Does anyone really care what Alan Greenspan has to say? The former Federal Reserve chairman's reputation is shot, his place in history secure as the Ayn Rand-besotted steward of an unprecedented financial crash.
Unfortunately, yes. Because not only does "the maestro" still command a seat in the court of public opinion, but his ideas also continue to fester in the current battles over financial reform and government regulation. Greenspan is finished, yes. Yet Greenspanism lives on among banking company CEOs, key Republican lawmakers and even the public at large.
His attack on Dodd-Frank this week in the Financial Times might be a footnote if it didn't so closely echo the critique of financial industry leaders such as JPMorgan Chase (JPM) chief Jamie Dimon and House Financial Services Committee Chairman Spencer Bachus, R-Ala., who are still shaping the debate. But while Dimon contented himself with saying at a U.S. Chamber of Commerce event on Wednesday that government efforts to regulate banking would do harm, Greenspan went even further. He wrote:
The act may create the largest regulatory-induced market distortion since America's ill-fated imposition of wage and price controls in 1971.Nature or nurture?
What that ignores, of course, is that it was Greenspan himself who helped create the largest "regulatory-induced market distortion" in American history. How? By tearing up financial industry rules. That's the great fiction at the heart of the kind of libertarian economics Greenspan preaches. As he conceives it, the financial markets exist in a state of nature, where the pristine environment owes only to the self-equilibrating forces of supply and demand. Then government spoils the view by putting up fences.
Except the "free market" is itself a distortion -- a rickety contraption made of laws, rules, contracts, standards, customs and myriad other government-enforced principles that allow trade to function. There's nothing remotely natural about it. Doubters can test that theory by turning on their kitchen tap -- if the water is clean, it's because government requires it to be.
To clear-cut the financial industry of rules is simply to substitute a different kind of distortion. That experiment has been tried, and it failed.
Better living through derivatives
Greenspan also disparages financial reform on grounds that it will produce "regulatory inconsistencies whose consequences cannot be readily anticipated."
This is the strawiest of straw-men. Because if clairvoyance is now a requirement for regulation, then let anarchy reign. Regulation by definition creates consequences that are hard to predict or are unintended. As he well knows, that's especially true in finance, where companies have always sought competitive advantage by wandering outside the lines.
Greenspan isn't satisfied to challenge the very concept of financial regulation. He also wants to turn those aspects of modern financial services that are most troublesome -- complexity, opacity, interconnectedness -- into inherent virtues. He writes:
The vexing question confronting regulators is whether this rising share of finance has been a necessary condition of growth in the past half century, or coincidence. In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.Greenspan is back in "oracle" mode here, referring only obliquely to what even he is unprepared to claim directly -- that everything about finance that looks bad is actually good. If a synthetic collateralized debt obligation is so impenetrable that even a crackerjack banker like Dimon can't figure it out, don't sweat it. Financial complexity is not to be marshaled, in this view, but rather something to be tended, like a precious rose. Our very standard of living depends on grasping its thorns.
As an economist, Greenspan should know that complexity breeds perplexity. In 2008, he famously admitted to being in a state of "shocked disbelief" at the financial chaos his policies had helped unleash.
Images from Wikimedia Commons
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