Alan Greenspan’s Shocking Confession: The Myth of the Free-Market Economy

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The conservative business press is exulting over how Alan Greenspan took down Jon Stewart when the former Federal Reserve chairman and economic guru appeared on the Daily Show the other day.

Indeed, the usually inscrutable Greenspan was downright irrationally exuberant and got off some good ones. This included a barbed suggestion that Stewart reread The Age of Turbulence, his new book on the global economy, so he can better fathom why the nannies who babysit America’s so-called free market economy like Greenspan did for 19 years always know best, as well as why investing in the stock market is preferable to the once hallowed but apparently passé concept of working hard and putting one’s money in a bank, or even under a mattress.

But lost in the self-congratulation was an exchange that revealed Mr. Central Banker and his fellow nannies to be acolytes in the One True Church of Capitalism. This means serving Wall Street trumps the needs of Main Street, and as a consequence lot of good people are being driven to wrack and ruin.

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  • superdestroyer

    What would you expect a “leader” to do? Crack down on loan practices that the market for new homes collapses. Didn’t we go through that in the 1980′s. Crack down on Wall Street and have people’s 401K retirement savings lose a large part of their value.

    The constitituion says that the government’s job is to mint money. That is basically what the Fed does in this age of checking accounts and financial instruments. What would be the alternative? Go back to the gold standard and have price depression like in the 1890′s?

  • Entropy

    The stark reality is that the economy is free market in name only.

    Well, duh. A free market does not mean an absence of rules, just as our “free” society does not mean unlimited freedom. It’s not an either-or question of “free” or “not free” it more like a continuum where you have complete government control at one end and zero government control at the other.

  • gadfly

    50% of U.S. households own stock.

    Wall Street is Main Street, Mr. Mullen.

  • mikkel

    I am not in favor of the gold or silver standard for the exact reasons that we (from an academic standpoint at least) moved away from it: it doesn’t adequately reflect the creation of non-material wealth.

    That said, the whole theory and Keynesian theory are being completely abused. Some how the idea that the government could step in during a Great Depression and help get out of it has turned into the idea that the government’s job is to try and prevent any and all recessions at all.

    The 90s did have a lot of “real” wealth creation because there were many new technologies that hit the mainstream that led to better productivity and commerce. In the latter part, it started to decline and was artificially propped up by our government and led to the bubble. This decade has seen marginal “real” wealth creation because it’s nearly all been driven by real estate due to massive amounts of credit. This entire recovery is more of a credit expansion than anything else.

    The Libertarians have a good point which is that once the government starts creating massive amounts of credit, they create a lot of inflation and the only way to win is to be an investor, not a saver. I just recently learned that the way that the Consumer Price Index is calculated (major measure of inflation) changed in the late 80s. In fact, by the old measurement, we’re in 6-7% inflation. This makes us seem a lot closer to the 70s style inflation than the official figures.

    From everything I understand, we are in store for some major deflation if the Fed does nothing (because of the trillions upon trillions of dollars of leveraged debt predicated on housing), or in order to counteract it, a long period of hyperinflation. We’ve gotten to this point because our government has sacrificed short term political gains and hasn’t let the market be nearly free enough.

  • http://kikoshouse.blogspot.com/ Shaun Mullen

    gadfly:

    Yes. I am part of that 50 percent, but that doesn’t mean that I and a lot of other people with portfolios — in my case a most modest one — aren’t hurting because of bigfoot economic policies.

    If it isn’t obvious, that is the underlying theme of this post, and we ignore the obvious at our peril.

  • mikkel

    Also, if I remember correctly the average house has only a few K in the stock market. Also the majority of people panic buy and panic sell. The average return on the stock market is actually around 2%. This is why I tell people that they should either learn what they are doing or invest in a wide array of indices and completely ignore what’s going on.

  • gadfly

    Keeping inflation low hurts you, Mr. Mullen?

  • mikkel

    gadfly, how is inflation actually being kept low? Look at what the $ has done against the Euro and Canadian dollar in the last six years. Greenspan himself said that the age of low inflation is coming near an end and was only helped kept in check due to unusual circumstances. Of course what he meant was that while they were creating massive amounts of credit to keep our own domestic economy have low inflation, the major developing countries in the world were pegged to our currency and thus the price of our imported goods hasn’t increased.

    Now that the dollar is so weak and those economies are starting to get some independence, then we won’t have the same luck.

  • http://kikoshouse.blogspot.com/ Shaun Mullen

    gadfly:

    I sense that you are more conversant with the economy than I could ever claim to be, so you will have to forgive me for being concerned that so many middle-class Americans are in such dire straits in part — and only in part — because of the excesses of Wall Street that I detail in my post.

    That matters a whole lot more to me than whether some CEO or super broker can qualify for the short list for the next limited-edition Ferrari because of obscenely high (my term) profits and fees while Joe and Jane Sixpack are looking down the twin shotgun barrels of foreclosure and bankruptcy through no fault of their own.

  • mikkel

    Shaun I think the greater point is not that the CEOs are necessarily bad people, but they are acting rationally based on expectations from the Fed. Greenspan has an understanding of why bubbles form, but he is for inflating them out instead of letting them collapse. This induces more risk taking because people know they’ll be bailed out.

    Most of the super rich brokers and companies get that way by being highly leveraged. If people weren’t confident that credit would be continually expanding at whatever rate it needs to in order to maintain the exuberance, then they would not make the same choices. This is what Ron Paul was referring to when he was berating Bernanke for having policies that implicitly made wealth move from the middle/lower classes to the richer ones (and you can’t accuse him of being anti-Free Markets). It’s not a direct wealth transfer, so not many people think about it in those terms.

  • Sam

    “The 90s did have a lot of “real” wealth creation because there were many new technologies that hit the mainstream that led to better productivity and commerce. In the latter part, it started to decline and was artificially propped up by our government and led to the bubble.”

    Please explain how the gov’t propped up the bubble. From what I can tell it was everyday investors as well as large funds that saw people making money on companies with P/E ratios in the hundreds, and thought it would last forever. Even Greenspan tried to tell people that it was a bad idea and very few listened. Eventually the market realized that not every company was going to be Yahoo or Amazon and there you have your burst.

    The subprime loan problems we are having now are the same phenomenon.

    A large portion of the economic rebound since the bubble burst has been less concrete, less “realth wealth creation” than we would like. Massive gov’t overspending has put money into the market, but since so much of it has been financed by foreign investment it comes back out of the american economy later plus interest.

    Also, corporate profits and incomes have risen due to tax packages that favor a movement of money to the upper levels. While this allows for good short term economic news the middle and lower class quickly become unable to sustain consumer spending levels that keep the economy going. Overall the effect is less movement of money and stagnating growth. Again, the subprime issues are a great example of this.

  • Sam

    Also, reading the full article, there seems to be some specific blame placed on the Fed for “allowing” subprime loans. How were they supposed to stop bankers from promoting them? The feds responsibility doesn’t include telling banks who they can and can’t make loans to. Was there some regulation that was relaxed? The banks thought they had a new way to make money, and for a time they did. Then the house of cards collapsed.

    Basically I’m a pretty big fan of Greenspan, and I think its a kneejerk reaction to blame some of the more hedonistic and consequence laden aspects of the marketplace upon him.

  • jpe

    I believe the idea, Sam, is that the Fed kept cheap money flowing into the system through keeping rates lower than what they should’ve been. When capital is cheap, one can afford to take riskier bets. That’s my distinctly non-economist’s take on the argument.

  • casualobserver

    The weakened dollar has already made a very noticeable dent in the trade balance…….unless someone is into buying foreign instead of American, that’s not going to hurt anyone.

  • Sam

    JPE,

    The rates were low, but they have been low before. The creation and more importantly the push on the part of commercial banks to enable subprime loans was entirely their decision. Just because central banks are getting a good rate on money doesn’t justify them loaning on a huge scale to people that are high risk repayments.

    Also, that doesn’t account for the large funds that decided to buy up these risky investments on the hope of making a quick buck. These are professionally managed funds that should have known better.