Tuesday, October 28, 2008

How mighty Greenspan's world has changed

Business Times - 29 Oct 2008

By LEON HADAR
WASHINGTON CORRESPONDENT

THERE was something pathetic about the testimony by Alan Greenspan, the former chairman of the Federal Reserve, before the House of Representative's Committee on Oversight and Government Reform last Thursday.

Here was the man, who only a few years ago was treated as the Oracle of Delphi by his groupies when he deigned to visit Capitol Hill, was suddenly finding himself subject to harsh criticism and even mean ridicule by the same lawmakers who had worshipped at the feet as the High Priest of American capitalism during most of the roaring 1990s.

The members of the Congressional forum who were cross-examining the 82-year-old ex-central banker sounded at times like inquisitors in a religious tribunal or in a Stalin-era show-trial, pressing a beaten-down witness to confess his sins and to repent.

'You had the authority to prevent irresponsible lending practices that led to the sub-prime mortgage crisis. You were advised to do so by many others,' said Representative Henry Waxman, a Democrat and head inquisitor on the Congressional committee. 'Do you feel that your ideology pushed you to make decisions that you wish you had not made?'

And, indeed, the man who once upon a time was hailed by pundits as the Maestro and the Master of the Universe sounded very apologetic, as though he was pleading for forgiveness. 'Yes, I've found a flaw. I don't know how significant or permanent it is. But I've been very distressed by that fact.'

For the Democrats, Mr Greenspan's Congressional testimony and his ensuing grilling by the lawmakers provided an opportunity to bash the successful drive by the Republican free marketeers promoted by the Fed under Mr Greenspan to deregulate the financial markets. The Democrats blame deregulation for the mess on Wall Street and have focused on the need to reassert government intervention in the markets as part of their agenda in the presidential and Congressional elections. Public opinion polls indicate that most voters seem to be receptive to the Democratic message.

But on another level, Mr Greenspan - who was an intellectual disciple of Ayn Rand, the libertarian novelist and philosopher who celebrated laissez faire capitalism in her writings - created the impression during his appearance that he was experiencing a crisis of faith, suggesting that perhaps he 'made a mistake' when he believed that the financial institutions could be self-regulating.

Hence, a few pundits on the political left compared Mr Greenspan's comments to those made by disgruntled former communists during the 1950s who publicly admitted that their ideological faith had been challenged by reality. But these pundits may be overstating their case by arguing that Mr Greenspan was a free-market doctrinaire and that betrayed by his capitalistic God, he is now defecting to the (ideological) enemy's side.

Working side by side with both who led the efforts to deal with the market crash of 1987 and the dotcom bust crisis of 2000 as well with a series of global financial crises in the 1990s, Mr Greenspan has always exhibited a pragmatic modus operandi. If anything, the former Fed chief has never contested the policy embraced by several Congresses that encouraged consumers through tax benefits and subsidies to buy homes, instead of following Ms Rand's view that choices in the housing market should be made by consumers and financial institutions.

Similarly, Mr Greenspan didn't follow free-market principles when he used the power of the Fed to keep interest rates low and pump cash into the financial markets after 2001. These government-backed policies as much as the deregulatory steps embraced by Washington in the 1990s clearly contributed to the joint housing and financial crises; they provided incentives to consumers and business to make irresponsible choices.

At the same time, it would be an exaggeration to suggest that Mr Greenspan, together with the rest in Washington, is now slouching towards socialism. Even at the height of Reaganism, Washington never abandoned the main tenets of the welfare state that it had adopted in the 1940s. At most, American policy- and law-makers have modified these tenets through some forms of deregulation and tax cuts while maintaining government control of large parts of the economy.

Mr Greenspan did play a role in that process, and now that the pendulum is turning back to the other side, he, like the rest of Washington, is adjusting to a new reality. What's really distressing is we now discover that in addition to not being an intellectual giant, Mr Greenspan was also never a profile in intellectual courage. How the mighty have fallen!



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