Ayn Rand’s man in Washington….Alan Greenspan
One is particularly relevant: “The Assault on Integrity,” which condemns any regulation or investor or consumer protection because, Greenspan argues, the government cannot do as effective a job in policing business as the free market can.
“It is precisely the ‘greed’ of the businessman or, more appropriately, his profit seeking which is the unexpected protector of the consumer,” he wrote. “It is in the self-interest of every businessman to have a reputation for integrity and a quality product.”
“A company cannot afford to risk its years of investment by letting down its standards of quality for one moment or one inferior product; nor would it be tempted by any potential ‘quick killing,'” he asserted.
How much did the naïve sentiments expressed in that article color Greenspan’s decisions as Fed chairman?
I wanted to ask him, but Greenspan declined to be interviewed for this column. Still, his actions speak for themselves.
Greenspan’s Fed looked the other way while essentially unregulated mortgage brokers churned out bad loans to dreamers, deadbeats, and suckers during the housing boom. No “quick killing” for them!
And in the late 1990s, the head of the Commodities Futures Trading Commission, Brooksley Born, warned of the growing danger of derivatives and pushed for more oversight of derivatives trading.
But Greenspan, along with Treasury Secretary Bob Rubin and his deputy Lawrence Summers, played hardball on Capitol Hill and shut Born down. The whole shameful story is laid out in a PBS Frontline documentary, “The Warning.”
Born, a prominent Washington attorney, told Stanford magazine about her first lunch with Greenspan in 1996.
“Well, Brooksley, I guess you and I will never agree about fraud,” she remembered him saying. “You probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud.”
Greenspan, Born said, believed the market would take care of itself.
The Fed chairman’s hands-off stance helped the housing bubble morph into a full-blown financial crisis when hundreds of billions of dollars’ worth of collateralized debt obligations, credit default swaps, and other unregulated derivatives — backed by subprime mortgages and other dubious instruments — went up in smoke.
Highly leveraged banks that bet on those vehicles soon were insolvent, too, and the Fed, the U.S. Treasury and, of course, taxpayers had to foot the bill. We’re still paying.
But this was not just a case of unregulated markets run amok. Government policies clearly made things much worse — and here, too, Greenspan was the culprit.
The Fed’s manipulation of interest rates in the middle of the last decade laid the groundwork for the most fevered stage of the housing bubble. To this day, Greenspan, using heavy-duty statistical analysis, disputes the role his super-low federal funds rate played in encouraging risky behavior in housing and capital markets.
But in his book, “Bailout Nation,” commentator Barry Ritholtz persuasively pointed out that the rock-bottom short-term rates engineered by Greenspan were unprecedented and they remained low for longer than they ever had before, stoking the flames of speculative fever. Meanwhile, Greenspan kept denying there was a housing bubble at all. Read Moneyshow.com commentary “The Roots of a Bailout Nation.”
So, we had too little regulation where it was needed and too much government interference where it wasn’t — the worst of both worlds.
I think the prominent conservative federal judge Richard A. Posner, who also teaches at the University of Chicago’s law school, summed it up best.
“Rational maximization by businessmen and consumers, all pursuing their self-interest more or less intelligently within a framework of property and contract rights, can set the stage for an economic collapse,” he wrote in his 2009 book, “A Failure of Capitalism.”
Although Posner believed that the Fed’s low-rate policy and failure to deflate the housing bubble in time were also major factors, he concluded:
“A profound failure of the market was abetted by governmental inaction…The movement to deregulate the financial industry went too far by exaggerating the resilience — the self-healing powers — of laissez-faire capitalism.”
Rand would no doubt have vehemently disagreed. But her most famous follower — in both the breach of her ideas and their observance — didn’t do her legacy any favors.