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Greenspan the Libertarian


Some errors die hard. In today’s CNN Money, an interview with economist David Rosenberg featured this distortion:

The crisis came about because of excessive leverage, a misunderstanding of credit quality as linked to securitized products, and a general lack of appreciation for risk. Thanks to years of deregulation, the government created a wild west and never established a strong sheriff. The head of the Fed was a libertarian who believed that all economic problems would always be solved in the private sector and that the private sector would always adequately price risk. The degree of supervision never matched the extent of the regulation.

A few observations:
Ron Paul, who is undeniably America’s (if not the world’s) most famous libertarian at the moment, has always opposed Greenspanism as a central threat to both liberty and economic prosperity. If both Paul and Greenspan are libertarians, then the word has no meaning.

Rosenberg blames the crash on a “lack of appreciation for risk” and “excessive leverage.” Like all establishment economists, Rosenberg never bothers to ask why these two phenomena occurred. Could it have possibly been due to the Fed’s repeated forcing down of interest rates that in turn led to mal-investment based on the wrong conclusion that savings and investment were plentiful? The common answer is just that it was greed, and for some magical reason, greed was worse all of a sudden in the middle of the last decade. Animal spirits will surely be blamed since animal spirits are the great deus ex machina of bad economics.

Rosenberg also states that Greenspan believed that “the private sector would always adequately price risk.” Where was this fabled private sector? If by “private” he means the sector in which the government and its Fed set the interest rate, the money supply, reserve rates and lending standards, then the word “private” has no meaning either.

Update: Mr. Engelhardt raises a good point in the comments below. Rosenberg does seem to make a very weak attempt at providing a “why,” although Rosenberg’s explanation has almost nothing to do with his stated problems. He blames lack of regulation, yet, why should lack of regulation cause a private company to take on excessive leverage or to misunderstand credit quality or risk? The two aren’t connected logically without invoking animal spirits since in an unregulated free economy, private owners are very much preoccupied with minimizing risk. No one cared about risk because of the Fed’s policies and because everyone knew that the feds would bail out the GSEs. So sure, lack of regulation was a problem, but it was the governments and quasi-government agencies that needed to be reined in, not the “private” organizations.

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