In other words: we were conned.
FT.com | Willem Buiter’s Maverecon | The Greenspan Fed: a tragedy of errors
During his years as Chairman of the Federal Reserve Board, Alan Greenspan’s statements reflected a partial (in every sense of the world) understanding of how free competitive markets based on private ownership work. This partial understanding also guided his actions as monetary policy maker and financial regulator.
Mr Greenspan consistently saw but half the picture when it came to what makes competitive market capitalism work. He recognised the central roles of greed, self-interest and competition. He failed to appreciate the complementary roles of non-strategic/non-opportunistic forms of altruism, solidarity and cooperation. Both competition and cooperation must be monitored and regulated, lest they become predation and collusion respectively.
Chairman Greenspan emphasized self-regulation, spontaneous order and the disciplining effect of reputation. He failed to appreciate the essential role external or third-party (i.e. state) enforcement of laws, rules and regulations. He did not understand the weakness of reputational concerns as an enforcement or self-discipline mechanism ensuring good behaviour, when credible commitment is limited at best in a world with short horizons and easy exits.
He failed to appreciate the essential role external/third-party (i.e. state) enforcement of laws, rules and regulations, and the indispensability of collective action when faced with the threat of the breakdown of trust and confidence.
Alan Greenspan’s period as Chairman of the Board of Governors of the Federal Reserve System represents to me the nadir of central banking in advanced economic-financial systems during modern times. While monetary policy was only mildly incompetent, the regulatory failures were horrendous. The US and the world economy will pay the price for Mr Greenspan’s misjudgements and errors for years, perhaps decades, to come.
By overselling, at home and all over the world, the virtues of American-style transactions-based financial capitalism and light-touch regulation, Mr. Greenspan has done more to harm the cause of decentralised, competitive market-based financial systems based on private ownership, than even Charles Ponzi.
The spectacular failures, first in 1997/98 and then in 2007/08, of the global tests of Mr Greenspan’s theory that global financial markets do not require global regulators and that even national regulators should use only the lightest of touches, did more to discredit financial globalisation and competitive market systems based on private ownership generally than any event since the 1930s.
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