Greenspan 1963: Writing in Ayn Rand's Objectivist Newsletter,
Greenspan declared as myth the idea that businessmen "would attempt to
sell unsafe food and drugs, fraudulent securities, and shoddy
buildings. It is in the self-interest of every businessman to have a
reputation for honest dealings and a quality product."
Greenspan 2008: Testifying before the House Committee on Oversight and
Government Reform, Greenspan recanted: "Those of us who have looked to
the self-interest of lending institutions to protect shareholders'
equity, myself included, are in a state of shocked disbelief.... This
modern [free market] paradigm held sway for decades. The whole
intellectual edifice, however, collapsed in the summer of last year."
Greenspan's life spanning quotes are the bookends of the dramatic
ascendance, dominance and ultimately demise of the radical right's
unquestioning faith in unfettered free markets.
Greenspan's pronouncement in 1963 marked an inauspicious beginning of
the new Free Market Fundamentalism in the midst of the coming LBJ
landslide and Goldwater defeat. But Rick Perlstein's Before the
Storm, an account of the roots of the coming conservative movement,
detailed how the Goldwater debacle launched a 40-year project to
construct a sophisticated conservative movement and create a new
American conservative consensus.
For the Free Market Faithful, those early years were dark days of "big
government" marked by the Great Society, landmark civil rights
legislation, Medicare and Medicaid. Dominant public opinion even
drove progressive policy-making well into the Nixon and Carter years
with major environmental and workplace legislation and new regulatory
agencies.
But the Fundamentalists, with revolutionary zeal, kept their eye on
the prize and systematically built the infrastructure for a
conservative triumph. Their greatest accomplishment was the shifting
of mass public opinion towards a set of agenda-enabling free market
beliefs - that the government could do no right, and the market could
do no wrong. They posited, successfully, that the laws of markets were
as immutable as the laws of nature.
Throughout the period of conservative dominance there were always
those who understood the fallibility of unregulated markets. In 1992,
the GAO, asked by Democratic Congressman Ed Markey to study the impact
of new and complex financial derivatives, concluded presciently that
"The sudden failure or abrupt withdrawal from trading of any of these
large U.S. dealers could cause liquidity problems in the markets and
could also pose risks to others, including federally insured banks and
the financial system as a whole. In some cases intervention has and
could result in a financial bailout paid for or guaranteed by
taxpayers."
In 1994, a bi-partisan bill was introduced in Congress to tighten the
supervision of the complex and growing derivatives in the banking
industry. The bill would have had the regulatory agencies establish
standards for capital requirements, disclosure, accounting and
examinations and audits. As expected, the banks argued that no new
laws were needed. Greenspan sealed the legislation's defeat (as he
was able to do with all attempts to establish updated regulation for
the financial industry) by testifying that the Fed had the powers it
needed and that a taxpayer bailout caused by derivatives was remote.
Greenspan claimed with the resolute faith of a true believer that
"risk in financial markets, including derivatives markets, are being
regulated by private parties... There is nothing involved in federal
regulation per se which makes it superior to market regulation."
There were doubters, but Greenspan, in the heady days of free-market
mania, was the ultimate silencer of doubt.
In 2003 Greenspan continued to praise derivatives as "extraordinarily
useful." As recently as September 2005, in a speech to the National
Association for Business Economics, Greenspan proclaimed his continued
confidence in derivatives in free, un-regulated capitalism, the
inherent ability of unfettered markets to self-correct in times of
economic distress and the overwhelming dangers of government
intervention.
Greenspan spoke glowingly about the "development of financial
products, such as asset-backed securities, collateral loan
obligations, and credit default swaps, that facilitate the dispersion
of risk." He claimed, with remarkable lack of foresight, that "these
increasingly complex financial instruments have contributed to the
development of a far more flexible, efficient, and hence resilient
financial system than the one that existed just a quarter-century
ago."
The argument was an old one. The inviolability of the laws of the
market would generate the information needed to establish appropriate
asset value and risk and self-regulate to prevent excessive
speculation. Government regulation would, by definition, get in the
way of natural market forces.
He did admit that the Fed, concerned about the irrational exuberance
of the Tech Bubble, considered and rejected aggressive action to reign
in the speculative excess of the late 1990's. They chose not to
"risk recession" and decided to "wait for the eventual exhaustion of
the forces of boom." Unfortunately, exhaustion turned into global
collapse.
Now, just three years later, the economic crises and its obvious roots
in a fanatical aversion to regulation led to Greenspan's striking
admission that he and his fellow believers had been wrong.
The dramatic collapse of the banking industry finally exposed several
key flaws in the Book of Greenspan. First, the entirely self-evident
fact that economics is a behavioral science - that economic conditions
are the sum total of human actions, emotions, vice and virtues.
Ultimately it was a very human vice - greed - that became the
paramount driver of economic growth. Greed, inherently incapable of
recognizing excess or limits, inevitably leads to economic distress.
Second, predictions that market signals would cause the necessary
corrections turned out to be stunningly false in the face of financial
instruments so complex that no one could accurately determine the
value of assets or level of risk.
Greenspan's awakening signals a turning point for American capitalism.
It's the beginning of the end of the fundamentalist free market epoch,
underlined by calls from Democrats and Republicans alike for greater
regulation, far more government oversight and even public ownership of
private capital.
The rise of the free market zealots is a study of how a movement,
driven by the clarity of purpose and a commitment to the long haul,
created a narrative of the American economy that clouded the steady
erosion of American living standards and the death march to the
environmental precipice wrought by global warming. Their fall is a
lesson for progressives who, shellshocked and silenced by right wing
ideological dominance, couldn't see the way back to a more progressive
future.
Progressives have plenty to do to undue the damage and fully untangle
America from the sway of the free-market faithful. Still, distrust
of government is high, the institutions of government have been
hobbled and the right wing message machine is still intact even if on
the run. Fortunately, the progressive intellectual infrastructure,
more developed and more capable than even just a few years ago, is
ready to drive a new New deal, focused on 21st century economic and
environmental challenges and reinvigorated with 21 century ideas.