Montreal, November 15, 2008 • No 261



Martin Masse
is publisher of QL.




by Martin Masse


          Alan Greenspan's made quite an astonishing comment before a House of Representatives committee in late October. He admitted that he had discovered a flaw in his belief in the ability of markets to regulate themselves, a discovery which apparently threw him into utter confusion.


          Greenspan used to describe himself as a libertarian. Having been a principal actor in the current crisis, in addition to having bewitched the business world with his tricks of monetary prestidigitation for nearly two decades, his confession carries a certain weight. And our State-loving friends were obviously keen to interpret it as yet another proof of the failure of "unfettered" economic liberalism that desperately needed regulating.

          To take just one example among many, in the Saturday, October 25 edition of Montreal's La Presse, editorial page writer Ariane Krol wrote sarcastically, "For this adept of laissez-faire and fervent admirer of libertarian philosopher Ayn Rand, this is practically an existential revelation. He did not live to the age of 82 in vain, we could say, if the situation were not so tragic. But for millions of Americans who lost their savings, it would have been preferable for him to have seen the light a little sooner."

A Tired Rhetorical Trick

          This rhetorical trick is certainly not very original. First, it is taken at face value that a high-ranking official (Bush, Harper, Sarkozy, Charest) is a believer in free markets, without mentioning that his policies are in fact diametrically opposed to what economic liberalism advocates; he is then accused of being responsible for some problem or other that occurred under his watch; and, following an infallible logic, it is concluded that his "dogmatic belief" in the free market is therefore the source of the problem and that this outdated doctrine should be consigned to the trash bin. "The ideology that guided him," Krol writes, "was shared by many in the Bush administration." Ah, yes, Bush, that great libertarian who as we all know cut the bloated bureaucracy of Washington in half, and whom we have praised repeatedly on this site…

          The reality is that even if he was indeed a member of Ayn Rand's circle in the 1960s, Greenspan spent his entire subsequent career as an apparatchik of the State and did absolutely nothing to reduce its size. On the contrary, as Chief Inflationist for 18 years, he participated in large scale government fraud during all the time which he occupied this post. His monetary policy, which was basically to inflate the money supply constantly and to flood the financial markets with liquidity as soon as an economic slowdown reared its head (the famous "Greenspan put"), had nothing to do with libertarian principles. Besides, the decisions of Greenspan the Fed maestro completely contradicted the principles professed by Greenspan the 1960s Randian.

"The reality is that even if he was indeed a member of Ayn Rand's circle in the 1960s, Greenspan spent his entire subsequent career as an apparatchik of the State and did absolutely nothing to reduce its size."

          Today, Greenspan is an old man, perhaps sincerely confused, who is trying to save his reputation for posterity after having sold his soul to the State in the latter part of his life. In this light, his explanation is perhaps the most appropriate defence he could muster, the one that best limits the damage to his name.

What Greenspan Didn't Say

          To understand how misleading Greenspan's confession is, we must first distinguish the two causes of the current crisis. The expansion of the money supply and the artificially low interest rates resulted in the formation of a bubble and the spread of wild speculation—that's the first, fundamental cause. The reason this bubble formed specifically in the housing sector is the existence of laws like the Community Reinvestment Act and of institutions like Fannie and Freddie that encouraged and subsidized the distribution of mortgages to millions of people who did not have the means to buy houses-that's the second, subordinate cause.

          Greenspan was clearly responsible for the first cause. But he in no way admitted this. On the contrary, he continues to pretend that it was impossible to know if a bubble existed, and that there were international circumstances impossible to control (too much savings in the world, as he bizarrely declared on several occasions) that made his job difficult. As if it were difficult to foresee what will happen when you lower interest rates to 1% and inject billions of dollars of liquidity every chance you get!

          Instead, Greenspan admitted having discovered a flaw in his understanding of the second cause. If the housing and mortgage markets had been more strictly regulated, pre-empting the excess and speculation that occurred, it is indeed possible that the bubble would not have developed in this sector. But the funny money would not have disappeared: the bubble would simply have inflated elsewhere, as it had some years before in the high-tech sector or in emerging markets.

The Market Wasn't Free

          In short, what Greenspan is telling us is that his monetary policy was, given the circumstances, correct, but that he was wrong to believe that the markets (completely distorted by his monetary policy, something he doesn't admit of course) could regulate themselves to avoid a bubble. From his perspective, it does make sense. If we accept the first proposition, the second follows perfectly. The distorted markets could not, indeed, regulate themselves in such a context.

          Nevertheless, the solution to this problem could not have been to regulate these markets even more strictly—there is already an enormous amount of regulation—in order to prevent the bubble from forming. For it would then have been necessary to regulate the entire economy to keep the bubble from forming elsewhere. The real solution would have been instead to adopt a more responsible and prudent monetary policy (presuming that we stay within the confines of central planning of the money supply).

          Ariane Krol ends her editorial by observing that "rare are those who, like him, had the intellectual honesty to question it [his libertarian ideology]." So there you have it: those of us who think the crisis spectacularly confirms our theories instead of shaking their foundations are intellectually dishonest. For my part, I do not doubt Krol's intellectual honesty, for she without a doubt firmly believes all of the economic sophisms and interventionist clichés that she serves up almost daily in her editorials. I doubt, rather, her intellectual ability to write anything other than superficial babbling.

          Does Greenspan himself really believe what he's saying? Could he have forgotten completely the principles he defended 40 years ago, even though Ron Paul constantly reminded him of them during his appearances before the House Financial Services Committee? I have no idea. But one thing is certain: his confession is much less significant in its consequences than it would have been had he dug a little deeper and admitted that it was his monetary policy of 18 years that was the real failure.


* This updated article was first published in French on Le Blogue du QL on November 1st, 2008. It was translated by Bradley Doucet.