Almost childlike in his idealism

The hits keep-a-comin' for former Fed Chairman Alan Greenspan. In today's installment at Bloomberg (hat tip CB), Jonathan Weil turns back the clock to 1963 when the Ayn Rand devotee was formulating his view of the world.

Ironically, this view of things might have described the current condition much better had he not been head of the world's most important central bank for 18 years.

Greenspan's '63 Essay Foretold Subprime Inaction: Jonathan Weil
Why did Alan Greenspan fail to act while the roots of the subprime-mortgage crisis spread? Here's one possible explanation: The Ayn Rand disciple held fast to his unwavering laissez-faire beliefs.

Yesterday's New York Times carried a front-page article chronicling the many warnings the former Federal Reserve chairman received about aggressive subprime lenders luring unsuspecting customers into crazy mortgages they never could afford. "Where was Washington?" the newspaper asked. And where was Alan?
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I believe the best answer can be found in an August 1963 article called "The Assault on Integrity" that Greenspan, then 37, wrote for Rand's monthly journal, "The Objectivist." Judging by how he rebuffed Gramlich and others, it looks like he followed his old instincts as the subprime mess festered.

Agent of Consumers
"Protection of the consumer against 'dishonest and unscrupulous business practices' has become a cardinal ingredient of welfare statism," Greenspan began his essay, which Rand included in her 1967 book, "Capitalism: The Unknown Ideal."

"Left to their own devices, it is alleged, businessmen would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. Thus, it is argued, the Pure Food and Drug Administration, the Securities and Exchange Commission, and the numerous building regulatory agencies are indispensible if the consumer is to be protected from the 'greed' of the businessman.

"But it is precisely the 'greed' of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer.

"What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product."
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"Protection of the consumer by regulation is thus illusory," he said. "Rather than isolating the consumer from the dishonest businessman, it is gradually destroying the only reliable protection the consumer has: competition for reputation.

"While the consumer is thus endangered, the major victim of 'protective' regulation is the producer: the businessman."

The largely unregulated subprime-lending industry, of course, didn't turn out this way. Countless mortgage brokers and lenders didn't care about their reputations. Wall Street banks, which packaged and pitched the loans as AAA securities, didn't care about theirs either. There were quick killings to be had.

Four decades later, Greenspan's argument seems almost childlike in its idealism. Yet, judging by his inaction, it looks like he never stopped believing.

Once again, had he not been Fed Chairman for almost two decades, helping to transform the world's greatest economy into a country full of leveraged speculators, willing to take risks with borrowed money that they wouldn't have dreamed of years earlier, his 1963 views might be a lot more relevant today.