Sir Alan's Follies

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By Steven Pearlstein
Friday, August 15, 2008

The Maestro just can't get the hang of this retirement thing.

You'd think at 82, with a celebrated career behind him and a bank account stuffed with speaking fees and book advances, Alan Greenspan might be spending lazy summer days fly-fishing in Scotland, perfecting his watercolor technique on Cape Ann or wagering on the ponies from the Saratoga clubhouse.

But here he is, writing op-ed pieces for the Financial Times, giving interviews to the Wall Street Journal and CNBC and adding a new chapter to his recent best-seller in what looks like a desperate attempt to buff up his legacy in the face of rather compelling evidence that . . . well, that he screwed up big time.

It's been nearly a decade since Greenspan's stock hit its all-time high with the now-famous Time magazine cover during the Asian financial crisis -- the one that featured Sir Alan, Bob Rubin and Larry Summers as "The Committee to Save the World." Since the committee disbanded, however, its members haven't fared so well. Summers managed to get himself hired and fired as Harvard's president, Rubin helped to steer Citigroup into the ditch, and Greenspan laid the foundation for the worst financial crisis since the Great Depression.

Okay, so nobody's perfect. But instead of acknowledging that he let his free-market ideology cloud his judgment as monetary steward and financial regulator, Sir Alan is out there trying to convince people how much better off they are because of deregulation, globalization and the dramatic booms and busts they have spawned. He reminds me of the politician who, having just been trounced in an election, blames it on the fact that his message "just didn't get through."

Consider Greenspan's critique of the government "bailout" of Fannie and Freddie. As Sir Alan sees it, it all goes to show that he was right all these years in arguing that the two government-sponsored enterprises were unnecessary (because Wall Street banks can do the same thing without government subsidy) and dangerous (because they were so large as to pose substantial risk to the financial system). As he's said all along, they should be broken up, privatized and sold.

What's so remarkable is how Greenspan can spin out his analysis without mentioning his own role in the creation of the massive housing and credit bubbles that got Fannie and Freddie into their current predicaments.

Reading or listening to him, you'd never know this was the Fed chairman who kept interest rates too low for too long, who denied that there was a housing bubble until it burst and who refused to use the powers given to the Fed by Congress to prevent abusive practices by mortgage lenders and brokers.

You'd be unaware that the man fretting about the size of Fannie's and Freddie's balance sheets was the same man who was most responsible for a dramatic consolidation of the financial services industry into a handful of global behemoths that were not only too big to fail but also too big to manage.

Nor would you have an inkling that this was the same regulator who didn't notice that the banks under his supervision were moving hundreds of billions of dollars of assets into off-balance sheet vehicles for the sole purpose of evading regulatory capital requirements and keeping them hidden from investors.

Finally, you'd have no idea that at this very moment when Greenspan is trying to convince us that Fan and Fred are no longer necessary to assure the availability of low-cost mortgages to American homeowners, the housing finance market has been almost completely abandoned by the private lenders, securitizers, insurers and investors on whom Greenspan would rely.

This last point brings us to the heart of the Greenspan Fallacy -- the notion that the only way to get the benefits of free-market capitalism is to accept the inevitability of booms and busts and learn to live with the unpleasant consequences. It is "human nature's propensity," he writes in the Financial Times, "to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today's crisis, has never been able to eliminate history's crises."

That's the old straw man, of course -- here in the United States, nobody seriously argues that regulation can prevent all market crises. But surely in the 95 years since the creation of the Fed, we've come up with numerous government regulations and interventions that helped to reduce the frequency and severity of financial panics and crises. For Greenspan to ignore that success or to equate, as he did in the Financial Times, any modest re-regulation with a wholesale turn toward socialism and protectionism, is nothing more than redbaiting.

Greenspan thinks people should take out adjustable-rate mortgages, not fixed loans, because in the long run they will pay less. He thinks that people should save in the good times to tide them over in the bad, and embrace the inevitability and economic benefits of the boom and bust cycle. He believes that markets, in the long run, are self-correcting and self-regulating. And, as he told CNBC, he thinks it was a good thing that speculators drove the price of oil to $147 a barrel because it gave markets a head start in adjusting to future imbalances in supply and demand.

What Greenspan seems to have forgotten is that economics is a social science, not a branch of mathematics. In the real world, people don't live in the long run -- they tend to live in the here and now. They value security, predictability and fairness, and are willing to sacrifice some economic growth to get them. And if the price of a gallon of gas has to jump from $2 to $4, they much prefer it to happen over five years rather than one.

What's surprising in Sir Alan's latest musings is not that they are intellectually dishonest or disingenuous -- we've seen that before. No, what's striking is that, coming from somebody who has seen so much over so many years, they are singularly unwise.

Steven Pearlstein can be reached atpearlsteins@washpost.com.


© 2008 The Washington Post Company

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