Caesar is DeadPosted on October 24th, 2008 2 comments
Amid the wailing and gnashing of teeth that has accompanied this financial meltdown, one might easily overlook or dismiss as rote the testimony before Congress of the former chairman of the Federal Reserve, Alan Greenspan. But mark my words: Greenspan’s testimony yesterday is the single most important thing that will happen in this entire fiasco.
Why such strong words? Because this marks the unequivocal end of perhaps the single most defining U.S. policy of the past two generations: unrestrained ideological free-market capitalism. For the past several decades, our federal fiscal policy has been driven largely by the notion that government meddling decreases a market’s ability to most efficiently move capital, and thus hobbling economic growth. Beginning with the Reagan Administration, our regulatory agencies have been systematically stripped of their oversight powers through legislation and executive policies. The idea was that the market would police itself, and regulate itself, better than any government ever could. Despite some bumps and glitches, it seemed to be working, and Alan Greenspan (who was appointed the chairman of the Federal Reserve by President Reagan) was in the middle of it all.
Then the credit markets collapsed, with the potential to take down the entire world economy, and suddenly the truth is painfully obvious: Zero regulation is not the best regulation. Alan Greenspan is an epic heavyweight in the minds of politicians, policy-makers, and the public, and he deserves accolades for abandoning his once-staunch policy theory – to say nothing of his professional legacy and near-mythical status – in the face of evidence to its contrary. But that this great thinker, the maestro of the single longest continual expansion of the U.S. economy, can sit before Congress and say in plain words “I was wrong,” means that no politician or policy-maker can continue to espouse those same policies of deregulation and be taken seriously.
The era of unregulated markets is over. Perhaps it was already dying, but Mr. Greenspan plunged the final dagger into its heart yesterday, ensuring the deed was done. Et tu, Alan?
By no measure am I an expert on economics; in fact I am a rank neophyte with occasional interest. But I’d also say that the “experts” are also no experts themselves, Alan Greenspan included. End disclaimers.
I continue to find it hard to parse the different solutions folks have put forward. Some claim this is a clear defeat for our system as it has been for the past, oh, thirty-odd years, and call it “free-market capitalism.” The solution for them is more regulation. Others see this as a failure of government to truly free the markets — making one wonder whether we’ve been living under free-market capitalism — and their solution tends to revolve around monetary policy, restoration of commodity-based currency, and less government intervention.
Whatever you do call it, I struggle to reconcile how one can call our economic system free-market capitalism when indeed government tinkering and tweaking has prevented it from being “free,” such as the Federal Reserve, the CRA, FDIC, Fannie Mae, Freddie Mac, Sarbanes-Oxley, and the list goes on and on.
I don’t pretend to know which course of action is the best, and it does seem to me that some amount of government regulation is required to keep markets free and more or less fair, e.g., in penalizing fraud, preventing monopolies, etc.
I remain skeptical of grand claims about the ultimate failure or success of free-market capitalism because I’m not yet convinced we’ve seen free-market capitalism in action, for better or for worse.
Considering that Alan was a Ayn Rand Objectivist disciple, his “you know, maybe regulation is important” turn yesterday was really surprising.