Busting the Greenspan Myth

Greenspan asserts that self-preservation keeps markets in check, and his invisible hand approach is based on the presumption that getting wiped out of financial existence is enough of a deterrent. But he is wrong for two reasons: Some banks these days are “too big to fail” and backed by their sugar daddy, the U.S. Treasury, so they’re free to bet the pot — which is what led to the 2008 crash. And two: he misreads the human nature to game the system. The more money involved, the more — not less — likely people are to lie, cheat and steal.

The Big Crash of 2008 should have been called “The Alan Greenspan Recession” because no single person contributed more to the conditions that caused the financial meltdown. Now Greenspan is back selling the same snake oil, claiming that the “global invisible hand” will make everything right, no need for strong regulation.

He couldn’t be more wrong. It’s time to bust the myth surrounding former federal reserve chairman Greenspan and his wrong-headed policies before another crash.

I used to believe the myth that Greenspan was largely responsible for the 1990’s economic boom by keeping interest rates low and regulators at bay. So did most everyone else. And indeed, many of his pronouncements are spot-on. But his blunders have been catastrophic, his worldview is naive and his economic prescriptions are thoroughly discredited. Take for example the “invisible hand.”

Greenspan has made a career out of hawking the idea that markets are best left to self-regulate through the invisible hand that guides behavior. The thinking goes that executives will not sink a company on purpose, because of the survival instinct: it’s in their best interest to stay in existence rather than go bankrupt — self-preservation at its best, just ask Lehman Bros or AIG.

Greenspan asserts that self-preservation keeps markets in check, and his invisible hand approach is based on the presumption that getting wiped out of financial existence is enough of a deterrent. But he is wrong for two reasons: Some banks these days are “too big to fail” and backed by their sugar daddy, the U.S. Treasury, so they’re free to bet the pot — which is what led to the 2008 crash. And two: he misreads the human nature to game the system. The more money involved, the more — not less — likely people are to lie, cheat and steal.

Greenspan’s theory survived scrutiny when the system and the individuals running it had more integrity, and the sums involved weren’t astronomical. We really do want to believe the best of ourselves and our institutions, but the globalized, deregulated financial system he helped create is a monster accountable to no one, driven by pure greed and run by kingpins. Fear of the invisible hand isn’t enough when the payday is hundreds of millions or even billions of dollars. Some people will do anything for that money, and did: when the system crashed in 2008, the rats jumped out with golden, diamond-encrusted parachutes, leaving taxpayers with the bill. Those executives couldn’t give a shit what happened to their companies. They feared no reprisal; their wealth made them untouchable.

Back when the movie Wall Street explored the roots of greed, a high yearly pay amounted to several million dollars, equivalent to around $10 million today. These days, top execs can spend that much just redecorating their offices. Faced with this reality, Greenspan’s invisible hand theory appears quaint, even comical, except that it has guided three decades of financial market policy, and his opinions are still influential.

Greenspan labeled the crash of 2008 a “notable exception” to his invisible hand theory — a hand so invisible it isn’t really there. The real exception though is finding circumstances where his theories hold true — and anywhere he still has credibility outside of Ayn Rand circles. Time has proven Mr. Greenspan wrong. The more he shows his face in the public arena, the more he is exposed as a thinker whose flaws are catching up with him.

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