How is it we all missed it when Greenspan shrugged?

Filed under: Hazlehurst |

Here’s an infallible rule of modern politics: it’s nobody’s fault.
If bad things happen, the passive voice rules. Mistakes were made. Past statements are now inoperative. There might have been irrational exuberance. The weapons of mass destruction might not have been found.
And when things move from great to not-so-hot to utterly disastrous, what happens to the architects of disaster?
If they’re corporate chieftains, they leave with a fat check — at least a few million, and often much, much more.
If they’re in government, they quit, become lobbyists and eventually write books blaming somebody else.
But if they’re truly grand pooh-bahs, the sole architects of world-historical disasters, they ascend (figuratively speaking) to the empyrean. They get seven-figure advances for their terminally boring books, they sign on to advise banks and billionaires for big bucks, and they’re endlessly quoted, fawned over and feted.
They get away with it.
Consider Alan Greenspan, once chairman of the Federal Reserve Board.
Here’s what we thought he was: the grave, cautious and brilliant man who brought non-partisan stability, intelligent direction and an unerring sense of timing to the nation’s central bank. Without Greenspan, where would have we been? At the mercy of series of clueless hacks, whose weakness and irresolution would have encouraged politicians to spend recklessly, run up the national debt and give no thought to the nation’s future.
Greenspan’s public statements might have been as twisted and convoluted as the song “Let’s twist again/Like we did last summer,” but he knew what he meant — didn’t he?
And here’s what he was: a card-carrying member of the cult of Ayn Rand (Rand is to economics what L. Ron Hubbard is to religion) who, since he understood neither markets nor economic theory, paid no attention to either.
Under Greenspan, the central bank watched benignly and uncomprehendingly as amoral, ambitious Wall Streeters created what Pimco’s Bill Gross has called a shadow banking system. That system, based on arcane financial products (structured investment vehicles, collateralized debt obligations), was entirely unregulated. Its sponsors had more in common with 19th century buccaneer capitalists like Jay Gould and Jim Fisk than with the careful bankers of the late 20th century.
Thanks to the shadow banking system, rivers of cash poured into real estate, causing an inflationary bubble which, as it was bound to do, eventually popped.
And here’s what Greenspan did: Responding to the needs of the promoters of the shadow banking system, he pushed interest rates down so that the real estate bubble would inflate even faster. And once the subprime disaster’s dimensions were clear to policymakers, he quit, joining the hedge fund which profited most in percentage and in dollar terms from the mess that he created.
And, of course, he wrote a book, claiming — I know you’ll be surprised! — that he didn’t do anything wrong … “non, rien de rien-je ne regrette rien!” as Edith Piaf once sang.
Greenspan believed passionately in free, unregulated markets. That’s fine in academia, not so fine in real life.
Over-regulated markets function badly, but unregulated markets eventually get taken over by grifters, swindlers and con men. Look at the savings and loan crisis of the late 1980s, at the collapse of the Internet boom a few years ago or even at the 1929 stock market crash. In each case, intelligent regulation might have made a difference, by curbing the speculative excesses that led to market collapse. Blinded by his own prejudices, Greenspan did nothing.
Too bad for us, I guess. We’ll see whether Greenspan’s hapless successor, Ben Bernanke, can figure out how to revive an increasingly comatose economy.
It won’t be easy, since the usual tools — rate cuts, tax rebates, tax cuts — might not work. In much of the nation, the real estate market is illiquid, as home values decline. If you can’t sell your existing home, you can’t buy another one, and most of us would rather hold on than sell at a loss. Absent liquidity, there’s no demand — new home construction plummets, developers close up shop, jobs evaporate and the economy craters.
What’s next, I wonder?
Perhaps, as a friend suggested, Greenspan should commission a tasteful platinum statue of his muse, Ayn Rand, and bow to it every night. I’d hope that he’d murmur a few words of gratitude: “Thank you, O divine Ayn, for your guidance. As you taught me so long ago, get yours first! And as for the poor suckers who got burned — they should have read ‘Atlas Shrugged’…”
John Hazlehurst can be reached at John.Hazlehurst@csbj.com or 227-5861.