Saturday, October 25, 2008

30 Years Too Late, Greenspan Learns The First Great Economic Lesson Of The 20th Century

This hasn't been a popular opinion for a while, but here goes. The 20th century offered two great economic lessons: (1) Underregulation of markets is a very bad thing, and (2) overregulation of markets is also a very bad thing. The first lesson should have been abundantly clear in the winter of 1932-33. But by the '70s, the second lesson was prominent, so much so that many economists just plumb forgot about the first.

Among the most influential of these economists was Alan Greenspan, later to become a longtime chairman of the Federal Reserve. I found it disturbing, reading about his background way back in the '80s, that the Span Man actually bought into the crackpot economic notions of the late Ayn Rand and her quasi-solipsist cult.

But among economists, such was the climate of the '70s and '80s. The welfare-state excesses of the '60s and early '70s had suddenly made the reforms of the New Deal era irrelevant, and the pre-1929 mind-set had returned with much vindictiveness.

But Greenspan, appearing before a House committee this week, made a startling admission. He conceded that he was "partially wrong" in trusting financial markets to police themselves. Here's the link.


Sadly, the Span Man ran the Fed mostly as a "free" market ideologue for 18 years. By the time he left the post, most of the damage had been done. Now it's going to be up to younger Americans -- Mr. Greenspan is 82 -- to clean up the mess for generations.

Let's revisit the two great lessons. In the early '30s, it was a no-brainer that the greed of players in the financial markets had contributed greatly to the worst economic meltdown in U.S. history. And so, general economic thinking was dramatically altered. It should have been clear that, left so unregulated, greed is NOT good. It leads to unsound practices, skewed income redistribution, social irresponsibility, shortsightedness; and in the end, everybody gets hurt. Au contraire, Gordon Gecko. Unregulated greed is BAD. Greedy people do not police themselves; quite the opposite, they do their best to rig the game. We have seen repeatedly in history that unregulated greed ultimately DOES NOT WORK.

But, by the '60s, we had the Galbraith-dubbed "affluent society," in which so much could seem to be taken for granted. We sort of became victims of our own success. The welfare state tried to do a little too much -- though in the U.S., it paled in comparison to the largess of other societies that spent far less on their war machines.

By the '70s, we had the symptoms of "stagflation" and demand-pull inflation that tend to show up in societies that are overregulating and overtaxing. Unfortunately, this opened the door for the economic quackery that has characterized the "supply-side" and "trickle-down" (tinkle-down, I sez) thought of the past 30 years. Many economists, secure in their own tenure and advisory posts, conveniently forgot about what happened in the first half of the 20th century.

Now, at last near the end of our second Gilded Age, Alan Greenspan is compelled to humble himself before Henry Waxman, and admit that he's had to rethink his ideas of the past 40-plus years.

Pardon me, little fish that I am, that I take a moment to gloat a bit. I was warning about this in 1984. I couldn't get many people to listen back then, mesmerized as they seemed by the foolish platitudes rising through Ronald Reagan's 70-ish turkey neck.

Don't worry, Mr. Greenspan -- you'll have plenty of dignified company in the online history books. Now just fade away, and leave the cleanup to sadder but wiser generations.