Mr. Greenspan v. common sense

Alan Greenspan was Chairman of the Federal Reserve Bank from 1987 to 2006, a position that gave him more influence over our economy for two decades than any other single person. His reputation was such that the nuance of his public utterings could turn the stock market into a roller coster.

Greenspan had been an original disciple of Ayn Rand's school of economic philosophy that proclaimed “each man must live as an end in himself and follow his own rational self interests.” This translated into the hard-nosed, hard-hearted advocacy of totally free markets without any government controls.

Under Rand's influence, a young Greenspan wrote to the New York Times in 1957: "Justice is unrelenting. . . . Parasites who persistently avoid either purpose or reason perish as they should." For that philosophy to work (if it ever could), it would require a nation's callous disregard for the vulnerable and needy. You would have to be willing to let people go homeless and starve; and, yes, be willing to let banks fail. It's pure and simple 'survival of the fittest,' where the rich get richer and the poor get nothing.

Greenspan later modified that somewhat and accepted some governmental role. But his youthful enthusiasm for an unregulated economic system remained his guiding philosophy.

Last year he vehemently defended himself against suggestions that his policies had led to the housing bubble and collapse. He insisted "There was nothing I could have done to prevent it." Now, however, he has finally admitted that he was wrong, saying the current crisis has shown him “a flaw in the model that I perceived as the critical functioning structure that defines how the world works.”

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself especially, are in a state of shock and disbelief," he told the House Oversight Committee last week.

Shocked, shocked !!! Who knew?

I knew. Now, I never took Economics 101, and I'd never, ever want me to be in charge of our economy. But what about a little common sense?

As I understand it now, the government encouraged mortgage lenders to make more risky loans so that more people could be homeowners. I think there are good reasons for that, and it's worth some government support through incentives and guarantees that encourage lenders to take a chance on -- and give a chance to -- those who might not quite qualify for traditional loans. But that has to have limits, unless you want government simply to provide homes for everyone, regardless of ability to pay for them.

What led to the runaway boom, which resulted in the runaway bust, was not this initial plan of reasonable incentives to increase home ownership. It was that the financial markets then figured out a way to make money out of bad loans.

Common sense tells me that if you make a profit out of something, entrepreneurs will find a way to make more and more of it. That's what they did. What started as an incentive to help ordinary people turned into a money-making bonanza for rich investors.

No longer did the person making the loan have any risk -- or incentive to be cautious -- because they immediately bundled and sold the mortgages to other investors. And they in turn created these wispy things called credit default swaps. The more bad loans you could buy up and get others to "insure" against loss, the more money you could make. Once you start making money out of a system that's designed to lose money, you have a house of cards. And houses of cards tend to collapse.

What did you not understand about that, Mr. G.?

Ralph