“At the Oval Office, 1974. From left are Rose Goldsmith, mother of Alan Greenspan; President Ford; Greenspan; Rand; and her husband, Frank O’Connor.” (From the New York Times)
"Ayn Rand might have been little more than a literary and political curiosity, except for one very important accident of history. In 1974, Alan Greenspan, one of her most devoted followers, was sworn in as the Chair of the Council of Economic Advisers, with Rand standing by his side. Thirteen years later, in 1987, Greenspan would ascend to the most important economic position in the United States: Chairman of the Federal Reserve.
Greenspan was a member of Rand’s inner circle from the 1950′s. In fact, he was an “official” member: as part of the “Ayn Rand Collective,” he read chapters of “Atlas Shrugged” as Rand composed the book. He would later contribute an introduction to it, as well as essays (including one in support of the gold standard) to Rand’s 1966 collection, “Capitalism: The Unknown Ideal.”
Luckily (we’re not fans of Rand’s theories over at The Devoted Intellect) Greenspan wasn’t able to apply all of his “Objectivist” ideals while heading up The Fed. (That’s right: the economic crisis could have been that much worse.) As he told the Fox News Network in 2007, he had to make compromises as an official in a democratic society (including, presumably, the compromise that prevented him from reintroducing the gold standard). A year later, he would famously concede that his ideologies about market economics (his views were far too irrational and fixed to simply be called “ideas”) were “flawed.” For a detailed description of those flawed theories, you can’t do better than to make your way through the 1,368 pages of “Atlas Shrugged.” Though we wouldn’t suggest that you actually do it…"
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Greenspan Concedes to `Flaw' in His Market Ideology (Update2)By Scott Lanman and Steve Matthews - October 23, 2008 14:14 EDT
Greenspan testifying in Washington today
Oct. 23 (Bloomberg) --
Former Federal Reserve Chairman Alan Greenspan said a ``once-in-a-century credit tsunami'' has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.``Yes, I found a flaw,'' Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. ``That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.''
Greenspan said he was ``partially'' wrong in opposing regulation of derivatives and acknowledged that financial institutions didn't protect shareholders and investments as well as he expected.
``We cannot expect perfection in any area where forecasting is required,'' he said. ``We have to do our best but not expect infallibility or omniscience.''
Part of the problem was that the Fed's ability to forecast the economy's trajectory is an inexact science, he said.
``If we are right 60 percent of the time in forecasting, we are doing exceptionally well; that means we are wrong 40 percent of the time,'' Greenspan said. ``Forecasting never gets to the point where it is 100 percent accurate.''
Self-Policing
The admission that free markets have their faults was a shift for the former Fed chairman who declared in a May 2005 speech that ``private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.''
Today Committee Chairman Henry Waxman, a California Democrat, said Greenspan had ``the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis.''
``You were advised to do so by many others,'' he told Greenspan. ``And now our whole economy is paying the price.''
Waxman and other lawmakers repeatedly interrupted Greenspan as he answered their questions, in contrast to deference to his testimony while he was Fed chairman.
Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony. Other rules should address fraud and settlement of trades, he said.
Resistant to Regulation
Greenspan opposed increasing financial supervision as Fed chairman from August 1987 to January 2006. Policy makers are now struggling to contain a financial crisis marked by record foreclosures, falling asset prices and almost $660 billion in writedowns and losses tied to U.S. subprime mortgages.
Today, the former Fed chairman asked: ``What went wrong with global economic policies that had worked so effectively for nearly four decades?''
Greenspan reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading counterparties to prevent surging losses.
The ``breakdown'' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.``
As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,'' Greenspan said. That would give the companies an incentive to ensure the assets are properly priced for their risk, advocates say.Subprime Lending
Greenspan said the Fed didn't know the size of the subprime mortgage market until late 2005.Securities and Exchange Commission Chairman Christopher Cox and former Treasury Secretary John Snow also appeared at the House committee hearing.
Snow said the economy is headed down a ``bad, bad path'' and he endorsed consideration of more fiscal stimulus. For the longer term, Snow said the global financial system should be reorganized by
focusing on increasing transparency of ``excessive'' leverage to prevent institutions from creating too much risk.The U.S. needs ``one strong national regulator'' to oversee firms and fix what Snow called ``a fragmented approach'' to regulation. ``Steps to restore transparency and responsibility in the marketplace will go a long way towards restoring stability and confidence,'' he said.Addressing the trio that oversaw the U.S. financial markets as the housing bubble developed, Representative John Yarmuth, a Democrat from Kentucky, characterized them as ``three Bill Buckners,'' referring to the Boston Red Sox first baseman whose fielding error some fans blame for the team's loss in the 1986 World Series."
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Steve Matthews in Atlanta at smatthews@bloomberg.net.
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net
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