Alan Greenspan claims that the free market failed to prevent the financial crisis, and that he is “shocked” that his professed “free-market ideology” turned out to contain a “flaw.”
But why should we take him seriously? Greenspan, while once associated with laissez-faire philosopher Ayn Rand, hasn’t advocated genuinely free markets for decades. Remember, this is a man who for two decades reveled in being, as the New York Times put it, “the infallible maestro of the financial system.”
Free markets don’t have “infallible maestros”; they liberate us from such “maestros”–the central planners who have time and again falsely claimed the ability and the right to orchestrate millions of economic lives. Free markets enable each of us to be our own maestro, conducting our own affairs, producing and trading as we judge best, and taking responsibility for the consequences when we fail.
Alan Greenspan’s entire tenure at the Federal Reserve was one devoted to distorting market outcomes in the pervasively controlled financial markets, including the mortgage market. The Fed by its nature wields enormous power over the market as it dictates the money supply and interest rates, which in turn determine lending, borrowing, and bank leverage throughout the economy. Early in Greenspan’s tenure, some expected the onetime opponent of the Fed and supporter of a gold standard to minimize the Fed’s distortion of markets. Instead, Greenspan became our Manipulator-in-Chief, repeatedly inflating the money supply and artificially lowering interest rates to allegedly magnify prosperity. Further, he voiced no substantial opposition to related market-distorters such as Fannie Mae and Freddie Mac (which incentivized lenders to make trillions in loans that they wouldn’t have made on a free market) and the cartel of government-supported rating agencies (whose absurd models gave AAA ratings to mortgage-backed securities).
Thus, when Greenspan speaks, he does so not as the voice of a (non-existent) free market in finance and housing, but as the voice of government central-planning–a voice with every incentive to blame the market rather than the Fed’s market-distorting policies.
It is certainly not the voice of the Alan Greenspan who denounced the Fed and defended the gold standard in Ayn Rand’s 1960s compendium Capitalism: The Unknown Ideal. That Alan Greenspan understood what free markets are, and explained how they encourage rational, self-interested behavior, so long as individuals were responsible for their own risks. He also explained how government handouts and bailouts reward irrational, destructive behavior. For example, when the government inflates the money supply and manipulates interest rates, it gives financial institutions new currency not backed by real assets, currency that gets funneled into certain sectors of the economy (such as dot-com stocks or houses), and creates artificial booms followed by catastrophic busts. Observe Greenspan’s 1966 analysis of the boom preceding the 1929 crash: “The excess credit which the Fed pumped into the economy spilled over into the stock market–triggering a fantastic speculative boom.” Sound familiar? What would that Greenspan identify as the cause of the speculative housing boom at the center of today’s crisis–the market or the maestro?
Greenspan is entitled to change his mind, of course; but it is intellectually dishonest to pretend that the market he manipulated for 20 years was genuinely free. And those questioning Greenspan’s actions as Fed chief should not be asking him what he didn’t do to prevent the financial crisis; they should be asking what he did do to cause the crisis by using his enormous power to reward irrational behavior. They should ask him how he can deny that his inflationary printing press, along with the housing welfare state, created the false promise of ever-increasing home values that was at the root of all the market irrationality–from “flipping” houses endlessly for fun and profit to interest-only “liar loans” for poor people to Wall Street’s slicing, dicing, and gambling on dubious mortgage contracts.
If anyone wants to understand the free-market explanation of financial crises, they should read Ayn Rand, or Ludwig von Mises, or even Alan Greenspan of 42 years ago. But to listen to today’s Alan Greenspan talk about free markets is like listening to a Chinese censor talk about free speech.
Nothing good can come, intellectually or politically, from blaming our problems on something that didn’t exist–whether the mythical free market of the housing boom or Greenspan’s mythical free-market ideology. Americans need to understand Greenspan’s true nature as the bureaucrat manipulating the market so that we can investigate the government controls that are the real cause of the present mess, and save ourselves from disasters caused by an even less free market in the future.
