Wednesday, December 12, 2007

I agree with Greenspan, in part

In today's WSJ, former Fed Chairman, Alan Greenspan, argues that the root of the mortgage crisis lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World. I agree with Mr. Greenspan, in part- the fall of communism, in my view, set the stage for our current mess- a stage, managed, for a time, by Mr. Greenspan.

It seems to me no mere coincidence that Darwin's Theory of Evolution emerged during a period when faith in the virtues of capitalism was, at least among the wealthy, strong. Both views are based on faith in the virtues of competition. The idea of natural selection through competition is equally at home in discussions of both evolution and capitalism.

Evolutionary biologists argue that environmental changes which reduce competition, such as the elimination of predators, will lead to increases in population. But this rise in population often sets the stage for a "culling of the herd" as new limiting factors (and there are always limiting factors) come into play. In other words, competition strengthens competitors and the lack thereof weakens them.

In our case, the (in hindsight, obviously, temporary) elimination of competition between the Communist block (now market based Russia and China) and the West reduced pressure on economic policy makers to get it right, i.e. to try to avoid the nasty aftereffects of an investment bubble, by, quoting ex-Fed Chairman William McChesney Martin Jr., taking away the punch bowl just when the party gets going.

Even Mr. Greenspan held this view in the early going as evidenced by his pre-emptive strike against inflation in 1994.

As the 90s progressed, however, western economic policies began to be viewed as unalloyed goods (promoted by, inter alios, Francis Fukuyama in his The End of History), markets, even manipulated ones, were seen as never getting it wrong and the desire to avoid investment bubbles was replaced by the view, notably promoted by Mr. Greenspan himself, that a better policy was simply to clean up the mess resulting from constantly refilling the punch bowl.

I suspect easy Al never threw a party for some of the people I know, who won't leave until all the booze is drunk. Then again, he did throw just such a party which has yet to truly end....and the credit addicts are in dire need of yet another fix.

This lack of fear resulting from reduced competition, was, I suspect, a factor which led the US to unwind some of the depression-era banking regulations, such as Glass-Steagle. Faith in the virtues of competition was replaced by faith in the virtues of concentrations of power, in many regards.

I suspect that, after the full effects of the current crisis manifest, we might once again discover the virtues of removing the punch bowl before the party gets going, and thus keeping our hang-overs small.

Until that time arrives, I'll keep a tight hold on my Gold.

9 comments:

jeff said...

greenspan, with his free market fundamentalism and his pandering to power, bears a lot of responsibility personally. he never met a problem that he didn't want to throw money at. the one time he tried to restrain excess, with the "irrational exuberance" remark, he quickly backed off. the fed shirked its regulatory responsibilities as well as being too loose with rates. as for pandering: who can forget sir prints-a-lot's defense of the bush tax cuts- without the cuts, the string of federal surpluses would lead to the government having to buy private assets. problem solved: now the chinese swf et al can buy our private assets, instead.

Bix said...

Although I admire your understanding of the evolution of societies, I disagree that Alan Greenspan was not fully aware of what he was doing. Creative destruction has been his mantra since his Ayn Rand days. The TRUE motivation in his reckless actions will FINALLY restore honest money to the world! In fact, AG has been TRYING to take down the fiat banking system since he was the Chairman of the CEA under Ford. He FINALLY found a way by using the bankers greed against them. This has been in the works for 40 years. Read my articles on lemetropolecafe.com called "The Road to Roota I & II" to get my take on the coming implementation of the gold standard and insight into the mind of Alan Greenspan. Bix Weir

Dude said...

Jeff,

As I noted in the essay, Greenspan was the lead promoter of the "don't prick an inflating bubble, deal with the mess afterwards" policy, and thus I agree, he, inter alios, is responsible.

ps He also tried to restrain excess in 1994.

Dude said...

Bix,

I too have entertained the notion that Greenspan was some sort of Francisco, a la Rand's Atlas Shrugged. It seems to me within the range of the possible but my sense is that he's not that smart. I think he believes his own bs, but I could be wrong.

STS said...

The end of the cold war is an important influence, but how it acts on Fed policy is subtle. 9/11 has also been important because it accelerated offshoring (harder to bring immigrants here? then hire them in their home countries!)

I don't think Greenspan was a Randian mole secretly attempting to teach us a lesson about the dangers of a fiat currency -- but it makes for an entertaining conspiracy theory.

I think the real story has to do with the internationalization of capital and the very different consequences for the marginal dollar of US assets/investment income on the one hand and for the marginal dollar of wages on the other. The United States is substantially less important a "unit of analysis" than it used to be. The relevant regulatory regime is often GATT rather than US law, the tax authority is as likely to be the Cayman Islands, the effective dollar zone is expanded to include Asian and Middle Eastern powers who are beginning to 'wag the dog' as their leverage increases.

Monetary policy is different in this globalized economy. There hasn't been enough detailed study of this effect. The economics profession will have 3 mutually incompatible accounts for it roughly 30 years after the major effects have already hit us. ;)

Ruby said...

Dude! I'm back! After starting a new teaching job, I as sucked into a vortex of regimented beauracracy! Haven't read much but Midas in the mail. And now I look up and YEAH! I'm holding tight to my AU too!

last time I wrote to you I was trying to learn about Baudrillard and the similacra, and I still couldn't read Mr. B, but I'm feeling the similacra all around me...

I'm reading Benoit Mandlebrot's The (Mis)Behavior of Markets and it's really good. He shows how all this technical analysis based on a normal distribution is nonsense. If you haven't read it, check it out.

Well, I've got alot of back reading to do, for the last several months... Happy Holidays!

Ruby

Dude said...

STS,

I agree, the influence of the "victory" in the cold war is so subtle that Greenspan missed it entirely.

Dude said...

Ruby,

Glad to read of your return.

Yes, I too found B a tough read. When I read a thinker I imagine the mind that wrote the words and in B's case, that was an unpleasant (but I think worthwhile in the end) experience.

I'll check out Mandlebrot.

ciao for now

Saladin said...

R.E. "I too have entertained the notion that Greenspan was some sort of Francisco, a la Rand's Atlas Shrugged."

Dude, for the life of me, I can't figure if his is Francisco or James Taggert. I'm almost positive that he is one, just can't ID which.

P.S. I say, I find the recent gold market action "interesting" to say the least. At risk of jinxing myself, I would have to say that sentiment is so negative that a major jump is at hand. (of course by that line of reasoning, the stock market and the housing market
should take a major jump as well)

I have a proposition that I'll leave you with. Do you believe that we are watching willful harm cloaking itself as woeful incompetence reguarding the world financial sphere. A.K.A a contrived, MANAGED, global economic collapse? Which would serve the purpose of maintaining Anglo/Saxon hegemony over the worlds geopolitical system.
Or is it simply a case of incompetence/mismanagement leading to ill effects?

Thanks.