From the horse’s mouth

Alan Greenspan was chairman of the US Federal Reserve during the great credit boom of 2002-07, which, as we know, ended in the massive credit crunch and financial sector collapse and the Great Recession of 2008-9.

During the boom period, he was hailed as a virtual god by Wall Street speculators and mainstream economists.  Bob Woodward, the famous journalist of the Watergate/Nixon scandal, even wrote a book called Maestro, describing Greenspan as the wisest of all helmsmen of the capitalist system.

The high priest of traditional monetary economics, Milton Friedman (now deceased), much revered by Margaret Thatcher and an advisor to General Pinochet after the CIA-inspired military coup over the democratic socialist government of Chile in the 1970s, commented in early 2006 that so brilliant had Greenspan’s Fed policies been “there is no other period of comparable length in which the Federal Reserve System has performed so well.  It is more than a difference of degree; it approaches a difference of kind.”

Then came the credit crunch and the slump.  In late 2008, Greenspan, by then replaced by the current Fed leader, Ben Bernanke, told the US Congress that he was in a state of shocked disbelief over the failure of his economic assumptions that ‘free markets’  would work.  Recently, Real World Economics Review readers voted Greenspan as the economist most responsible for causing the global financial crisis, followed by Milton Friedman and White House advisor Larry Summers.

Now he has published a 48-page report aptly called The Crisis and presented it to America’s prestigious Brookings Institution reviewing the experience of the last few years and trying to explain and justify his actions.  Not surprisingly, Greenspan finds that the credit crunch, the financial collapse and the Great Recession cannot be blamed on his theories or the economic models or policies that he adopted at the Federal Reserve.

His mainstream economic critics argue that it was the ‘excessively’ low interest rates that he applied at the Fed that gave incentives to banks and other financial institutions to engage in increasingly risky ventures like sub-prime mortgage lending because it was so cheap.   Greenspan rejects this argument, claiming that there was little connection between the low interest rates that the Fed set and the loan rates set by the mortgage lenders.  For him, the cause of the financial collapse was “high euphoria (or animal spirits); the failure of financial regulators to check on what was happening; the failure of credit rating agencies to warn of impending risks; and the failure of modern mainstream economics to understand the processes”.

It is a funny justification to make that Federal Reserve interest rate levels played no role because it implies that central banks like the Federal Reserve really have no power in controlling financial markets and curbing their ‘excesses’.  So the great maestro of capitalism was really nothing of the kind and the Fed, far from being the most powerful monetary body in the world, was in fact powerless in the face of market forces.

But there was a much bigger confession about capitalism from Greenspan in his paper.  He said that there is really nothing any monetary body can do to avoid booms and slumps under capitalism.  “Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. “

In short, without the abolition of capitalism and its replacement by socialist planning, booms and slumps are chronic and inevitable.  It’s from the  horse’s mouth.

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