There’s been a fair bit of debate about what, if anything, the current crisis means for economic policy and political philosophy more generally. A lot of this has been hung up on issues of terminology, which I will do my best to avoid here and in future.
Coming to substance, quite a few people have argued that the crisis doesn’t really signify very much, and that, once it is resolved, things will return to pretty much the way they were a couple of years ago. I disagree.
This concession of error by Alan Greenspan is, I think, pretty strong evidence against the view that the crisis is not so significant, in policy or ideological terms.
First up, Greenspan gave little or no support to the silly Republican talking point (repeated by quite a few commentators here in Australia) that the crisis was caused by marginal government interventions like Fannie&Freddie and the Community Reinvestment Act. On the contrary, he stated
The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations* (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower
And Greenspan conceded that his faith in deregulation had led him into erroneous policy decisions
â€œYou had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,â€? said Representative Henry A. Waxman of California, chairman of the committee. â€œDo you feel that your ideology pushed you to make decisions that you wish you had not made?â€?
Mr. Greenspan conceded: â€œYes, Iâ€™ve found a flaw. I donâ€™t know how significant or permanent it is. But Iâ€™ve been very distressed by that fact.â€?
To sum up, Greenspan’s concessions and the big interventions we’ve seen already lead me to believe that this crisis will result in much tighter regulation of financial markets and a much more central and explicit role for governments in the management of financial and economic risks.
How much this matters for bigger questions of what kind of political philosophy will predominate depends very much on the importance you attach to risk management as a central feature of public policy and as ground contested between democratic governments and financial markets. I’ve argued for a long time that risk is crucially important, and therefore see the failure of financial markets to manage it as having fundamental implications for the way in which society will be organised in future.
* Note, BTW, that CRA loans were mostly not subprime and that Fannie&Freddie only entered the subprime business very late in the development of the bubble.