Thursday, October 23, 2008

Greenspan Finds A 'Flaw' In Free Market Ideology, I Find A Flaw In Greenspan's Thinking

As I have pointed out many times before, former Fed Chairman Alan Greenspan has never understood business cycle theory, and now it appears he doesn't even understand basic free market theory.

"Yes, I found a flaw [in non-regulated banking markets]," Greenspan said today during testimony before the House Committee on Oversight and Government Reform. "That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well."

I have found a flaw, also. It is Greenspan's thinking.

The entire free market system is based on the fact that there is not perfect knowledge. Some people will be better at making a profit than others. Those who make losses, will be pushed to the side by those who do not.

The fact that some bankers believed in faulty econometric equations is not a failure of the free market system, anymore so than the failure of the Edsel, Nehru jackets and laser discs for movies, were failures of the free market system. The beauty of the free market system is that any nut job, who can scrape up the money can try, any wacko thing he believes in. Since, it is impossible to know in advance who is a complete nut job, and who has superior vision, it is a good thing, indeed, an important thing that this freedom exists.The great turn downs for funding that then ultimately find some funding and then turn into the great success stories is how legends are built. Likewise, the great failures are studied so that they are not repeated again.

The financial institutions that bought voodoo econometric securitized mortgages should fail. No regulatory intervention needed at all.

For Greenspan to think otherwise is Greenspan's flaw in understanding the basics of the free market system. No regulation is needed, and as I have asked many times before, just what makes anyone think that regulators have a crystal ball that can never be flawed?

With government regulators in charge, the entire economy will be directed in one direction. With free markets, many, many different possibilities will be tried.

The free market is all about options, flexibility and alternatives. Regulation is about straight jackets.

1 comment:

  1. Greenspan seemed to have no problem understanding the free market and the fact that some companies won’t succeed when its something he does not care about. He stood by when US clothing, steel, appliances, electronic, etc industries lost out to competition, even when such competition was helped by some selective interpretations of “free trade” or because it was burdened by the cost of the welfare/warfare state. Yet when it is his beloved financial industry then he can’t understand that they failed in the market place and should go out of business, instead they must be put on life support from the taxpayer and regulated by the likes of Henry Waxman.

    Though this might be for his own self-absorbed reasons, if the big US financial institutions fail then he is no longer connected to that power base and he himself becomes irrelevant. No more book deals or speeches, he becomes just another failure in the market place.

    One of the things that frustrates me in watching coverage of the financial crises is how few put forward the idea that bailing out banks who have at best been run by fools or at worse by criminals is a bad idea. Is there some sort of shortage of fools or criminal that we need to subsidize them? Instead they want to “save” these institutions even when as far as I can see that any real accounting would show that many have no real assets compared to the vast liabilities they have.

    But I guess that most of the “experts” got to the position they held by kissing the ass of the system so they are afraid that if they lose that sponsorship they will lose everything