Alan Greenspan was on C-Span in October testifying before a congressional committee on the root of the financial crisis. In this video, he is interrogated by Congressman Henry Waxman, Chairman of the Oversight and Government Reform Committee.

It is important to note here that Alan Greenspan is a proponent of market deregulation and personally subscribes to the philosophies that espouse individual rights and freedom. What I find interesting is how the market crisis has seemingly shaken Greenspan’s ideas on capitalism and self-interest.

Note at 3:36, when Rep. Waxman asks: Where did you think you made a mistake?

Alan Greenspan’s somber reply:

I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders and their equity in the firms. And it’s been my experience, having worked both as a regulator for eighteen years and similar quantities in the private sector especially ten years at a major international bank, that the loan officers of these institutions knew far more  about the risks involved about the people to whom they lent money than I saw even our best regulators at Fed were capable of doing.

So the problem here is something which looked to be a very solid edifice and indeed a critical pillar to market competition and free markets did break down and I think that, as I said, shocked me I still do not fully understand why it happened and obviously to the extent that I figure out where it happened and why, I will change my views.

The facts change, I will change.

The critical error I get from Greenspan’s admission are that his ideals of individualism and capitalism are based on an assumption of perfect information, especially on the part of bankers. In a way, he took it with some faith that the banking system was best qualified to police itself, and which led to the excesses that led to the bubble and subsequent crash. Greenspan deferred to the authority and credibility of bankers, which he now admits was not entirely accurate.

The latter comments of Rep. Waxman is representative of the backlash against free market ideologies because of the crisis. The caution here is that we are in danger of discrediting ideals (i.e. free-markets, individualism) when we should be criticizing the execution of those ideals (e.g. flawed capitalism). Greenspan’s execution of his ideologies was based on a critical flaw: he presumed the market and its participants sufficiently knew and compensated for the risks. Challenging his premise is the fact that no one expected the crisis to be as long and as deep as it is.

Being constantly critical of deeply held premises is the only defense against false reasoning. Even in face of seeming success, we should never waver in our evaluation of ourselves. Sadly, we only learn of the value of critical self-assessment after the crisis has already struck.

Always check premises. Or get shocked, like Greenspan, when a Black Swan strikes.

In this clip, Yaron Brook of the Ayn Rand Institute and Peter Schiff of Euro Pacific Capital explain why the new mortgage reform bill wil hurt housing market and economy. The discussion hints at restrictive regulations in the wake of irresponsible actions of the U.S. government.

Government intervention is contrary to the principles of free market capitalism and the new proposed regulations impinge on individual rights which the essence of a free economy.

In his article: The High Cost Of Washington’s Price Manipulation Policy, Dr. Brook expounds on his view of the need to remove government intervention particularly in the mortgage and housing markets in order to allow capitalism to resume its healthy flow:

Maybe it’s time for a new approach. How about we start thinking of ways to address this crisis by getting the government out of the business of price manipulation–and let prices, from home values to interest rates, be determined by people’s free choices and the law of supply and demand?

An interesting panel: Peter Schiff author of “Crash Proof”, Dr. Yaron Brook from the Ayn Rand Institute, Victoria Barrett associate editor for Forbes Magazine, and Gary Kaltbaum of garyk.com. The panel criticizes the actions of the U.S. government, Federal Reserve, and discusses the future of the economy.

Watch Peter Schiff plug in Ron Paul and Yaron Brook remind the audience of what should be government’s core functions with regard to individual rights under capitalism.

The Ayn Rand Institute is an organization which provides material on the author Ayn Rand’s works and philosophy: Objectivism. Dr. Yaron Brook is part of the Ayn Rand Institute and along with his Objectivitst colleagues, a vocal critic of the U.S. government’s actions to date in response to the economic crisis.

Dr. Yaron Brook explains that the only way government can help the economy is to liberate us from “environmentalist restrictions on oil drilling and energy production”, Sarbanes-Oxley, the “semi-socialization of the health-care market”, the Federal Reserve, and “other forms of government spending”, not “stimulus packages”.

More of Dr. Brown’s thoughts in this interesting article:  Stop Blaming Capitalism For Government Failures

This is just the latest example of a pattern that has been going on since the rise of capitalism: capitalism is blamed for the ills of government intervention–and then even more government intervention is proposed as the cure. The Great Depression? Despite massive evidence that the Federal Reserve’s and other government policies were responsible for the crash and the inability of the economy to recover, it was laissez-faire that was blamed. Consequently, in the aftermath, the government’s power over the economy was not curtailed but dramatically expanded. Or what about the energy crisis of the 1970s? Despite compelling evidence that it was brought on by monetary inflation exacerbated by the abandonment of the remnants of the gold standard, and made worse by prices controls, “greedy” oil companies were blamed. The prescribed “solution” was for the government to exert even more control.

Visit the Ayn Rand Institute here.

After the bailout of the mortgage firms and big banks, the large US automakers are now asking for Uncle Sam’s assistance in the news yesterday:

WASHINGTON (AP) — Detroit’s Big Three automakers pleaded with a reluctant Congress Tuesday for a $25 billion lifeline to save the once-proud titans of U.S. industry, pointedly warning of a national economic catastrophe should they collapse.

Millions of layoffs would follow their demise, they said, as damaging effects rippled across an already-faltering economy.

But Paulson and many in the US apparat are opposed to this:

Treasury Secretary Henry Paulson told Congress on Tuesday that the administration remains firmly opposed to dipping into the government’s $700 billion financial bailout fund for a $25 billion rescue package for Detroit’s Big Three automakers, no matter how badly they need the help.

“There are other ways” to help them, Paulson told the House Financial Services Committee as the bailout bill clung to life support on Capitol Hill.

This just continues to highlight the sore condition of the US economy and its participants, and the dangerous precedent set by the government in its bailout of the financial firms, further increasing government intervention on market conditions. Meanwhile, the level of money being printed to fund all these bailouts could disenfranchise the US taxpayers first by burning tax money to pay for greed, and by debasing the US dollar causing inflation.

Stagflation is a likelihood as the US economy contracts while prices continue to rise.

On the other hand, a bailout by the government will be a temporary relief to consumers by saving jobs, in the long-run this now creates a moral hazard by letting the errant automakers get away with their mismanagement.

A history lesson: Chrysler was bailed out years ago, and that act was criticized at the time, but evidently that bailout planted the seeds of the present troubles. Seems like deja vu: (emphasis mine)

It was designed to prevent the nation’s No. 3 automaker (1978 sales: $13.6 billion) from sliding into a bankruptcy that could have put many thousands out of work and sent a shudder through U.S. financial markets.

In his first public act at the Treasury, Miller spelled out the ideological ground rules of federal aid and warned other troubled companies against expecting similar help. Such assistance, he said, “is neither desirable nor appropriate, being contrary to the principle of free enterprise.” But Chrysler was an unusual exception, he added, in which the Administration “recognizes that there is a public interest in sustaining [its] jobs and maintaining a strong and competitive national automotive industry.”

Contrary to the principle of free enterprise? You better believe it. Only this time, it seems there are too many unusual exceptions.

They say money is a perfect way of keeping score on life. Every year, Forbes magazine publishes that score for people to see, and in recent years–this list has been segmented by region (as the total list is pretty much dominated by American billionaires).

Financemanila writes:

The list of 40 takes the booby prize among the region’s rich. As a group, wealthy Filipinos are actually the poorest, when compared to their brethren in Indonesia, Malayasia, Singapore and Thailand. They had the smallest total net worth, $16 billion; fewest number of billionaires, just three; and lowest minimum net worth, a mere $25 million

The nation’s historic political instability certainly hasn’t helped, nor has the fact that the Philippine Stock Exchange has the tiniest market capitalization, an estimated $50 billion, in the region.

Still the country is showing signs of life, according to Forbes. Its stock market is up a third, making it one of the best performers in Asia this year. And foreign investors and businesses are more welcomed than in the past, thanks to President Gloria Macapagal Arroyo’s policies.

See the complete article here.

In this time of financial crisis, it is interesting to reflect on the scoring system of our present capitalistic society that we participate in. The Financemanila article contains some brief profiles on the members of the list, and the temptation is strong to look for common traits amongst the wealthy to see if there are patterns amongst them. Apart from age (as most of the list are above 60), the range of businesses and interests that the wealthy have used to gain their ranking are quite varied.

This now posits an interesting conundrum when compared against the values that our existing society promotes through other structures apart from the monetary system: i.e. what religion, culture, tradition promote.

Is it possible to win in the capitalistic game, but lose everywhere else? Conversely is it possible to be “right” as far as religion, tradition, social graces, and principles, but be penniless? I posed the same question to some friends recently: the money question. How come money seems to gather or flow to where you don’t normally expect it to.

The answer, if the sparsity of the Forbes list is a clue: is a definite yes. Seems like everything in life works one way–but money works in a completely different manner. Unfortunately, we are all tied to the monetary system by default, and we depend on it for survival. Which creates for us a dual-reality. One reserved for all of life’s pursuits–higher thinking, physical activity, fun, enjoyment, reflection, passion, morality–and the other is the reality of money, which doesn’t care about all other realities. If you are poor, you can still be happy–but perhaps the rich people have more reasons to be happy?

This is really funny. It seems that capitalist United States is hoping that Communist China doesn’t act like a capitalist and unload U.S. government debt.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=anZHfo6tQi60

Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says

By Kevin Hamlin

Sept. 25 (Bloomberg) — Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

“We are in the same boat, we must cooperate,” Yu said in an interview in Beijing on Sept. 23. “If there’s no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.”

An agreement is needed so that no nation rushes to sell, “causing a collapse,” Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank’s monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

“Whether some kind of agreement between them to continue to hold Treasury bills is viable, I’m not sure,” said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. “It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it’s something to be avoided.”

The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.

`Grave Threats’

U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing “grave threats” to its financial stability.

China’s huge holdings of U.S. debt means it must bear a large proportion of the “burden of sorting things out” in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every “couple of days” is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

“China is very worried about the safety of its assets,” he said. “If you want China to keep calm, you must ensure China that its assets are safe.”

Currency Manipulator

Yu said China is helping the U.S. “in a very big way” and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

“It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,” he said. “China knows what to do. We don’t need your intervention.”

The U.S. financial crisis had taught China a lesson and that was: “Why are we piling up these IOUs if they may default?” China’s economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

“Our export-growth strategy has run its natural course,” he said. “We should change course.”

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating “IOUs from the U.S.,” said Yu. “This is paper and it may default and it will not increase China’s national welfare.”

If China doesn’t allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.