Objectively Yours

Alan Greenspan's Legacy

My metier has turned out to be cranks and charlatans, and in the Trump era, business is good; a new specimen seems to come out of woodwork every day. It makes some people nostalgic. How different things were when people like the late Alan Greenspan, who passed away at age 100 last Monday, was in charge of the Fed for 20 years! Well, let’s not get carried away. Greenspan was certainly polished and respectable, but, as every obituary notes, he was part of Ayn Rand’s inner circle. Rand essentially ran a libertarian cult that inculcated its members in a philosophy of extreme selfishness. While Rand had many famous fallings out with disciples, their relationship endured and she attended his swearing in as Chairman of the Council of Economic Advisors the Oval Office in 1974.

It would be grossly inaccurate to say all of Greenspan’s policies were simply downstream from Rand’s “Objectivist” doctrine. On the contrary, he was flexible on questions of dogma. For a Rand publication in 1966, he was writing in favor of the Gold Standard, which seems to be every crank’s favorite monetary idea. “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard,” he concludes. Of course, you can’t really be a gold bug at the Fed—part of your job is to ensure the liquidity the economy needs not to collapse during a crisis. So, he dropped that part of the Randian doctrine, but he never stopped advocating for laissez-faire principles. As Robert Reich recently wrote in the Guardian:

Greenspan pushed Clinton and Congress to repeal the Glass-Steagall Act, which since the Depression decade of the 1930s, had separated investment banking from commercial banking, thereby preventing banks from gambling with personal savings. He also argued vigorously against regulating derivatives – essentially, financial bets on financial bets – that proved to be weapons of mass financial destruction.

In his public advocacy for these policies, he crossed the line of being a mere technocrat and was acting as a politician. With easy money and deregulation, the ingredients of the 2008 financial meltdown were in place. When the catastrophe came, Greenspan admitted he was wrong, somewhat to his credit. “[I found] a flaw in the model that I perceived is a critical functioning structure that defines how the world works, so to speak,” he told a congressional committee. “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms … I was shocked.” According to Randian ideology, self-interest should have made the markets purely rational; no one would do anything dishonest or shortsighted.

But can such a belief really be forgiven in any adult, let alone one of such high mental capacity as Greenspan seemed to possess? A moment’s thought seems to militate strongly for “No.” I’m sure everyone has witnessed moments of human folly where people are undone by their own self-seeking actions. Everyone has seen greed pull people under and competition become destructive to the competitors. Beyond common sense, there’s the evidence of history. What of the past financial crises? Don’t they all basically have the same dynamics: increasingly complex ways of producing a bank run? If you go back to Greenspan’s old writing on gold, you start to see the problem. Young Alan thought that the Great Depression was made worse and even brought on by the abandonment of the gold standard. That’s just empirically false. In fact, countries recovered in the order they abandoned gold.

While Greenspan could change his mind, and alter course, he was fundamentally attracted to ideological conceptions of the world: just so fables that exempted him from paying attention to the messy reality underneath. Surely, in his career, he must have encountered the work of Hyman Minsky, who argued that the combination of the Fed’s infusions and deregulation was creating the equivalent of a financial hydrogen bomb. But that would’ve had to involve admitting that the market could be irrational and that was the one thing central view that could not be abandoned. The other problem with Rand cult’s ideology was the essential elitism: the business elite, the 1% if you will, got there from being superior, from being more rational, they were productive and virtuous, and therefore they deserved the Fed’s help. They could be trusted with it because they would always act with their superior self-interest as their guide. When it’s broken down to its essentials, this is not a worldview that should have ever been given serious consideration, no matter the short term success its adherents might demonstrate. It’s a glib and arrogant series of bromides. Combine it with the name big-o “Objectivism,” the equivalent of calling your philosophy “The Way Things Really Are–ism,” and you’ve got an intellectual disaster on your hands. That’s what Greenspan’s legacy finally is—an intellectual disaster: America relied on the acuity of his mind for its safekeeping and he failed us.