Greenspan's Testimony: Will the 'Maestro' Face the Music?

Alan Greenspan testifies before the Angelides Commission on Wednesday. Without wishing him any personal ill will, let's hope he gets a grilling. We come not to bury Greenspan, but to ... well, actually we do come to bury him. For the greater good of all, he and the radical philosophy he represents must be exposed for all to see.

Paul Krugman observed the other day that Greenspan is "still not a mensch [1]," and that's putting it mildly. Greenspan's engaged in a full-scale media blitz to convince the public that he still deserves to be called the "Maestro," s he once was by an adoring press and DC establishment. But underlying Greenspan's words and deeds, almost invisibly, is a extremist philosophy that has captured financial policy.

Greenspan's a lifelong disciple of Ayn Rand, the anti-government radical who rejected altruism and believed that "Man's ... own happiness as the moral purpose of his life." Charity was contemptible to her. She once wrote, "What are your masses but mud to be ground underfoot, fuel to be burned for those who deserve it?" Rand believed in self-interest as the prime motivating force in the world, and her book Atlas Shrugged celebrates a world where the fortunate refuse to help others.

Greenspan once wrote a letter [2] praising Atlas Shrugged. Echoing his guru, he said that "Justice is unrelenting ... Parasites who persistently avoid either purpose or reason perish as they should." Since that day, more than forty years ago, Greenspan has become the figurehead (not the "fountainhead [3]" - figurehead) for a new form of "establishment radicalism," a white-collar extremism which that has hijacked American economic policy for the last thirty years.

On another occasion, Greenspan wrote: "Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes."(1) Since most Americans support helping the needy and indigent, that's hardly a view which most of them would accept or find admirable.

Randians have a complete right to their views, of course, as do all of those who dwell far outside the political mainstream. But it's worth asking how, in a democratic country, the political institutions that govern our finances came to be so completely dominated by a philosophy that few Americans understand or support.

Someday someone will write that story. But the goals for Wednesday's testimony are much more immediate: The Commission must determine the extent of Greenspan's negligence, and then explore ways to design a regulatory structure that is resistant to unelected ideologues like him.

Greenspan's recent tract in his own defense (pdf [4]) for the Brookings Institution is an instructive read for Commission members, if not for the reasons he might wish. The document's 18,456 words can be summed up in the words "hey, who knew?"

From its very first sentence, Greenspan's paper is startling in its unwillingness to see the truth. He begins, "The bankruptcy of Lehman Brothers in September 2008 precipitated what, in retrospect, is likely to be judged the most virulent global financial crisis ever." The date is convenient, since it's after Greenspan's tenure at the Fed. The prediction that this will be "the most virulent ... crisis ever" seems dangerously optimistic, to the point of naivete.

But what's most striking in that sentence is its confusion of cause and effect. When a former Fed Chairman blames the entire financial crisis on Lehman Brothers, it's like a drunk driver blaming his accident on the wall he struck.

Commission members should ask Greenspan to clarify these remarks. They should also ask him why he continues to place the lion's share of blame on Fannie Mae, Freddie Mac, and subprime mortgages. This conveniently dovetails with right-wing talking points, but fails to address the massive breakdown in prime mortgages or the developing crisis in commercial real estate. Does he see any causes of the crisis that are not either isolated or conservative shibboleths?

Greenspan asserts in the Brookings paper that asset bubbles are inevitable and can't be prevented. That's another fairly radical position for a central banker to hold. It's like having a Secretary of Defense who believes we're incapable of resisting military attack. How did that belief affect the performance of his duties while at the Fed?

The Commission might also ask Greenspan if he intended to justify or defend bankers' unwillingness to withdraw from a runaway market when he quoted Charles Prince of Citigroup (who will also testify this week). Said Prince, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." It was Greenspan's job to know the difference between a merry jig and St. Vitus' Dance. The jerking movements of the big banks spelled danger for the economy, yet Greenspan didn't try to stop the music (even though Prince's quote could be interpreted as a cry for just such an intervention).

Greenspan also described the crisis as a "hundred year flood," which prompted Nassim Taleb to say that financial experts who don't plan for rare events are like pilots who don't know about storms [5]. What's more, floods are natural disasters. This crisis was manmade, a fact Greenspan seems unwilling to acknowledge.

In what should be a warning for Commission members on what they may face on Wednesday, Greenspan has a tendency to filibuster - even on the printed page. Take this paragraph: ... (B)y what standard should reform of official supervision and regulation be judged? I know of no form of economic organization based on a division of labor, from unfettered laissez-faire to oppressive central planning, that has succeeded in achieving both maximum sustainable economic growth and permanent stability. Central planning certainly failed and I strongly doubt that stability is achievable in capitalist economies, given the always turbulent competitive markets continuously being drawn towards, but never quite achieving, equilibrium (that is the process leading to economic growth)."

All of that is basically Adam Smith-ish bankerese for "Shit happens." The Commission should not consider that an acceptable answer. It should grill the former Chairman on "too big to fail," especially this comment:

Beyond significantly increased capital requirements is the necessity of addressing the problems of some financial firms being "too big to fail" (TBTF) or more appropriately "too interconnected to be liquidated quickly."

"Too interconnected to be liquidated quickly"? This is obfuscation and misdirection, smoke and mirrors, a defense of the indefensible.

As we said in the beginning, this is not about discrediting one person. It's about understanding the philosophy and mind-set that led to a disastrous collapse. Greenspan will attempt to obfuscate. He will condescend, lecture, and distract. For the sake of the country, the Commission must not allow that to happen. And it should treat Greenspan's answers with all appropriate skepticism. It should bear in mind that when he testifies, the old Objectivist is sure to be acting in his own "rational self-interest."

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(1) From "Gold and Economic Freedom," written for Ayn Rand's newsletter when Greenspan was a devotee of the gold standard. Essays from the newsletter were eventually anthologized in a book called Capitalism: The Unknown Ideal.