Greenspan’s “Flaw” Not Just Significant, Also Ginormous

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):

Greenspan Admits ‘Flaw’ to Congress, Predicts More Economic Problems | Online NewsHour | October 23, 2008 | 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).

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5 Comments

  1. Mark

     /  October 29, 2008

    What kind of social conditions shaped Mr. Greenspan’s thinking? You criticize him for being late to the sociology party, but in turn you seem to analyze him as if he is a man on an island. To be fair, wouldn’t you agree Mr. Greenspan’s ideology was the more or less official ideology of our society? And wasn’t Greenspan’s mandate to grow the economy? Wouldn’t he have been a rogue to advocate anything else?

    Mr. Greenspan has contributed loads of economic growth to countless Americans. How important is ‘growth’ to your sociological imagination? And to downplay ‘growth’ — seeing as how Americans want it, wouldn’t dismissing growth be a fairly un-democratic thing to do?

    All that said, great blog, great post.

    • Ok, so where is the growth. Everything is down 40-60%. That is what the flaw did. And Greenspan also said that if this flaw had been figured in growth would have been slower but more permanent.

      Just look at Socialist Russia (not Capitalist Russia) or England to see how growth happens under socialism.

  2. Thanks!
    Greenspan’s mandate as Fed Chair was… to promote “sustainable economic growth, full employment, and stable prices.” (cf. this post) The sustainable part is the tricky bit. Keynes argued that government had to tamp down booms as well as prop up busts – macroeconomic policy in the US has been good at the later and shitty at the former. One strong argument is that loose monetary during the 90s boom led to asset price bubbles in tech stocks and then housing. How big a role this loose money played is, of course, hotly contested, but there is a strong argument to be made that Greenspan failed to act on his mandate by missing the sustainable part of economic growth (by allowing things to grow too quickly). And, yeah, of course Greenspan’s ideology is the offiicial one of the land (almost definitionally, as he was officially in charge of a long time). So I’m not blaming him particularly – I tend to not blame individuals for almost anything (cf. this post).
    Also… the median income statistics, and gini coefficients, from 1980 to present suggest that this growth Greenspan helped generate was distributed far from equally.

  3. Would you say that Greenspan is the ready to endorse Mao Tse-Tung’s point on internal contradiction?

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