the curtain, mashing the buttons and pulling the levers of the economy, perpetuating an illusion. Ironic that what he held onto so tightly has ushered in, for at least a short time, an age of economic socialism in America. I wonder what Rand, who came to America from Communist Russia, would write about that?


Update
Tim Rutten has written a column in the Los Angeles Times called "Greenspan's Blindspot" wondering this:

Did Greenspan really believe that the people in power, presented with a chance to make a killing, would put the interests of their institutions and stockholders ahead of their own?

Put aside for a second the fact that the former Fed chairman spent more than 20 years of his life as a disciple of the novelist-turned-barely-baked-philosopher Ayn Rand, whose concepts of "rational egoism" and "individualism" put the "R" in ruthless and have provided generations of gullible undergraduates an intellectual rationale for their lingering adolescent self-absorption. Has Greenspan lived through the same times the rest of America has recently experienced?

And:

Perhaps only an economic education prepares a man to draw as his conclusion from catastrophe the gnomic declaration that fallible human beings are not infallible. Some things, however, are true 100% of the time: Societies in which the few are allowed to fatten themselves without limit on the labor of many are not just; they aren't even particularly productive for very long. Countries -- like companies -- that cling to notions that allow some to pursue their own interests by behaving indecently toward others come to bad ends.

Greenspan's Chilling Commentary

Capitalism is based on self-interest and self-esteem; it holds integrity and trustworthiness as cardinal virtues and makes them pay off in the marketplace, thus demanding that men survive by means of virtue, not vices. It is this superlatively moral system that the welfare statists propose to improve upon by means of preventative law, snooping bureaucrats, and the chronic goad of fear. So wrote a young Alan Greenspan in 1963 as an adherent to Ayn Rand's Objectivist philosophy. Some forty years later the morality of capitalism is again on display in Greenspan's new book "The Age of Turbulence" and his subsequent comments.

There is a certain void in a capitalist's outlook. Production and consumption are one thing, but what of ethics and morality? Rand, who came to America from the Soviet Union in 1926, wondered the same thing. She embraced America's entrepreneurial spirit but wanted to give it a little soul. Ultimately she described her Objectivist philosophy as the "concept of man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute." Indeed, it was largely a celebration of self and production and consumption for the good of the self. It is not hard to see why such a point-of-view has taken an influential role with many capitalists, eager to give their careers a little more heart. In the 1950s Greenspan became a member of Rand's inner circle, The Collective, a group of intellectuals who sat around dreaming of utopias and how the world should be run. His book chronicles American economic history from roughly that time to the present day. Of contemporary interest is Greenspan's conjuncture with President George W. Bush and his advice on Iraq.

Much has already been made of Greenspan's comments that the war was "largely about the oil." Greenspan seemed a bit surprised by the reaction. "I was not saying that that's the administration's motive," Greenspan explained in an subsequent interview, "I'm just saying that if somebody asked me, 'Are we fortunate in taking out Saddam?' I would say it was essential."

He also said in his discussions with President Bush and Vice President Cheney, "I have never heard them basically say, 'We've got to protect the oil supplies of the world,' but that would have been my motive." Greenspan said that he made his economic argument to White House officials and that one lower-level official, whom he declined to identify, told him, "Well, unfortunately, we can't talk about oil." Asked if he had made his point to Cheney specifically, Greenspan said yes, then added, "I talked to everybody about that."

The author's book and comments have proven to be as revealing as one could hope from such a calculated economist. Many have suspected all along of ulterior motives for Bush's invasion of Iraq, but Greenspan comes right out and says it. And since he enjoys a rarefied level of respect and admiration it is hard to dismiss his words. But what are we to make of the former Federal Reserve Chairman, once thought to be an independent financial entity, lobbying the president for an invasion of another country?

What we have witnessed over the last seven years is the collusion of policy and ideology. Indeed, not just in America, but world-wide, one's world view is quickly trumping all other responsibilities. Bush is the true believer in the power of Christianity and Democracy as the liberating forces in the world. Greenspan, the Objectivist, believes the same thing about capitalism. The Iraq war represents the confluence of religion, freedom, and capitalism, all brought to bear in an attempt to free the oppressed people of Iraq, and secure our interests. Never before has a war felt more entrepreneurial, so American-made, and the result has been a complete disaster and you'll never hear a hint of hindsight from the men who conjured it up in secret meetings. They are the "prime movers" of our society. The ones who, like Rand and the Collective, sit around and ponder how to better run the world the way the rest of us study football.

Rand's message has often been attacked by people her circle labeled as "do godders," those who argued that individuals should also work for the benefit of others. Her philosophy has been labeled as an elaborate type of Social Darwinism in-which the "fittest" survive and augment what they have. What matters is the person who produces, who works with others to increase what he has and, in theory, increase his happiness. Lining up such a view with Greenspan's deadpan explanation of the Iraq war seems almost too transparent to believe. Keep in mind that perhaps a half a million Iraqis have died since the US led invasion in 2003. Then consider the numerous reports saying that our invasion has made the region significantly less stable, and enhanced terrorist recruiting. Then consider the thousands of US lives that have been shattered, and billions of dollars spent, and the deceit by the Bush administration to bring the invasion for tuition. All of this is on one hand, and the "protection of oil supplies" is on the other. The long-term results of the invasion are impossible to predict, even to someone with Greenspan's acumen, but surely these possibilities must have occurred to the man and factored in to his equations. Surely the value of life must be more than stable oil supplies.

The problem with people like Greenspan and Bush is not necessarily what they believe, but that they believe their point-of-view can't possibly fail. There is no stopping someone like Bush because he has the power of religion and an almost childlike faith in America to filter his decisions. Greenspan, on the other hand, uses reason and the computational power of economics. Two very different methods of induction, yet the results are the same. Groups of power, like the Collective, like Washington think tanks, are nothing more than self-serving entities wrapped in a philosophy. It does not take long to see their morality when it comes to using other people's lives.

Greenspan's words are not only troubling in their cold and calculated reasoning for a war that has turned into a human rights nightmare, but they seem so selfish and short sighted. They seem imbued with a sense of privilege, as if nothing could be more reasonable than deciding the fate of Iraqis over morning coffee. What could possibly go wrong when your world view is brought to task? To the true believer, nothing, but his words are cold comfort to those remaining in Iraq, and those who have been displaced. And if Mr. Greenspan is such a genius, why couldn't he tell the task of regime change and asset securing was well beyond the reach of a man like George W. Bush? Perhaps his irrational exuberance in the power of capitalism also corrupted his judgment of character.