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?