Note: And now for something a little different!
My wife left town a few weeks ago for a work trip, and like any thirty-year-old man away from the watchful eye of his spouse, I cued up PBS’ Frontline documentary about unregulated derivatives and the early warning signs of the financial crisis.
You know women, always keeping a man from his current events documentaries. Am I right, fellas??
The documentary mainly centered on a battle of minds between Alan Greenspan, ardent de-regulator and chairman of the Federal Reserve, and Brooksley Born, who wanted to regulate financial derivatives. (Bear with me, this post will get interesting. I think.)
Backstory on Greenspan. He believed in the purity and rationality of financial markets, and thought that any attempt by the government to meddle with the markets was doomed to fail. And he believed this with an almost religious zeal. Greenspan was heavily influenced by the libertarian philosophy of Ayn Rand, and was a member of Rand’s inner circle, to the extent that she stood beside him when he was sworn in as Chair of the Council of Economic Advisors.
Well, we all know what happened. While serving as Chairman of the Federal Reserve for nearly twenty years during a period of nearly unprecedented prosperity, Greenspan succeeded in his efforts to persuade the country that a largely unregulated financial market was the way to go.
Then we experienced the greatest financial meltdown since the Great Depression, and guess what, financial derivatives and deregulation played a big role in that crisis.
Now. You’re Alan Greenspan. One of the biggest calamities in financial history just occurred. You have just spent your entire working life trying to achieve a goal, you did it with incredible zeal, and you were so talented you succeeded at obtaining it. But just as you’re walking out the door having completed your life’s work, something goes very very wrong that strikes at the heart of everything you worked for.
What do you do?
I would wager that at least 95% of the human population would blame external factors. They’d say, “Oh, well, such and such couldn’t have been anticipated!” Or they would point to the fact that not all of their suggestions were implemented, and say, “The problem is that people didn’t listen to me enough.”
Not Greenspan. In one of the most arresting moments in THE ENTIRE PBS SPECIAL ON FINANCIAL DERIVATIVES WHICH WAS BASICALLY THE CHUCK NORRIS ACTION MOVIE OF FINANCIAL DOCUMENTARIES, in October of 2008 Greenspan went before a Congressional Committee and said something pretty profound:
I was wrong.
And not a measly little, “I was a little bit wrong.” Representative Henry Waxman asked Greenspan point blank if he was wrong about the events surrounding the crisis or whether his entire world view had been wrong:
Waxman: “In other words, you found that your view of the world, your ideology, was not right, it was not working.”
Greenspan: “Absolutely, precisely. You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
!!!!
(In an action movie that’s where a tanker truck would explode.)
We all know that it’s not easy to admit when we’re wrong. Heck, it’s not even easy to always spot when we are wrong in the first place. The brain wants to think it’s right.
And it’s another thing entirely to admit that we’ve been wrong about something on the order of an entire worldview. This was essentially Greenspan’s religion, and at the end of his life he realized the foundation was shaky. That’s a really big thing to admit to yourself, let alone to Congress. What is it like to look back on a life’s worth of work and realize you went astray?
And sure, it’s probably better to be, you know, correct in the first place than to have a deathbed conversion after things have already burned to the ground.
But I still think there’s something great about Greenspan admitting he was wrong. We live in a world that is perpetually torn asunder by divisions and partisanship and circles where there’s no such thing as being wrong as long as you’re on the right team. Sometimes it feels like the truth is being splintered into a million pieces, and everyone gets their own little sliver to call their own, and the whole idea of truth is perpetually in the eye of the beholder.
But Greenspan looked at the facts, he looked as his track record and beliefs, and he couldn’t square it. And there’s something kind of amazing about someone standing up and saying, “You know what? I was wrong.”
You DO realize Mrs. Nathan can read probably read this blog post, however far afield she's tripping? She'll know the extent of the horrors that unfold in her absence, the depths of depravity you sink into! PBS documentaries!? Have you no shame? What next? Reading economics text books on your I-Pad?
BTW, I disagree with some of your analysis, and partly with Alan Greenspan. About being wrong. I think he was more right than he now thinks. US financial markets have always been highly regulated, and Greenspan moved a long way from Ayn Rand's philosophy a long time ago. But he did make the common error of assuming people generally behave consistently and logically. And that he and others could predict that behavior, i. e. guess what a person is going to do BEFORE that person has even decided what he or she is going to do. A delusion not limited to libertarians, unfortunately.
And may I gently remind everybody the the 'P' in PBS stands for PUBLIC, as in owned by the Government? I could also suggest that the financial problems of the USA owe more to profligate public spending by the likes of Henry Waxman than the past policies of Alan Greenspan, a view endorsed by a majority of US voters a couple of weeks ago, but that would be naughty. And, yes, derivatives are the work of the Devil.
But I could be wrong…
Nathan,
It's nice to see you expand your blogging horizons. Keep it up … you're a good writer and I think now that you are away from the publishing industry, you shouldn't limit yourself to talking just about books.
As far as Greenspan, sure it reflects well on him that he said he was wrong … but was he being genuine, or doing spin control?
The problem with people like Greenspan, with political theorists like Rand and Karl Marx, for that matter, is that their ideas run counter to human nature. Both extreme individualism or communisim might do well in a perfect world where people didn't have to work together to get things done or actually have wants and desires of their own.
Our economic system is the way it is now for very good and pragmatic reasons. It's the model most countries end up with – local at China for gosh sakes!
As for Greenspan, I don't have much sympathy for him. His one-man crusade helped create an environment that very nearly put us in a second great despression.
I never knew Alan Greenspan was a fan of Ayn Rand, and I certainly didn't know her philosophy influenced his professional judgement. I love The Fountainhead, but it's an extreme perspective to espouse in real life.
Just reading all these posts makes me feel so smart.
"You say you want a revolution
Well, you know…"
The fact that saying "I was wrong" is even remarkable is a sad commentary on our society. Even sadder is that someone would be surprised by it.
Nathan, one of your best posts ever IMHO. I've been taken aback by Greenspan's change of philosophy lately. Another interesting note about Greenspan is that while he was supporting all of this 'deregulation' he was at the same time manipulating the market through his control of interest rates in such a way that he -in my opinion- largely engineered the recession/housing bubble. I don't think anyone had ever gone to such lengths to manipulate the market in that fashion before.
On his way out, he was also fully supportive of the 'spend your way out of a depression' philosophy, encouraging the bailouts and the purchasing of bonds through the fed. Now that all of these efforts have proven to be haphazard at best, he's taking exception to the protege who is merely following in his footsteps.
Still, your point is taken. I'm sorry, and I take full responsibility for this post.
My kid, the many gods bless his soul, is an Arguer. He either has a career in prison or The Law, and we can only hope he uses his considerable genius for arguing his way out of doing nearly everything he doesn't want to do for good, not evil.
The only way to stop him in his tracks is to look him in the eye and say, "Yup. You're right. I'm wrong. The sky is a nice shade of puce today."
And here all along I thought you were leading up to admitting you made a mistake by leaving agenting. I was ready to welcome you back with open arms.
My arms are dangling dejectedly. (I can use an adverb now and you can't reject me. hahahaha)
I believe that over time history will prove Greenspan wasn't wrong about as many things as it seems now…
He's a convenient scape goat, but as important as it is to admit one is wrong, it's equally important for people to take responsibility for their own actions. Hopefully people don't forget that when this crisis is over.
But who am I kidding? Of course they'll forget. It's an endless cycle of fear and greed. Greenspan can't be blamed for that. Like Warren Buffett said, "The only thing we can learn from history is that we don't learn from history."
"the Chuck Norris action movie of financial documentaries" might be my new favorite line of yours. I try to always point out to my kids when I'm wrong–even though it's not about things as vital as the national economy, I think it's important to model flexible thinking.
Also, I hope your wife comes home soon. Does she have any idea how wild and crazy you are in her absence? 🙂
Alan Greenspan is still offering strong advice that rattles investors, recently in regard to global finances. In a guest column for the Financial Times prior to the G-20 Summit, Greenspan accused the U.S. of purposefully weakening the value of the dollar and the Chinese of holding down the value of the renminbi, and he advocated abandoning protectionism in order to allow global markets to flourish more naturally. He also said that China has become a "major global economic force" and should now take on the responsibility inherent in that position. Is he right? Who knows, but his remarks prior to the G-20 Summit sparked quite a bit of anger and nervousness. One of many articles about this: Greenspan warns over weaker dollar.
Lee Iacocca said, "Lead, follow, or get out of the way." Greenspan needs to do the later and in a hurry. He should not hold the financial sway that he does with him being the driving force behind millions losing jobs in this economic downturn. It was more than derivitives. It was ultra low rates that were held there for too long, advocating for ARM mortgages, and asleep at the wheel regulation that, literally, almost made the global economy come to a stand still. Sorry does not cut it.
The post was great, and some of these comments were outstanding as well. I say what the heck, download the economics books to your ipad. 😉
I think it goes to show Alan Greenspan is a scientific man. In the context that he promoted his earlier economic beliefs, he was right to an extent. American miracle is a result of "market economy"; but for the US, the world would have gone astray in socialism. But present dynamics do also show that unregulated markets bring doom as well and based on fresh evidence he is willing to revise his long held opinions. Kudos. That is Scientific thinking – as new evidence emerges, you recallibrate your old theories. I think that is amazing of him. I would trust his further analysis even more because he has an open scientific mind.
(Similar scientific thinking is missing in politics although – we continue propagating passionately held theories without corroboration through reality. We need some Alan Greenspans in politics also.)
I second that Chuck Norris line being perhaps one of the funniest things I've ever read here. Loved the tanker blowing up reference too- priceless.
I have to wonder if Greenspan ever wondered along his journey if he was wrong at the time he was still taking it. I think it's a lot better to realize you're wrong and admit/correct when you can still do something about the damage you're causing. Afterward, to those who've been irreparably damaged by your actions or "worldview" it's little consolation to hear someone say, "Yeah, I was wrong."
I also think admitting you were wrong is a lot harder to get out of when the entire world already knows it- though granted there are still people who would stubbornly say "No I meant to do that, you'll all see someday that I was right all along!"
This post proves to me that you could write about the menu at McDonalds and make it absolutely fascinating (any thoughts on the 'no Happy Meal toys' thing?)
~bru
J.T. Shea, no, not really. With a few notable exceptions, almost all of the Democrats who were defeated in the midterms were Blue Dog conservatives, not progressives or reformers like Henry Waxman. And seriously, a guy like Waxman has spent the majority of his career going after business AND government malfeasance, waste and corruption.
An interesting analysis of the midterm election.
@wry wryter – me too!
Recognising you are wrong and changing direction can be useful. But our culture loves to blame and scapegoat, which is why we don't often admit it.
I suspect in the case you refer to, that admitting to being wrong may be use of a technique called 'yielding' in martial arts (not an expert, folks, so correct if necessary!)which deflects an attack by giving way unexpectedly.
Excellent post! I remember watching Greenspan confessing he'd been wrong all his life and for the first time ever, he managed to impress me (before that I considered him a hopeless idiot who was always making all the wrong decisions, all the more an idiot for being an Ann Raynd fan!)
I agree with you: it takes courage to own up to one's mistakes, especially fundamental ones like in Greenspan's case.
Two things worry me: in view of the mid-term election results, how many Americans are willing to follow (or have followed) in Greenspan's footsteps?
The other is this: don't believe women aren't interested in this kind of subject: I am a woman and I am deeply interested (I've got an MA in Economics from Columbia, that might explain it…in part!) Check me out on my blog and you'll see: https://claudenougat.blogspot.com
Greenspan was trying to plead guilty to a lesser charge than the one he is truly guilty of. For 2003-2006 he kept interest rates too low for too long, fueling the housing bubble. So now he says, "I was wrong–in that somebody else did it." He's the opposite of great.
I respectfully beg to differ, Nathan. Greenspan didn't allow or encourage deregulation; he allowed and encouraged ignoring of the regulations we have in place. Anyone who wants to blame 'free markets' on our various financial messes of the past 30 years (going back to the Savings and Loan bailout of the mid-80s) doesn't understand our economy. We are the most regulated economy in the world. Just look at the Income tax code for starters. The failures of the economy were due to the failure of the regulatory agengcies to do their jobs.
Greenspan was a follower of AYn Rand back in the 60s, but soon did a one-eighty and became an ardent Keynesian, who sold out to the establishment in the hope of becoming the closest thing America has to being anointed king- becoming Chairman of the Federal Reserve.
His ex post facto apology was pure theatrics, designed to restore the luster to his image. In my and many other opinions, he'll go down in history as one of the worst Fed Chairmen ever, for what he wrought upon the American economy in the late 1990s and 2000s.
I'm glad he apologized, but he apologized for the wrong reasons and put the blame erroneously on 'free markets'. Truly free markets would never have precipitated any kind of financial crisis even one-tenth as bad as the mildest 'crisis' Greenspan submitted the US through during his tenure.
Respectfully,
ChiTrader
Interesting points, Other Lisa, but I didn't mention Democrats or Republicans. Most US politicians are profligate spenders of OPM (Other People's Money), many Republicans included, unfortunately. Voters have an innate sense of that fact, and try to use the rather simplistic two party system to express their concerns. With limited success.
We would probably differ as to who is or is not a 'Blue Dog conservative' or progressive or reformer, or even what these terms mean, but I do try to look beyond those ever-changing labels. I'm broadly Libertarian (another label, I know!) and favor individuality over organizations. I think most of us already belong to more than enough organizations at birth. Unlike many Libertarians, I do not excluded corporations from my critique of organizations. But the Government is the biggest and most intrusive organization.
Chitrader, I looked at the Income Tax Code once, and once was enough. Now I'm waiting for the movie version, which will be 1,000 hours long. Starring Chuck Norris.
Money, politics, religion, sex, and the weather are taboo discussion topics at our family's dinner table because they invariably cause arguments from passionate viewpoints.
Who and what caused the current financial crisis has many toxic inputs, so many that they "bio accumulated" as financial markets fed on toxic investment schemes. One or two toxic investmets spread across a few institutions wouldn't have caused a burp. But as the financial institutions laid off risks they were bought up and rose through the food chain and concentrated toxins. By the time they realized they'd been poisoned, there was no where else to lay them off.
J.T. Shea, one point on which I agree with you: our political system is utterly dominated by big (primarily corporate) money. Until there's some kind of meaningful campaign finance reform, it will continue to be so. Where we seem to disagree is in what the midterm elections actually meant in terms of a "mandate." But let's leave it at that.
As a p.s. I should say that I live in California, and I think the perspective might be a little different from here…
(word verification: "omens" — really!)
Other Lisa, I don't make assumptions about your views based on geography. After all, Ronald Reagan lived in California too!
Corporate political donations can indeed over-influence politicians, though I believe the pursuit of pure power over others is more corrupting than the pursuit of mere money.
I don't see the mid-term elections as giving anyone an over-riding mandate, since the US electoral system is designed to avoid such single election mandates, and works well in that respect anyway. But the mid-terms do send a message (or messages). Mixed messages, admittedly, but messages nonetheless.
The irony is the same voters will probably make the same protests in two years' time by voting out the Republicans they just voted in!
I like Alan Greenspan, and agree with Iliadfan that his theories were right, with the exception that equations didn't take greed into account.
I LOVE how everyone likes to blame the large companies, yet time and time again, I saw people buy a house they couldn't afford, two SUVs they couldn't afford, and they cry like a baby when the thing folded and they had to foreclose. I don't feel sorry for any of them.
I think Alan expected people to have more common sense, but 80% of the population doesn't. Just look at the size of the houses that are foreclosing.
I myself never bought a house that I couldn't afford on one salary. Even if that means I lived in a smaller one.
Most people aren't like me. They're greedy, then blame the government/big banks for their woes.
Admit wrong, forgive ourselves, fix problem, leasson learned, move on and save 10 years of wasted stress from life!!! And that advice only takes 30 seconds to follow. Wow, who'd of thought maturity could really be so simple??? =]
Anonymous 6:13 am, you're right, unfortunately, and what is really frightening is that the current policy of both Democrats and Republicans seems to be to re-inflate the credit bubble in general, and the housing bubble in particular, as quickly as possible.
"We live in a world that is perpetually torn asunder by divisions and partisanship and circles where there's no such thing as being wrong as long as you're on the right team. Sometimes it feels like the truth is being splintered into a million pieces, and everyone gets their own little sliver to call their own, and the whole idea of truth is perpetually in the eye of the beholder."
Ya said a mouthful there, Kid. Exactly what I've noticed and have been thinking, off & on, for a while. When I worked as a lobbyist at the state level, around 2000 – 2003, somewhere in there, a few lobbyists I worked with began using this expression: "Perception is reality." With a sort of urgency, even desperation: "Perception is reality!" "Perception is reality" ("The sky is falling!" Whatever.)
And I would think, "No. No it isn't." ———- Example: One day in a parking lot I waved at this guy getting out of a red pickup because I thought it was Mr. K, from my hometown: turned out it was Mr. B from the bank. OK. I was wrong. My PERCEPTION: it was Mr. K. The REALITY: it was Mr. B. Perception — Reality — in that case, NOT the same thing.
But the philosophy was there, and seemed to be — 'it's whatever you can get people to believe.' And it was new. When I had begun lobbying, the rule was, "Never lie, because then you would lose your credibility."
The advent of "Perception is reality" seemed to coincide with widespread use of the internet. Not to "BLAME" the internet, but it seems to be the way some people use it — we were told this would be the "Information Age" — sometimes it appears to be turning into the "Age of Disinformation."
Just found your blog. Like it. Will read daily. This post: edifying & excellent.
Bit of a late response but whatever.
Yes, it's admirable that Greenspan admitted he was wrong, but… too much regulation would have put us in an even worse economic quagmire because the government is perpetually incompetent.
You mean his fascination with Rand was not a red flag? She is/was the Rush Limbah of the left.