We have said before that no Fed Chair was ever “free market.” This absolutely includes Mr. Greenspan. His legacy is one of a price fixer, an economic manipulator, a bubble blower, and ultimately one who in many ways ushered in the crony era we live in today.
But as we see in the attached piece from Sebastian Mallaby, Allan Greenspan, the one time “Maestro,” knew better all along. He knew that Fed policy could and typically did destabilize the real economy. Yet he still pursued the policies that he did because according to Mallaby Greenspan was afraid of catching hell from Congress and the White House.
The Greenspan calamity is often held up by big government people as an example of what happens when a society dares to even consider laissez faire economics. Greenspan was a “libertarian” (more accurately an objectivist) after all. His policy MUST have been “free market.” It was, right? I mean I think it was. I mean, he was a Republican so he must have been a free market guy…
And it goes on like this. Yes Greenspan was and is a Republican. Yes he was once a member of Ayn Rand’s inner circle. Yes Alan Greenspan understood the free market critique. But NO he did not act in a way while at the Fed that reflected a “free market” ethos. In fact it was because he abandoned the free market thinking that had brought him to prominence that he ultimately failed.
Though not the first US bailout, the bailout of Long Term Capital Management in 1998 was done on Mr. Greenspan’s watch for instance. This bailout was completely anathema to the idea of “free markets.” The firm should have gone down. But because LTCM was run by connected financiers and because many of the world’s banks had a stake in LTCM it was saved. This was the blueprint for the 2008/2009 bailouts.
Still, as the attached article points out Greenspan knew that his activist disposition was unwise and that sooner or later the market piper had to be paid. He however had become a Washingtonian over the years and Potomac fever overtook him. As such politics drove him to a large extent. Which only makes sense as the Fed, despite the myth of independence, is a highly politicized body.
There is an odd passage in attached piece however:
And far from being a confident believer in the self-policing efficiency of markets, Mr. Greenspan agonized about their instability. He frequently reminded listeners of the crash that ushered in the Great Depression—only to witness the financial crisis of 2007-08, which brought his maestro status (and much else) to an end.
It’s odd because in the rest of the article the author makes the case that Greenspan actually did understand fundamentally the self regulating nature of markets and it was his abandonment of this understanding that contributed to the Crash. It was the Fed activism, Greenspan’s activism, that created the conditions for the Crash, not “markets.”
Even with this strange insertion the piece is still worth a read as it is a cautionary tale of what happens to many people in Washington, the Swamp, over time. Something about the place encourages the abandonment of sensical thinking. People get a glimpse of the Ring, of power, and Gollum-like grow too enamored with it.
It’s a tale as old as humanity itself.
(From The Wall Street Journal)
“The lost doctoral thesis cast him in a new light. In his 18½ years as Fed chairman, he had come to embody the popular ideal of the modern central banker: a trigger-happy activist, quick to shield the economy from turbulence with transfusions of money. But Mr. Greenspan’s thesis started from a very different place. It was based on a paper that he first delivered in 1959, when he was still under the spell of the eccentric libertarian novelist and philosopher Ayn Rand. In his thesis, rather than seeing an activist Fed as a bulwark against instability, he formulated a critique that led him to denounce the Fed’s creation as “one of the historic disasters in American history.”…
…But his doctoral thesis, he took the opposite position: According to the young libertarian, the Fed had an obligation—a clear and inviolable duty—to avoid printing the money that fueled financial bubbles. If markets were allowed to rise to giddy levels, consumers, feeling wealthy, would splurge unsustainably and run up excessive debts. Seeing assets fetch ever higher prices, entrepreneurs would rush to build new assets—factories, warehouses, condominiums—racking up more debt in the process.”