Greenspan and Ideology

TW: I regard our current financial mess as a bi-partisan fiasco. However, the Republicans (McCain less than others) were the ideologues who pushed incessently for de-regulation and worshiped blindly at the altar of free markets. Extremism never seems to work out so well. As a student of history, have been reading alot about the late 1920's and early 1930's recently. When massive dislocation such as the 9/11 attacks and the financial meltdown of '08 occur, massive political dislocation follows in lockstep. We screwed up the post 9/11 management lets hope we do better in 2009 and beyond.

From Floyd Norris at NYT and Packer at New Yorker:
Norris:
"According to his testimony today, he is in “a state of shocked disbelief” over the discovery that foolish bank lending and inflated asset values have damaged the financial system. Claude Rains said it better when he discovered there was gambling going on at Rick’s place.

Greenspan:
“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said. “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Norris:
That makes his failure all the more appalling. If he knew that “dire consequences” were coming, why did the Fed not move to head them off? The answer is that the economic theory Mr. Greenspan subscribed to held that the central bank should react when prices of goods got out of control — we call that inflation — but should yield to the genius of markets when asset prices and credit markets do the same.

Mr. Greenspan is right on one thing. The “whole intellectual edifice” collapsed. But he is wrong to blame it solely on the wrong inputs. It is too bad that Mr. Greenspan never appreciated the work of Hyman Minsky, who understood that stability is destabilizing, and that there will come times when the very calmness of markets, and lack of apparent risk, causes investors to take ever greater and greater risks.

What was missing was a regulator who understood markets, rather than worshiped them."

Packer:"And Roger Catt, the retired Wisconsin farmer who told me [in an article Packer wrote for New Yorker on Appalachian politics] that “McCain is more of the same, and Obama is the end of life as we know it,” will be voting for the end of life as we know it...Helen (Babe) Walker, seventy-three years old, who lives in the Appalachian mining town of Glouster, Ohio (discussed at length here), writes: “I think that the residents here in Glouster are getting accustomed to the fact that we will be having a black president. They think it is not a bad idea.”

http://norris.blogs.nytimes.com/2008/10/23/greenspans-lament/