Earlier this year, CNBC had a surprisingly good two-hour special on the roots of the global financial crisis -- House of Cards. I'm late to the party; I only saw it for the first time Sunday night. Host David Faber interviewed a wide range of brokers, analysts and others in the housing mortgage business all of whom, in one way or another, identified a lax regulatory architecture as a key culprit in the race-to-the-bottom standards that allowed in-over-their-heads consumers, beginning early in the decade, to turn their houses into ATM machines (indebted homeowners are also interviewed).
CNBC also explored the skewed incentives that allowed the ratings agencies to stamp as Triple-A new financial products like the now-notorious collateralized debt obligations (CDOs) that never should have received such ratings. It further showed that both the Federal Reserve and the SEC failed fundamentally in their oversight functions, allowing these practices to metastatize through the financial system. And it showed that Wall Street had found what it thought was a cash-cow that would last in perpetuity -- securitized mortgages, premised on the incredible assumption that housing values would never go down and more or less everybody could pay their mortgages.
This story, of course, has been told many times now. But beyond its impressive clarity and breadth, one notable feature of the CNBC documentary was that Faber was able to sit down with former Fed Chairman Alan Greenspan.
When pressed about the Fed's lack of oversight throughout all of these shenanigans, Greenspan defended himself in two principle ways. First, he argued, in effect, that the Fed Chairman cannot really do anything about speculative bubbles. Greenspan freely admitted that he did not understand the complexities of some of these "exotic" new financial products, like CDOs. But Greenspan insisted that, even if he did, he could not have done anything because trying to deflate the housing bubble would have caused an economic calamity of its own and, besides, Congress would not have liked it. In short, his hands were tied.
I've never heard any of Greenspan's legion of defenders previously say that he was a pushover, afraid to take stands disliked by Congress. So I am dubious to hear Greenspan say, in effect, that he was afraid of Congress. Beyond that, his insistence that he could do nothing represents a shocking dereliction of duty. Critics of Greenspan, like Nobel Laureate Joseph Stiglitz, maintain that ensuring the stability of the financial system is, in fact, the Fed Chairman's number one responsibility. Greenspan demurred that to deflate the housing bubble would have caused massive unemployment and untold economic calamity. But the premise of his defense is that he could only have done something once the bubble was already at its peak. By contrast, Stiglitz argues that Greenspan could have, for example, "curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation -- or "liar" -- loans, the interest-only loans, and so on)." Stiglitz further reminds us that Greenspan played a crucial role in the late 1990s in dismantling the regulatory architecture of our financial system that had stood since the New Deal (of course, he was not alone in this. Phil Gramm, Robert Rubin and Lawrence Summers were also involved in important ways).
And, as Dean Baker has argued, Greenspan could have used his bully pulpit all along to caution against what was clearly becoming a speculative frenzy in housing. Had he done so, perhaps the massive sums of capital (or at least a significant portion of it) being directed to that clearly unsustainable market would have gone elsewhere.
Now keep in mind that a key premise of capitalism is that the market is a more efficient allocator of resources than the government. But the housing bubble directed lots of real investment capital into a soon-to-bust sector. (This excellent analysis from 2007 shows just how much the American economy had become dependent on housing to sustain itself.)
Surely, there were better ways to allocate capital than into massive over-building of a product for which the market was about to go belly-up. Critics of Soviet planning told (perhaps apocryphal) stories about the woeful inefficiencies of Soviet central planning. One such story involved Soviet building construction. In order to meet yearly quota for new buildings, the Soviets would lay the foundations for structures they had no intention of finishing, leaving the sight of concrete slabs, lined up one after another in Soviet cities. How much worse could that have been than pouring trillions of dollars into a soon-to-collapse market that would leave large numbers of Americans unemployed while producing countless unoccupied houses and contributing to an earthquake in the global financial system?
Greenspan didn't take steps to induce more moderate, responsible and balanced investment in the housing sector not because he couldn't, but because he did not believe it was his job to shepherd responsibly our economy. In his worldview, markets do that all by themselves.
This brings us to the second and more damning indictment of Greenspan. CNBC's Faber repeated throughout the show that greed was the driving force behind this house of cards. Of course, free market ideologues like Greenspan believe that greed is good, that it is part of human nature, and that there is far more harm than good that comes from attempting to rein it in. Greed as a virtue has been a pillar of Alan Greenspan's philosophy for his entire public life. Individuals and corporations pursuing profit as aggressively as possible with as little constraint as possible is what makes the world a better, richer place. As a mythical Wall Street trader once put it, "greed is good." So, when Greenspan gravely shook his head in agreement with Faber that greed was the culprit, the gesture itself was a dishonest one. And his lament to Faber, that this is human nature, so nothing could have or should have been done about it, is disingenuous. Given Greenspan's logic -- that it is futile to try to check base human impulses, even when those prove undeniably socially destructive -- one has to wonder why we should have any laws at all, given the apparently always-destructive consequences of allowing the government to intrude in human nature?
What Greenspan cannot acknowledge is that capitalism has functioned in many different forms over the past two centuries and that a version of capitalism -- with extensive social safety nets and significant regulation, including restraints on speculative and other potentially socially dangerous behaviors -- has done just fine, including in the United States itself, at producing widespread material comfort.
In sum, in contrast to Greenspan's denuded view of humanity, what happened over the past 10 years is not representative of some uncheckable human impulse. What happened is that the people in a position to check socially destructive impulses -- a basic function of law, after all -- chose not to. Not because they have some deep, dark, wise understanding of the human condition. But rather because they are immoral extremists.
While progressives are spending their time these days gawking in horror at the crazies showing up with assault rifles to Obama's speeches, its worth remembering that a far more respectable form of extremism has already wreaked terrible havoc on America and contributed in no small measure to the current, more easily identifiable insanity.