Those who read this blog have probably heard Alan Greenspan’s shockingly self-aware and yet… disconnected testimony in front of the Government Oversight Committee (chaired by Rep. Waxman). In case you missed it, here’s a large chunk of the exchange (via PBS):
REP. HENRY WAXMAN: The question I have for you is, you had an ideology, you had a belief that free, competitive — and this is your statement — “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. None meaningfully worked.” That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price. Do you feel that your ideology pushed you to make decisions that you wish you had not made?
ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
REP. HENRY WAXMAN: You found a flaw in the reality…
ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
First, I love the almost Althusserian take on ideology: “Everyone has one. You have to — to exist, you need an ideology.” And yet, then Greenspan goes on to add “The question is whether it is accurate or not.” Alas, Greenspan is a late arrival to the sociology party, and has not yet learned that the question is not whether ideology is accurate – for accuracy is, in some sense, a concept only measurable with respect to an ideology – but rather, what does this ideology do?
Second, what was Greenspan’s “flaw”? A small miscalculation in the relationship between inflation, interest rates and home prices? No:
“I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms.”
That’s right, his possibly not significant flaw was that self-interested actors are not the best capable of acting in their own self-interest*. That is, the underlying basis of capitalist ideologies all the way back to Adam Smith (before we even called it capitalism), e.g. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest.” Everyone pursuing their own self-interest (by some sort of freaky action at a distance called “the invisible hand”) leads to the most optimal outcome. But Greenspan is saying that banks, those paragons of capitalist rationality, could not even best pursue their own self-interest, and that government ought to have stepped in. Greenspan definitely has not forgotten how to undersell a phenomena – his “Fed” speak is clearly still functioning smoothly.
Too bad the *Fed* isn’t still functioning smoothly…
(I’ll add a link to the Daily Show Coverage of the testimony when it’s posted tomorrow.) Here’s TDS.
* Ok, really it’s more of principal-agent problem. But that’s sort of the point – principal-agent problems are rather a big deal with agents as potent as banks and principals as weak as shareholders in most large business (Useem 1996 not withstanding).