Posts Tagged ‘free-markets’

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.

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