Thursday, October 23, 2008

It took the near-total collapse of the global economy to convince Alan Greenspan that markets cannot regulate themselves

Better late than never. I guess.

Former Federal Reserve Chairman Alan Greenspan said a ``once-in-a-century credit tsunami'' has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

``Yes, I found a flaw,'' Greenspan said in response to grilling from 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.''


The admission that free markets have their faults was a shift for the former Fed chairman who declared in a May 2005 speech that ``private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.''


Greenspan reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading counterparties to prevent surging losses. The ``breakdown'' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.
I suppose Greenspan's economic models didn't allow for the possibility that people left alone with massive sums of money might steal some of it. Seems like a no-brainer to me, but he's the economist, not me.

But what about common sense? When you get up to go to the bathroom in a restaurant, why do you take your wallet or your purse with you instead of leaving it on the table? Because some people can't resist the temptation to steal, especially if you make it easy for them.

Greenspan and his fellow free marketeers made it easy for people to steal, so a lot of them did.

What a shame that it took the evaporation of trillions of dollars of global wealth to teach them this basic lesson about human nature.

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