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Almost childlike in his idealism

Wednesday, December 19, 2007

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?
...
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."
...
"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.

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25 comments:

Troy said...

Easy Al is forgetting two things:

after one clears $20-50 million into offshore holdings the necessity of securing external income no long comes into play.

What is good for the 'businessman' and what is good for the 'employee' is disjoint. The employees of the lending institutions can shift to new hosts, their reputation is not tied to their organization, unlike the 'businessman'.

Anonymous said...

Tim,

Not sure I understand the context of your last paragraph. It seems to me that Weil is making an argument for more regulation, not less. I still think Greenspan '63 argument is correct. The root cause of the subprime crisis isn't a lack of government regulation. It is a monetary system that allows special interests to create credit out of thin air.

Apollo said...

Bloomberg has it all wrong. Our economic problems are NOT due to Alan Greenspan's devotion to laissez faire capitalism. The Fed wouldn't exist under capitalism.

Under capitalism, in order to go into debt, you would need to convince someone with gold to lend it to you. Hence, loans would only be made to resonably sound businesses, not to consumers for vacations.

Greenspan is a hypocrite and has no integrity.

Tim said...

Anon 9:53,
One could argue that the lack of regulation has allowed special interests to create money out of thin air and that's a major part of the current problem.

Anonymous said...

Tim --
Precisely. Anybody who thinks that a gold standard would somehow banish bad paper really hasn't thought things through at all.
-- sglover

Anonymous said...

I agree with Apollo's statements but would like to add that I have always wondered how a disciple of Rand, as Greenspan apparently was or is, could be head of the Federal Reserve which goes against laissez faire capitalism. By pumping out money, it created bubbles which rewarded, in the short-term, highly risky financial practices.

Chuck Ponzi said...

Tim,

I have to disagree.

Regulation is opposite laissez faire.

Regulation is socialism, which in and of itself is delusion. I highly recommend the following essay:

http://doctor-horsefeathers.com/archives2/000705.php

What is happening right now in the credit markets is the fix to subprime. Trying to stop it is just going to delay the fix and make it that much less palatable to the rest of us. Had we stopped it before it happened, we would not be collectively any better off, just waiting for another trap to fall into.

Chuck Ponzi

Anonymous said...

Tim,

Second Chuck Ponzi's argument here. The '63 article argues correctly, author's subsequent actions and reputation notwithstanding, that ultimately any national regulation at all illusory. Just allow individuals to decide through free markets how much or how little credit to create. This and what to use as money is not the domain of government. This brings creditor and debtor into closer contact.

PFT said...

Our banking systems regulator (Fed) is simply a cartel of banks who regulate themselves in secrecy with minimal oversight. In a free market, reputation is certainly important, it does not apply when the industry is a monopoly.

At the time Greenspan wrote that article, about businessmen, not bankers, he was fiercely anti-Fed, because the Fed and banking industry is the anti-thesis to a Free Market.

pft said...

I meant a "competitive free market".

getyourselfconnected said...

I think I understand the passage "it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product." The problem now is through the Greenspan FED the business knows for a fact a bailout will occur if problems arise, so the free market never gets to go for the jugular of poor business practices. Thanks maestro!

Tim said...

Remember that in Adam Smith's day they fired at each other on the battlefield with muskets, lined up ankle to ankle in two rows - one loading and one about to fire. Back then you could have true laissez faire because, as on the battlefield, no one was worried about the world being destroyed.

Today, for the same reasons that we have arms limitation treaties and non-proliferation agreements, you can't just let the financial markets do their own thing - we are seeing the result today.

getyourselfconnected said...

Excellent analogy! I had not thought of it that way Tim.

Anonymous said...

Well, he was wrong. He did not foresee corporations getting so big that they'd stifle competition and become an extension of government.

Now that we know that both communism and capitalism lead to fascism, what's the next untried regime?

troy said...

what's the next untried regime?

Georgism, if I were King.

Marx called it the "last ditch of the Capitalists", and while Henry George had no truck with Socialists he accurately saw what parasitical rapaciousness rentiers of all stripes wreak on the system.

Anonymous said...

I have to disagree with Tim's analogy. The "battlefield" has gotten global only because central banks are flooding the world with ammunition.

Tim said...

The more important point in my analogy was the power of the weapons, not their global reach.

Anonymous said...

I have to disagree with Tim's analogy. The "battlefield" has gotten global only because central banks are flooding the world with ammunition.

I really think that people who delve into economics and finance end up with a completely distorted view of external reality.

"Globalism" -- whatever exactly one means by that -- is a consequence of technology, science, empiricism. Those are not going away. In fact, they are certain to accelerate. How transactions are mediated, whether through paper or gold or magnetic storage, is really a pretty tertiary issue.

Vespucian said...

I have wondered for a long time whether Greenspan was still a raging Randbot and that his mission has been to destroy the fiat system by stealth so as to make a return to the gold standard necessary, or at least highly desirable under the circumstances he created.

Yes, this is tinfoil hat conspiracy theory territory, and therefore very likely not correct, but I'll be darned if it doesn't fit the facts.

Mathelete said...

The bigger point to Greenspan's essay is that regulations fail. The author lists Enron, but how many laws did Enron break? We can pass regulations to stop the latest financial mess, but will it stop the next one? There's always going to financial crises. If the market were less regulated the crises would be different, but no more frequent.

And with regards to reputation, does no one think the ratings agencies will emerge unharmed? That there won't be any litigation?

I don't oppose regulation, but there must be a clear line between micromanaging business and setting the rules. The subprime mess could not have occured without Greenspan lowering rates to 1%. Fraud was comitted in some cases. I don't see how regulation will be more effective that what business and investors have already learned, in this case.

Anonymous said...

Tim,

You're a socialist then. I am surprised. If you can't just let markets do their own thing, who is to decide what is best? This is exactly how we got to be in this mess. The strict enforcement of private property rights limits the concentration of power in governments because allows people to opt out of solutions that do not work. Mises concluded, and I wholly agree, in the end you are either for free markets or for governments. There is no other choice.

Tim said...

I'm surprised that I'm a socialist too.
One of the biggest problems in the world today is that far too many people see things as only black or white - to me, the world is almost entirely gray.

Anonymous said...

Man. Some people are so right leaning that as soon as you say something unradical, you are a socialist.

Wake up people, the US is SOCIALIST and has been for decades.

Why? Because as soon as government interferes in the distribution of capital, you've got socialism.

Proof? The FED is at the top of the pyramid. The FED directly interferes with market pricing of debt!

Anonymous said...

Try 'Planned Chaos' and see if you agree with Mises. It has taken some time but I am coming around to the conclusion that there is no such thing as 1% socialism. It is all or not; in which case, I would choose not.

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