Greenspan concedes

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

“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,� said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?�

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.�

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.

82 thoughts on “Greenspan concedes

  1. Dont blame deregulation; it was a failing of the govt’s chief regulator that fueled this mess.

    It was F&F’s role to absorb risk which threw caution to the wind.

  2. “And Greenspan conceded that his faith in deregulation had led him into erroneous policy decisions”

    Like holding cash at 1%? You’re surprisingly quiet about the role of monetary policy.

  3. Rog, take it up with Greenspan, not me. If an Ayn Rand acolyte, working under an extreme-right Republican Administration can’t manage a deregulated system, you need to either
    (a) admit that this kind of system can’t work; or
    (b) consider migration to an alternate universe where it does.

  4. “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.�

    Note the persistent egocentricity.

    Remember when Greenspan was a living deity whose every syllable was carefully scrutinized for meaning? To utter a word against him was heresy.

    The fall from grace must be distressing indeed. Just like the fall of a certain George W. Bush.

    How is it that such egotists rise to positions of power where altruism is more sorely needed?

    And why is it that those who saw the truth and spoke up were so marginalized, ridiculed and ignored? Could it have something to do with the media?

    Shouldn’t those early Greenspan critics now be elevated to positions of power, for the good of society?

    Shouldn’t those who rode the Greenspan gravy train now be marginalized, ridiculed and ignored? Shouldn’t their profits be appropriated for the public good? Shouldn’t they get down on their knees and beg forgiveness?

    It won’t happen, of course. Ego is everything in this sick society. We’ve still got a long way to go.

  5. Point 4, you don’t drive past a road crash and thing to yourself cars should be banned.

    There is no such thing as a perfect system (this is what the Maths tells us, butterfly effect and chaos theory.

    But you Mr Q, also make the fundamentalist Aristotelian mistakes with climate models and cap and trade, as did Greenspan with his view on the system.

    There are issues with deregulation and with regulation, there is no magic bullet. what is a known, is that the system has provided a massive expansion of living standards across the world.

    The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events “unlikely”.Tabel the black swan.

    this is known through our knowledge of Math not economics.

  6. Mr Quiggan. Speaking of Alan Greenspan, I’m keen to hear your viewpoint on moving back to the system of the Gold Standard.
    Wouldn’t it have avoided all of this?

  7. Sean:

    The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events “unlikely�.Tabel the black swan.

    Barry Ritholz:

    The “Blame Fannie/Freddie/CRA” crowd, do provide a service: I know anyone who repeats this meme is an empty headed parrot, a mindless drone without an ability to think. This is a huge timesaver, as it has allowed me to dismiss many of the ditto heads I might have otherwise wasted time on.

  8. Did the Austrian school have a meeting where it was decided that the current financial crisis would be a good opportunity to potentially take their theories off the bench of political economy, from a fringe heterodox position into the mainstream?

    How else to explain the fact that you can barely go anywhere online these days without finding some screed about the gold standard?

    Yes, it’s a great idea to use a commodity where mining supply can cause inflation, and value is distorted by it having practical industrial applications!

    Floating exchanges are far far superior; we’re never going back.

  9. Will,
    Careful. It’s heresy around here to talk of “floating exchanges”. Don’t you know the era of the market is over? The time of the State is at hand!

    Don’t bother replying with any Republican Talking Points either. I’ve heard them all before.

  10. More than anything, power corrupts perception. The mind cannot make any logical deductions when every perception is false. The cossetted American plutocracy have had a collision with reality. Welcome to the real world gentlemen. The rest of us have to deal with it everyday.

    A society whose ruling class feels no pain whilst the underclasses suffer is like a man with leprosy. It is the lack of transmission of pain from the extremities to the head which causes injuries to be ignored and allowed to fester. One can only hope that the plutocracy is in for much more pain. Then some change may come.

  11. Yes, it’s a great idea to use a commodity where mining supply can cause inflation,

    The point is that in practice it can’t really.

    Assume we have a gold standard and the value of $1 is fixed at 50 milligrams of gold. A gold miner produces gold. A gram of raw gold will never ever sell for more than $20 under this gold standard scenerio. So with the price of his product fixed the gold miner faces annilation if there is inflation. Inflation would drive up his input costs (labour and capital) and he has no scope to increase the sale price of his product. Which is of course why the gold standard was virtually immune from inflation.

    Okay if somebody finds a stack of gold that is easy to mine it might theoretically cause some temporary inflation. But the odds are very remote. During the hey day of the gold standard the Australian and Californian gold rushes caused inflation to move upward to around 3% per annum. Hardly shocking.

    Likewise you might get some inflation if there is a collapse in economic output as happened during the plague in medieval europe. However even that was short lived.

  12. There seems to be a hell of a lot of focus on side issues, the primary cause of the crisis was easy money.

    Its happened before and it’ll happen again.

  13. Ikonoclast,
    That’s all very true but how would you know if your own perception were corrupted? You wouldn’t know, would you? You’d be just as deluded as those poor plutocrats. What a frightful thought!

  14. The second indented quote above is actually my response to the first piece of text. I fluffed the formating.

  15. Re 11 and 14. #14 is empty because the premise in #11, “power corrupts perceptions” has been removed.

  16. Greenspan as his name suggests spans the spectrum from the Louis Leeches to the Gordon Geckos with the majority of us stuck in the middle of their continual depradations. These extremes both unleash the ‘something for nothing’ mentality for which we all must pay eventually and welcome to eventually now. Greenspan could throw money at Asian meltdowns or Dotcom bubbles, putting off the day of reckoning because the money wasn’t his. In fact it didn’t seem to belong to anybody, although it would always represent a multitude of claims on real production. When his personally costless ponzi scheme finally ends he’s shocked and blames it all on others’ greed. The man’s generosity knows no bounds.

    As long as fiat money from thin air exists, such generosity and the ensuing mentality of something for nothing will be our permanent scourge. Short of mannah from Heaven with some divine intervention, a true gold standard is historically our best option. That is anathema to those who would be generous with other’s wealth to be sure, because it forces them to be honest politically about that. ie no taxation by stealth. However the spinoff for them and us generally is it limits the opportunity for something for nothing with asset booms and busts. Money(really claims on production) that is quietly appreciating is much more circumspect about its time use (forgone consumption) Clearly it’s time to put a stop to the divine right of elected kings, as well as rein in the carpetbaggers, because it’s all fool’s gold and childish ‘something for nothing’ games. None of this belongs in an adult world and I’m sick of both twin’s tantrums.

  17. Point 8, Its called competition, FF created a culture that the others run to pass and did.

    The nuclear detonator is a bit like a small bomb that sets the big bomb off, this is why F&F are the detonators, conceived and built in Washington by ideological idiots. (do you do butterfly effect in economics by the way?, its quite a big deal in the real world of Math)

    Point 9, Fiat money is political money, its a “social construction” (google it) its a systems based upon trust. When the trust goes the system collapses as we see now.

    What is needed (once again not a magic bullet) is currency competition and central banks stripping of their monopoly powers.

    What I advocate and I believe the Austrian school does is a system of dual currency, one fiat the main currency and another “material” currency (probably in higher denominations but still legal tender)a basket of commodities inc gold.

    This in a free market would hold the fiat currency to account, if the politicos messed up their ability to hold and use power would diminish.

  18. I’ve argued for a long time that risk is crucially important,

    Let’s follow that link:

    The US has maintained higher levels of reliance on private insurance than most other countries, but even so, almost 50 million people are uninsured. Many more are covered by the public residual insurance schemes Medicare and Medicaid, which are hugely expensive. In fact, despite offering coverage to only limited groups such as the elderly,military veterans and the very poor, the US government sector actually spends more on
    healthcare relative to GDP than its Australian counterpart.

    [snip]

    In other words, public financing is the only feasible response to the problems of health care.

    Some “argument”. Firstly, 50M “uninsured” does not mean 50M without treatment: those 50M use free clinics and hospital emergency rooms.

    I have personally been treated under both the US and Australian healthcare systems. The US system is far more competitive and consequently delivers a vastly superior product.

    So, ixnay the socialized healthcare.

    The fundamental problem with US healthcare is not provision but insurance. The health insurers have lobbied themselves too many loopholes that allow them to cherrypick who they insure. That negates the whole point of insurance. Also, insurance here is largely employer provided, which creates all kinds of problems for the the self-employed and those moving between jobs with pre-existing conditions.

    The solution is very simple: tighter regulation of the health insurance markets. Disallow cherrypicking. Force all insurers to treat people as members of large, well defined groups (eg, young, family, old). The main reason employers currently provide insurance because they can negotiate a group plan, whereas individuals cannot: they are underwritten based on their personal medical history, not based on their demographics or other “group” properties (since when is that “insurance”?).

    Of course you then have the adverse selection problem that only the sick will insure, but you can fix that by forcing everyone to pay a percentage of their income in health insurance, either into a complying policy or directly to the state which then doles out the money to the private insurers. The US already does this: we all pay into medicare (insurance for the elderly and poor).

    So don’t throw the baby out with the bathwater: the US healthcare system is private, competitive, and largely of very high quality (much higher quality than either the public system in Australia or the NHS in Britain, both of which I have experience of). It also drives much of the medical innovation used in the rest of the world.

  19. Its very strange how economists see human behaviour in very static, linear ways. Its very anti-human IMO.

  20. I dont know why I should quote Greenspan (who has admitted that he was mistaken)but it is better than some journos version;

    “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”

    Is he suggesting that the govt guarantee all shareholder equity?

    The actions of Greenspan in particular and the Fed in general proves that there is fault lies within the system of central banking.

  21. Thankyou Mr Greenspan.

    I admit to feeling sorry for Greenspan when I read those articles but then I remembered that many economists and notably Keynesian economists across Australian universities, have been derided and ridiculed and worse, for far too long now, because they expressed doubt that free market ideologies and those that relied too heavily on de-regulation, would be ultimately be effective.

    May we now move back from the edge towards some synthesis and stop looking to an ideal theoretical paradigm to solve all problems in all markets, but start to examine the real outcomes of implemented economic policy (and not wait for a mythical long run that may or may not ever arrive)? May we once again study and teach undergraduate economics students economic history rather than ONLY market theory?

    I would welcome the initiatives but more importantly so would undergraduate economics students who actually ask for it.

    Alanna

  22. The financial markets have been force fed with regulated mandatory superannuation in many industrialised nations for decades now. Whilst individuals can choose funds, they cannot choose the ultimate allocation of those funds and for the most part those funds have chased financial assets (too few financial assets such that new ones were created or existing assets became overvalued?). It is a glaring anomaly to argue for the de-regulation of the global financial sector when its very inflows have been decreed by regulation in the first place.

    That is living in a parallel universe.

    Would it not have been better to pay employees directly and let them choose? Some would have saved, some would not but it may have produced a better outcome overall, and prevented overextension of the financial sector.

    Alanna

  23. ‘Its called competition, FF created a culture that the others run to pass and did’

    In which case market participants obviously arent rational actors. They knew the risks, knew that borrowers would be unable to pay and still lent money.

    ‘Fiat money is political money, its a “social constructionâ€? (google it) its a systems based upon trust. When the trust goes the system collapses as we see now.’

    Unless the value of Fiat money is derived from the need to pay government taxes. In which case trust is next to irrelevant, only the capacity of the government to levy and collect taxes.

  24. Alanna, it wasn’t just Greenspan that got it wrong as Gerry Jackson points out-
    ‘During the Howard years Australia experienced an extraordinary monetary expansion. Allow me to once again draw readers’ attention to the monetary aggregates. From March 1996 to December 2007 currency rose by 110 per cent, bank deposits by 178 per cent and M1 by 163 per cent. These are terrible figures that could only end in tears. Yet they have yet to register with our commentariat.’

    You could allow for some population growth (around 1.5% pa)and some funding of productivity growth, but the overall picture is pretty damning nevertheless. You’ll notice the market is working perfectly now to correct that gross imbalance, defying all Keynesian efforts to the contrary.

    The overriding economic history lesson for me is that in the long run market forces will always regulate the errant regulator. It’s like gravity I suppose. I didn’t invent it and it’s frustrating I can’t soar with eagles, but I find it’s best to work with an implicit understanding of its immutable laws. More one of your Wright Bros than the Icarus dreamers I suppose. Hey, it works for me and mine.

  25. I can add some things to Terje’s comments about gold and inflation:-

    – As there is a significant stock of gold around, this buffers the effects of changes of availability/cost of obtaining new gold, spreading the effect over time.

    – The industrial uses of gold actually contribute a stabilising effect too, also helped by the buffering.

    – Even so, new cheaper supplies do have a cumulative effect, one that makes a real difference to just where and how new capital gets laid down (historically, middleman countries like England and Holland were the long term gainers, with countries at each end of the trade chain like Spain, Turkey, Poland, India and China losing out in different ways).

    – Historically, there have indeed been sudden new releases of gold, notably after Alexander the Great’s conquests and the Spanish ones in the Americas (and, of course, the conquest of Granada provided a one off shot that set those off; it wouldn’t have mattered so much if it had not happened in just that time and place).

    Similar things apply to other bullion, like silver.

  26. The Right were quick to condemn marxism for failing the Soviet Union. The Right refused to condemn the Soviet Union for failing marxism.

    So glad to see that since neoliberalism has failed the United States the Right are now prepared to entertain the possibility that the United States failed neoliberalism.

    Keep it up fellahs. You’re growing wiser by the decade (admittedly from a very low base).

  27. Observa

    Give me the Wright Brothers over the Icarus dreamers any day (whatever school). No matter how great the model looks – some doubt is a good thing.
    Its not without credit that Greenspan bared his doubts publicly.

    Alanna

  28. Freedom lover @19 says:

    “I have personally been treated under both the US and Australian healthcare systems. The US system is far more competitive and consequently delivers a vastly superior product”

    Hmm. I’ve just been treated under the US system. AUD 350 for a short visit to a GP and a short course of antibiotics.

    One of the highest rations of health expenditures to GDP in the OECD.

    Commercials on TV that feature families who have been forced into bankruptcy by medical bills – people who had health insurance.

    Give me Australia’s “inferior” system any day.

  29. I welcome Q’s dropping of the fairly meaningless battle of the “isms” (even if others here want to continue with such empty debates). What can be agreed is that recent events in financial markets provide an important additional datapoint for determining to optimal form and level of regulation in those markets. As for other markets, that there are significant lessons here is less clear: a sophisticated policy analyst would already be aware of the potential for imperfect information, cognitive limitations and systems externalities to create inefficiencies in markets. Perhaps the financial market events will remind such analysts of the potential extent of such market failures and the costs that in some instances can flow from them. But the policy calculus still appears much the same to me: certainly, I wouldn’t be recommending a reduction in the speed limit, increased scrutiny of GM foods, or other risk reducing measures, as a result of anything I’ve learned in recent times from studying events in financial markets. Nor is it immediately clear to me that, in more directly affected areas such a labour markets, judgments about the appropriate allocation of risk between employers, employees and the unemployed, and thus the appropriate form and level of regulation of labour markets, would change significantly as a result of recent events in financial markets.

  30. “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.� (Greenspan)

    Altruism and responsibility based on self-interest?

    Alan needed only take one quick glance around planet earth to see selfishness rules selflessness; and that greed is only tempered by fear per se.

  31. Tom N: I agree on most of your examples, but these are cases where government is already playing a big role in determining the optimal level of risk – your (correct) point is that the failure of markets doesn’t mean we should be more risk-averse in future.

    While the implications for labour markets aren’t, as you say, immediately clear, I think that they will end up being quite significant.

    For some more direct implications, let’s look at:

    The allocation of risk in public-private partnerships
    Retirement incomes policy
    Education financing/student loans

    In all of these areas, I think the case against relying on markets will be substantially strengthened. The starting points are different in different countries, but the direction of movement will be similar in all cases, I think.

    More to come soon on this, I hope.

  32. Observa wrote

    “You’ll notice the market is working perfectly now to correct that gross imbalance, defying all Keynesian efforts to the contrary.”

    I agree unsustainable markets do inevitably correct but I personally think Keynes would never have suggested pumping helium into an exploding Zeppelin as the bail out package and other initiatives appear to be trying to do.
    Far better to have used those taxpayers funds to clean up the debris which is likely to follow. The bail out package was in my mind a pure waste and I fail to see it as a Keynesian style intervention rather than a mad attempt to keep afloat an already top heavy over populated financial sector.

  33. F&F obviously contributed to the problems. I wasn’t aware that anybody was even trying to deny that.

    And the CRA was just one manifestation of a general policy of promoting home-ownership among lower socio-economic groups. Just looking at the CRA misses the woods for the trees.

    The reason Austrians seem vocal now is that this is exactly what many Austrians have been predicting for a long time. It’s strange then that when they are proved right by events, the this is used to promote anti-Austrian ideas.

  34. Sorry, but the Austrian school isn’t making a come back any time soon, and they certain aren’t justified in claiming some sort of vindication in all this mess.

    This is STILL fundamentally a debate between grown-ups in the orthodox economics, based on the neo-classical paradigm. Nothing in the present financial crisis suggests that it would be a good idea to abandon neo-classical econometric modelling in favour of the Austrian school’s business cycle theory, and its basis pseudo-scientific “Praxeology.”

    If anything the crisis pushes us to empirically re-examine, in a more comprehensive manner, the real constituent elements of efficient markets; it asks us to cease treating economic theory as as a axiomatic state of nature in need of no serious defence, and to look closely at real-world behaviour. Particularly, all myriad distortions that impeded markets, like, say, Soros’ theory of reflexive feedback in the system.

    In other words, we need to be keep our models, but be less rigidly prescriptive about their utility in the face of the real world. We need to take seriously behavioural economics as a discipline, and focus on incremental data-driven modification of our economic assumptions. In other words, we need to be outward-looking and non-utopian in our assumptions.

    The Austrian school is the exact opposite this – it is rigidly theoretical, and indifferent to real word behaviour; it is thus “inward-looking” which is what actually got us into this mess – a myopic TINA view that financial institutions were best equipped to manage risk through unregulated leveraged derivatives, because “government is always in the way.”

  35. Will,
    The Austrian school is not indifferent to ‘real world’ behaviour. Far from it, in that it recognises the real world consists of central bankers continually inflating money supply (in our Reserve’s case 2-3% reduction in purchasing power p.a.) with improper market signals, consequent malinvestments (particularly long term investment decisions) and hence the large booms and busts. That is not to totally deny animal spirits or unbridled enthusiasm for particular investments from time to time, but that monetary discipline must cause tradeoffs in other sectors to accomodate that. OTOH the real world of monetary monopolists, simply by printing more money, eventually induces the many to believe this means they can have more cake and the same quantity of ingredients for biscuits. Austrian economics denies such Utopian dreams from the very start.

    Alanna, I use ‘Keynesian’ in the broad sense. ie it is Keynesian to specifically target homeowners with tax clawback, rather than across the board tax cuts or rebates. It’s also Keynesian to believe in setting the overall level of interest rates. (actually it’s delusions of grandeur or just pure folly if you follow the Reserve of late)

  36. There seems to be a big misconception on here as to Greenspan and the Austrian school.

    Greenspan is part of the Randian school which is Aristotelian in it roots. The Austrian school is Socratian in its roots.

    IMO economics is just politics with numbers attached to Greek letters, the best way of understanding either of these two schools is to understand the philosophies that underpin them.
    Poppers open society is a good introduction to Austrian school economics, as too the entire work of Hayek.

  37. Post 25,

    “In which case market participants obviously arent rational actors. They knew the risks, knew that borrowers would be unable to pay and still lent money.”

    Not really its a bit like the “Bush lied people died” argument.

    Whatever your opinion of Bush or the Gulf war II, faulty intelligence is not the same as lying is it?

    As too the case of “Risk” here, they misjudged risk and miss calculated, but they did it believing what they believed to be correct.

    Anyways the solution is simple, we need to devise a banking market system where banks don’t get too big. Thus instead of one big bank going bang, you will have lots of small banks and if one goes bank its effect can be minimized.

    This is not a regulation issue, its a governance issue.

  38. Observa says

    Alanna, I use ‘Keynesian’ in the broad sense. ie it is Keynesian to specifically target homeowners with tax clawback, rather than across the board tax cuts or rebates. It’s also Keynesian to believe in setting the overall level of interest rates.

    Observa, I disagree. Keynes did not urge action until the great depression had taken full effect. It was not particularly Keynesian to intervene during the correction itself but rather post hoc to hasten the cure. I think that is the point being missed here. Would Keynes have urged action when the stock market was catually correcting itself? No. Would Keynesn have urged specific targetting of homeowners in an already overinfalted property market? I doubt it. What Keynes would have done is urged remedy for the unemployed that might follow from this crisis. That, to me is a Keynesian intervention. Im not sure that these recent interventions could be seen in the same way or be labelled as a Keynesian intervention Observa.

    Further, In dont really kmow what Greek letters the Austrian school arisesn from, nor am I familiar with the particular branch that Greenspan adhered to but I do find the Austrian school rigid and despite their apparent problems with central bankers inflating the money supply – there is very little suggestion for any interventions that may help recovery (once again I find I am wondering if these economists want to leave it to the market to sort out – in which case I find myself once more considering Keynes the most sensible yet the most maligned of the 20th century economists).

    Alanna

  39. I await your promised posts with interest, John. However, a couple of quick points.

    1) Surely “retirement incomes policy” is largely a part of financial markets regulation, in which case I agree that the meltdown does indeed have implications for that policy, as my earlier post indicated.

    2) Few economists I know are particularly enchanted by what State Governments have been doing with PPPs. There is a strong case for redistributing responsibility for risk and its consequences to the public sector here, but that case existed prior to the meltdown. Again, apart from those aspects of PPPs that intersect with financial markets regulation more broadly, I am not sure what exactly the recent meltdown implies for the appropriate use and design of PPPs.

    3) I’ll be interested in what you come up with on student funding. How does the meltdown have any significant bearing on argument for vouchers rather than a provider-determined allocation of courses, for instance? Perhaps you have something else in mind, but for now the implications escape me.

    Perhaps your point, then, is really one of political rhetoric – that opponents of proposals to reduce regulation or increase market influence will be able to point to the meltdown as a means of smearing such proposals. Fair enough – I’m sure that will happen. But I suppose my interest is in what lessons we should draw from the meltdown; not what, errr, talking points will be drawn.

  40. katz says “So glad to see that since neoliberalism has failed the United States the Right are now prepared to entertain the possibility that the United States failed neoliberalism.”

    During his time in office, GW Bush has presided over massive increases in federal government spending. He also adopted a slightly more protectionist position on trade. I’m not sure how these policies fit into an extreme free-market or neoliberal framework, but anyway.

    Ronald Reagan and Bill Clinton actually have better records than Bush as market-based reformers. Clinton supported welfare-to-work measures, cut capital gains tax, and generally supported free trade. Under Clinton and Reagan, America generally did better economically than it has under Bush.

    There is no doubt W has been a very bad president. But he didn’t do the damage he has by following free-market principles. He did it by promoting big government (including the absurd notion that you can engineer democracy overnight in fractured societies), and throwing a few sops to social conservatives in the culture wars.

  41. sean,
    I agree completely. It’s grating listening to people who only recently learnt what a CDS is solemnly denounce market participants for underestimating correlation risk. Fortunately there is a very simple riposte: If they are so clever and prescient why didn’t they bet on their superior information and take a position in the market?

    It’s great fun to watch these budding financial experts try to slip out of the noose. The most common responses clearly demonstrate their ignorance of financial derivatives and markets in general.

  42. Alan Greenspan, presided over the US Federal Reserve for almost 20 years. He is described as having a “cult of personality” defined by wikepidia as follows ” A cult of personality or personality cult arises when a country’s leader uses mass media to create a heroic public image through unquestioning flattery and praise. Cults of personality are often found in dictatorships”

    The thing about Alan Greenspan is that his “individual” power to effect/ implement his economic ideology had a tremendous effect and obviously a detrimental one on the US and global economy. His Cult status was enabled by a state propaganda machine that gave him unprecendented and unquestionable power to influence and implement his ideology all over the financial markets.

    It is unlikley that any democratic model could have reduced his influence and in fact it may have promoted and fed his position of power, particularly as he was around for twenty or so years as chairman of the Fed. This article “Democracy, Autocracy and the Individual Influence of Rulers” explains the idea of the individual influence of leaders.

    http://www.allacademic.com//meta/p_mla_apa_research_citation/1/9/7/3/2/pages197325/p197325-1.php.

    This maybe a shock to the collectivist. But suppose hypothetically their existed twenty Alan Greenspans individuals each with their own cult status, each with varying economic ideologies in the market place. Would this monstrous financial dilemma ever have occured. The odds are that the ideologically flawed “Alan Greenspans” would have failed and the mess would have been cleaned up long ago by the better ideological models with much less pain.

    Dismissing the praxeological models of Mises is foolish. To understand the individual behaviour at all levels of the economy and life should never be taken for granted. It is important to accept that any natural system will always have self correcting mechanisms. It is and illusion or a “control fantasy” that people like Alan G had and propagated that needed correction rapidly but was allowed to grow and wrap around our global economy like a cancer to the point were disaster was always going to be more uncomfortable then it should have been.

    Of course know that “Laissez Faire” Capitalism (not) myth has been proved, we will move on to the Social Democratic model with the “same” cult leaders, tighter (and extra) regulations , save the world ideals, centralised power and sadly vastly diminished liberties. All under the the “control fantasy” our next cult leader will share with us.

    Control is always a fantasy. Even though we know this on an intellectual level most of us often get caught in this escape from reality. Our need to control is a defense mechanism. We desire security, to avoid pain, want to be constantly happy, we want to control others so they don’t judge us or violate our boundaries. We want to control how others see us. In fact the control fantasy is usually always about the future and generally wastes a lot of time.

    Alan Greenspan was an idiot. It wasn’t capitalism that created him’ (in fact it would have got rid of him a lot earlier) it was his flawed ideology, “control fantasy” that people needed from him, and cult status afforded to him by our democratic propaganda machine for a prolonged period, that allowed his armageddon ideology to assist greatly in the capitulation of our financial markets.

  43. Joseph Clark said

    “If they are so clever and prescient why didn’t they bet on their superior information and take a position in the market?

    It’s great fun to watch these budding financial experts try to slip out of the noose. The most common responses clearly demonstrate their ignorance of financial derivatives and markets in general.”

    As a matter of fact Joseph I did just that and I am glad I did. I volunteered only so much super as was mandated on me and I did not gamble on shares over the past ten years (and I have lots of friends who went in heavy weight especially with Costello’s tax incetives.”)

    I always considered it more of a government benefit than mine and Im glad I did.

  44. Yes Keynes was certainly misunderstood especially by the left, of which he was not one. (the number of Lefties who think he was some sort of Modern Marxist is astonishing)

    Keynes general view that markets pretty well worked but needed a hand now and again.

    In simple terms Austrian school is trial and error market economics, a never ending correction of a living system. so its what they would see as political distortions that cause problems and they would seek to remedy. (this they saw well in advance of the current crisis)

    Randian economics is a rigid system that in itself is perfect, as with Marxism its a kind of fundamentalism.

    But folks on the left,love to lump them in the same basket for political purposes, as too the right with socialism and Marxism but the left that specialize in it.

    Boiling this down to their roots, it really comes down to your view on the nature of science. In short the Aristotle view is the future is knowable and predictable through our understand of the past. The Socratic view would be that the future is unknowable as it is shaped by our actions in the present.

  45. Joseph also writes

    “The most common responses clearly demonstrate their ignorance of financial derivatives and markets in general.”

    Some of us knew they were dangerous Joseph. They are just as capable of magnifying downsides as upsides.

    What is most alarming is the failure of regulators to dampen the exuberance of the upside magnification (those of us so authorised to act and who should have understood both financial derivatives and markets).

  46. Ludwig von Mises

    If one rejects laissez faire on account of mans fallibility and moral weakness, one must for the same reason also reject every kind of government action.

  47. observa, you side-stepped my point there about econometrics. Also, I do maintain that praxeology as a methodological system is inward-looking and very far from an humble empirical social science. You’re response that human fallibility is built into the assumptions of the system misses the point.

    Um, nobody is lumping in Randian Objectivist “political philosophy” with the Austrian school sorry.

    That’s just a misreading of the flow of discussion, probably caused by the fact that JQ happened to name-drop Rand as a pejorative in the OP.

    I’ve a background in political philosophy, and I quite familiar with her bad fiction and A=A ontological nonsense. Austrian economics may be an outlier, heterodox discipline, but I’m not disputing that it’s a legitimate school of political economy. In contrast, Objectivism is just unadulterated nonsense for angsty adolescent conservatives who’ve never studied real philosophy and are looking for some pithy combination of methodological individualism and ethical egoism to suit their pre-conceptions of ideological triumphalism.

    I would never, ever, but serious scholars like Mises and Hayek in the same camp as a hack like Ayn Rand.

  48. Hayek and Mises? Really? Flawed. Acknowledged as flawed but then there is always self interest isnt there? Except self interest rarely creates great contributions to mankind and is rapidly forgotten as they will be in time.

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