Alan Greenspan, the former chairman of the Federal Reserve, was often considered as one of the most powerful men on earth. What is interesting about Alan is that he was once an acolyte of the novelist-philosopher Ayn Rand, and a proponent of the Gold Standard. It is indeed an irony that he later renounced his views on Gold Standard and headed the very institution he attacked-The Federal Reserve.
As advocates of a free market economy know, it is a characteristic of the enemies of capitalism that they blame the evils of interventionism on the free market. It is, they say, the “laissez faire” policies of Alan Greenspan, which caused the present economic crisis. They conveniently forget that Greenspan gave up his views on Capitalism long ago. It is also forgotten that the existence of the Federal Reserve is incompatible with a free market economy. How is Government manipulation of money and credit a free market policy? Isn’t it a form of central planning? Isn’t it ridiculous to blame the present mess on Capitalism when Capitalism never existed in the first place?
There is one thing in common between those who blame Capitalism for the present crisis. It is that they are totally ignorant of Economics, and yet hold strong opinions on the topic. As of a gross misrepresentation of terms, anti-capitalists now hail Greenspan as a “laissez-faireist”. As everyone, including anti-capitalists know, a full free Capitalism never existed anywhere in the world. All nations known as Capitalist are “mixed economies”. Isn’t it the same men who remind us this fact when we point out the fact that higher the degree of freedom, higher the prosperity who blame all these evils on Capitalism? When an allegedly ‘Capitalistic’ nation “breaks down”, value judgment is placed on the system, ‘Capitalism’ and when a Socialistic nation is tyrannical, value judgment is placed on individual leaders and not on Socialism. It just obviates that they know the truth deep inside. In a mixture of Statism and Capitalism, it is Statism which causes all the evils and it is Capitalism which takes the blame. Statism means force and Capitalism means freedom.
The very same men argue Soviet Communism failed not because the system was intrinsically evil, but as human nature is flawed. They argue, the flaw isn’t in bureaucracy as such, but in individual men. They scream ‘evils of commercialization’ when it comes to a private enterprise. Why is value judgment passed on the system when it comes to the Free Market? Why is value judgment passed on individual men when it comes to bureaucracy or statism? The answer is obvious.
To make sense of the present crisis, one should first have a strong causal theory. This phenomenon of boom-bust cycles is clearly explained by the Austrian theory of Business Cycles. Economic depressions are caused by nothing inherent in the free markets, but due to government interference in the market-specifically, government manipulation of money and bank credit. At any point in time, a particular amount of money would be spent in investment and savings and the rest in consumption. This investment-consumption pattern would be decided by the time preference of the people. If time preference is low, the investment consumption proportion would be high and if time preference is high, it would be low. The boom starts when banks print money and lend it at lower interest rates to businessmen and the general public. The increased money supply lowers the rate of interest below the market level artificially. This artificial lowering of the interest rates makes several projects seem profitable to businessmen which wouldn’t have appeared so otherwise. If the interest rates had fallen due to lower time preference of people, and was backed by real savings, boom-bust cycles wouldn’t have taken place. But, the artificial lowering of the interest rates sends wrong signals to businessmen about the savings-consumption pattern of individuals. Businessmen are mislead to think that there are more savings, when there isn’t. This low interest rate sends a signal to the entrepreneurs that consumers are asking for more goods and services in the future. In order to fulfill those future demands at a future date entrepreneurs starts new long term capital projects in present time which will enable them to produce more in future and thus meet the future demand of consumers. This leads to mal-investments. The recession is the necessary part of liquidating these mal-investments.
The Federal Reserve kept the interest rates artificially low and encouraged people to borrow, which lead to the housing bubble. Add to this: The community Reinvestment act forced banks to lend to poor debtors. Add to this: Government licensed rating agencies gave AAA rating to mortgage backed securities. In an entirely free market, lending to poor debtors would never have happened, as it won’t be profitable. It was Federal Reserve’s inflationary policies which made it profitable.
It makes no sense to blame the present crisis on deregulation.51, 000 new regulations were added in the past 12 years. The financial and housing system is highly controlled by the Government. There was never a free market in finance and housing. Fannie Mae and Freddie Mac are government-sponsored, government regulated mortgage giants. Banks are chartered, defined and regulated by the Government. Government promoted increased home ownership. The existence of the Federal Reserve is totally incompatible with Capitalism. Artificially low interest rates wouldn’t have been possible in the absence of the Fed. The existence of the Securities and Exchange Commission too is incompatible with Capitalism.
Let’s now analyze Alan Greenspan, the man, in detail. My introduction to Alan Greenspan was through an article-“Gold And Economic Freedom” he wrote for Ayn Rand’s “Capitalism-The Unknown Ideal”. In the article, Greenspan made a strong case for free banking, the Gold Standard and a free economy. It is safe to assume that he renounced his free market views for the Chairmanship of the Fed. He is no longer an Objectivist or a Capitalist. He might be considered as a traitor to Objectivism and Capitalism. He wrote in his autobiography about Objectivism that “as contradictions inherent in my new notions began to emerge the fervor receded”.
When Greenspan was asked whether Ayn Rand would have been a fan of the Federal Reserve, he answered that they never discussed the issue in particular. This is certainly a dishonest statement. In his 1966 article for the Objectivist Newsletter, Greenspan himself wrote these words: “Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.” And More: “A free banking system would have been compelled, by economic necessity, to put the brakes on this process of runaway speculation. Credit and investment, in such a case, would be drastically curtailed; the banks which made unprofitable investments, the enterprises which proved unproductive, and those who dealt with them, would suffer—but that would be all; the country as a whole would not be dragged down. However, the “anarchy” of a free banking system had been abandoned—in favor of “enlightened” government planning.” However, when Greenspan was made the Chairman of the Fed, he didn’t even make a move to institute the Gold Standard.
In his Biography, Greenspan wrote that he has always harbored nostalgia for the Gold Standard which guaranteed price stability. Further, he wrote that he doesn’t see the likelihood of its return in the near future and it is a necessary cost for the existence of the welfare state. What is this statement intended to mean? It is certainly that the Federal Reserve creates money out of thin air to fund the welfare state. Moreover, Greenspan got it all wrong. Price stability is both unachievable and undesirable. As Friedrich Hayek had once written, the “impossibility of achieving in practice an absolute stabilization of the level of prices in a dynamic economy has been proven time and again.”
When he was asked in a recent interview whether he was wrong, he replied-“Well, partly.” “’A critical pillar to market competition and free markets did break down,’ Greenspan said. ‘I still do not understand why it happened.’” “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.” Was this the man who wrote this about the 1929 Crash that “The excess credit which the Fed pumped into the economy spilled over into the stock market–triggering a fantastic speculative boom.”? He blamed the fraud of Enron, WorldCom and Global Crossing on “infectious greed”. Wasn’t it Greenspan who wrote for the Objectivist Newsletter that “it is precisely the ‘greed’ of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer?”
The greatest crime that Greenspan had done was not his inflationary policies during his term. It was that he “admitted” that his belief in enlightened self interest was wrong! Greenspan was just passing the blame to the market. Surely, this man is a hypocrite!