Thursday 06 November 2008
by: Steve Weissman, t r u t h o u t | Perspective
Former Federal Reserve Chairman Alan Greenspan. (Paul Giambarba / t r u t h o u t)
Poor John Galt. Only last year, The New York Times referred to Ayn Rand's "Atlas Shrugged" as "one of the most influential business books ever written," and portrayed Galt, the novel's iconic hero, as a role model for corporate CEOs in their dogged pursuit of self-interest. No wonder, then, the gnashing of teeth in executive suites when Ayn Rand's most famous devotee, former Federal Reserve Chairman Alan Greenspan, admitted that enlightened greed had failed.
"I made a mistake," he told the House Oversight and Government Reform committee, "in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."
For Congressional Democrats, Greenspan's mea culpa pointed the way toward greatly strengthened regulation of our financial markets, which the Fed chair had long opposed. President-elect Barack Obama similarly seems intent on imposing a new regulatory framework, along with higher tax rates on income and capital gains for families making over $250,000.
But please don't gloat yet, as some progressive pundits have done. Most of those at the top of America's corporate tree do not want to be regulated more tightly or taxed at a higher rate, and they are not about to wave the white flag of surrender. For them, the battle is just heating up.
Forbes magazine, which delights in calling itself "The Capitalist Tool," led the counterattack with a cover photo of editor-in-chief Steve Forbes and his call to arms, "How Capitalism Will Save Us." Twice a Republican presidential hopeful and now an economic adviser to John McCain, Forbes had made his millions the old-fashioned way, inheriting his father and grandfather's publishing empire. And, to borrow from the late Ann Richards, he raised his battle flag with the utter certainty of one born with a silver foot in his mouth.
The current crisis, Forbes declared, "was not the failure of free markets but the outcome of bad government actions."
Among his long list of regulatory and monetary errors, Forbes specifically damned the Fed for creating excessive liquidity, keeping interest rates artificially low, and allowing the value of the dollar to fall in line with the Bush administration's desire to promote American exports.
He also faulted Fannie Mae and Freddie Mac for promoting affordable housing in ways we now call "predatory lending," federal prosecutors for too aggressively pursuing fraud investigations of failed corporate risk-takers, and an arcane accounting regulation that requires financial institutions to write down the value of holdings to reflect falling market prices.
I would love to discuss at length each of these and their relevance, but his argument is mostly sleight of hand. The brunt of his message is what he glossed over and left out. In his zeal to absolve the free market of any fault, he completely dismissed the responsibility of individuals and institutions in the housing and financial industries. Their "greed and recklessness," he said, were nothing more than a response to government actions.
Even more stunning, Forbes simply ignored what most observers see as the prime cause of the mess we're in, and that is the massive deregulation of our financial institutions. Forbes was - and is - a leading champion of deregulation, and given what followed his success in selling it, who can blame him for wanting to talk about almost anything else?
In fact, his silence on the subject has nothing to do with shame. Like the Bourbon kings who learned nothing and forgot nothing, Forbes continues to fight against reasonable regulation of his mythic free markets, placing his faith in some invisible self-regulating mechanism that seems to have gone AWOL.
He also continues to take it on faith that lowering tax rates on capital gains will increase investment and create more jobs, even though historical studies suggest that the tax rates do not significantly deter or encourage investment. And, of course, he continues to champion his proposal for a highly regressive flat tax, which would redistribute the tax burden even more onto those who can least afford it.
Nor does Forbes stand alone in his defense of unregulated markets and lower taxes on the wealthy. These remain the religious dogma of trickle-down economics, from John McCain to the US Chamber of Commerce and diehards on Wall Street. True believers, they will continue to push their economic faith no matter who becomes president. If Obama's victory means anything, fewer of us will be fooled this time around.
This crisis was not a failure of laissez-faire capitalism, it was a failure of intensive regulation —with Greenspan's hypocritical contributions. In unbelievable, mass stupidity, the most commonly touted solution is more regulation!
ReplyDeleteFrom The American Competitive Enterprise Institute:
“While the Dow collapses, we have a bull market in government regulations. The 50-plus departments, agencies and commissions are now at work on 3,882 rules; 757 will affect small businesses. More than 51,000 final rules were issued from 1995 to 2007.”
That’s nearly 54,000 NEW regulations, added to what was there before, in only 12 years!
That is hardly Rand's laissez-faire capitalism; that’s massive socialist/fascist government interference! At root, those are the very ideologies Rand spent her lifetime hoping to save Americans and America from. Now, when the effects of those destructive ideologies from Washington hit the fan, everyone is blaming laissez-faire capitalism instead. They are ridiculous, uninformed, or dishonest.
Greenspan dropped any pretense of understanding Rand's arguments well before he became head of the Fed., and he then became a major part of the problem. His monetary policy and suppression of interest rates (1%!!), when Rand would have said “let the market decide”, were an appalling government intervention. Add in the HUD, CRA, CDS, Fannie Mae, Freddie Mac and the recipe for a catastrophically distorted market, including the trading of derivatives, was complete.
Edward Cline wrote, "Reason and rationality flee when force becomes a factor in men’s decisions, to be replaced with the pragmatism of punishment-avoidance or a risk-free shot at easy money."
So imagine YOU are the CEO of a large financial organization. Your competitors are complying with the regulations and appear to be making good for their shareholders, while things are getting tight for your firm. What do you do?
You want to buy a house, and the government directly or indirectly tells your lender they will protect him from default so long as he keeps the mortgage interest low. What do you do?
You do the pragmatic thing, join in, and trusting in the state's easy money guarantee. As a CEO, if you are able to understand the fraud in the government’s game, you build yourself some protection for when the government's house of cards collapses. Most people believe the "government is here to help" (say by regulation), so they don't protect themselves.
You would not have dared to engage in the risky lending or buying that lead to the crisis, were it not for the handful of people in the US government who believed they were smarter than the free market, and who installed legislation to distort it. Without those people, lending rates would have adjusted themselves years ago, paper money would not have been printed like it grew on trees (e.g. “helicopter Bernanke”) and the present crisis would never have materialized.
Capitalism is the only *moral* system because it let's a man keep what he produces; it was the American system. An historical and geopolitical look at nations shows that those which are more free have citizens who prosper more by their own effort, and live more peacefully. Free markets made America great, from 1776 to the late 1800's, and then serious regulations began. Even America's poor were wealthy compared with the middle class of other nations. Ayn Rand was right, and should not be blamed for a protegé's failures.