CT Blue

Perhaps our first mistake was believing that a regulator who did not believe in regulation was an indispensable man.

Alan Greenspan has now decided that maybe, after all, the government has a role in regulating the economic system. I’m no economist, but I do have a degree in history from a relatively elite college, so maybe that’s the reason why I, along with most sentient beings, was perfectly aware that we had, many times in the past, already learned what Greenspan had just discovered. It seems to me that it takes an effort of will akin to religious conviction to believe that unregulated markets will always and everywhere self regulate and bring about the best of all possible worlds. The Ayn Rand types like Greenspan go even farther, and if they had their way the government would not protect us from any of the John Galts out there. Just wondering, but would the air in LA be breathable today if we’d listened to the Sultana of Selfishness?

But to get back to Greenspan, while he may concede that he refuses to believe that our present situation could have been avoided, or that we can avoid more such crises in the future, not, that is, unless we veer from poorly regulated markets to central planning:

The former Fed chairman also acknowledged that the central bank failed to grasp the magnitude of the housing bubble but argued, as he has before, that its policy of low interest rates was not to blame. He stood by his conviction that little could be done to identify a bubble before it burst, much less to pop it.

“We had been lulled into a sense of complacency by the only modestly negative economic aftermaths of the stock market crash of 1987 and the dot-com boom,” Mr. Greenspan wrote. “Given history, we believed that any declines in home prices would be gradual. Destabilizing debt problems were not perceived to arise under those conditions.”

…

“Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible,” Mr. Greenspan wrote. “Assuaging their aftermath seems the best we can hope for.”

I haven’t read Dean Baker’s reaction to this because I want to see if I can anticipate it.

First, the housing bubble was identified. Baker identified it, as did Krugman, and no doubt a host of others. As Bake has pointed out in the past, housing prices were rising at rates out of proportion to historical trends, and rents were not rising in tandem with housing prices, both signs that there was something wrong with the housing market. Even I knew something was wrong. Housing is a basic necessity, and it stands to reason that the cost of a necessity cannot increase by 15 to 20% a year while real income remains flat. Something has to give, and it’s not like anyone expects income to rise.

Of course if you can’t identify a bubble, you won’t try to pop it, or to let the air out gradually. Greenspan refused to do both. It should not have been difficult for the Fed to put a stop to subprime lending.

Let us not forget that this entire crisis, including the housing bubble, might never have happened had we not repealed Glass Steagal, and allowed the thieves free access to our money. That was done at the urging of Greenspan and others, who felt it was critical that bankers be allowed unfettered access to our money.

It also doesn’t help that Greenspan took a hands off approach to deriviatives and urged Congress to do so as well, and of course Congress always followed the advice of this Delphic font of wisdom.

Finally, Greenspan’s either/or prescription for the future is nonsense. We don’t have a choice between Randism and communism. We had no out of control bubbles in this country while the reforms put in place during the Depression remained in force. It was only when Greenspan and his ilk came to power, and removed those barriers to plunder that they returned. We now, unfortunately, have a Congress too beholden to the bankers to even consider re-erecting a meaningful regulatory structure, not to mention simply outlawing financial instruments that serve no useful function.

There’s only one thing we should do to a proven failure like Greenspan. We must create a government post even more powerful that that of the head of the Federal Reserve, and we must give it to him. Failure is rewarded in Washington, and failure on that scale deserves extra special treatment.