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DANCING WITH BEARS

GREENSPAN IN THE DOCK

Today's headlines suggest that former FedHead Alan Greenspan has abandoned all his free market principles, shouldered all the blame for the mortgage crisis and has humbly signed on to the Obama campaign as the resident bad example, presumably to be paraded before select audiences wearing a dunce cap.

How quickly the politicians discard their former heroes when expediency trumps fidelity.

As a young graduate student in New York, Greenspan belonged to a group that was in the thrall of the author-philosopher Ayn Rand (Alisa Rosenbaum), a refugee from communist Russia (where the Soviets had essentially destroyed her parent’s business). She was a fiercely anticommunist atheist who defended the ethic of rational self interest against cultural and political forces that enforce a sacrificial ethos, deride profit and sap achievement. She had no formal economic training. She loved America.

Later in life, Mr. Greenspan was asked if he was still a follower of Ayn Rand's philosophy (Objectivism). He said he was an agnostic where Ms. Rand was concerned.

Under blistering examination in congress yesterday, Mr. Greenspan was asked whether he had given up his libertarian market principles, and he said “partially”, then he attempted the kind of nuanced answer that congress, the president and media had accepted without question when he was at the top of his game. Not this time. Nor did anyone listen carefully.

Ayn Rand despised libertarians, not so much because they “believed in” free market capitalism, but because they lacked core moral values. In Ayn Rand's ideal world, her economic heroes were productive, hard working, men and women of great personal honor and integrity. And they were not shielded from the consequences of failure by complex credit instruments. In a scene in one of her novels an “old fashioned” banker (when Rand uses the term old fashioned, it is intended as a complement) makes a loan to one of her heroes with no collateral other than the man's character. No, the old fashioned banker would not “float paper”, thus “securitizing” the loan and transferring the “risk” (i.e., responsibility) to others.

Accountability for failure wonderfully concentrates the mind.

When governments or networks of financial institutions, acting like a government, mess with the natural risk consequence mechanisms that attend ordinary free transactions they rob the market at large of its internal corrective checks and balances. No regulatory scheme is perfect and no regulatory body can be more effective than a system that requires full transparency and accountability.

Markets that eliminate the consequences of failure – or transfer those consequences to innocent third parties, or try to dilute them – no longer function as rational and impartial pricing mechanisms. Put differently, such markets can no longer be trusted.

Mr. Greenspan's problem (shared by almost everyone in the Beltway bubble) was not a failed economic theory but failed real world practice. Compared to Ms. Rand's “old fashioned” values, Wall Street and “post-modern” banking operate in a morally bankrupt culture. Fiscal bankruptcy followed. And that consequence was as inevitable as hypothermia and death following a naked frolic with polar bears in their natural habitat.

JBG

Without accountability for failure, there ain't no such thing as a free market.