Alan Greenspan's Learning Disability

By Lee Russ

Tuesday, October 28, 2008 at 08:51 PM

Last Thursday, Former Federal Reserve chairman Alan Greenspan told a House Committee that he "made a mistake 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." Which was pretty damned strange, actually, because he supposedly learned that very lesson way back in 2002 concerning the accounting field.

Here's what Bill Goldstein of the NY Times reported back in July of 2002 (emphasis added):

Last Tuesday, Alan Greenspan, chairman of the Federal Reserve, brought that era to a definitive end with his diagnosis that ''an infectious greed seemed to grip much of our business community.'' Acknowledging he was wrong in his long-held belief that the government should not regulate the accounting industry, Mr. Greenspan also said: ''It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.

Mr. Greenspan's embrace of greater regulation is a remarkable turnaround for an economist who for many years was a close friend and colleague of Ayn Rand, the high priestess of unfettered capitalism, who fulminated against the ideas Mr. Greenspan now espouses.

That little piece of learning was announced as part of the investigations into Enron and its fellow accounting/financial reporting disasters.

So how exactly would Mr. Greenspan explain learning that lesson about the accounting industry in 2002, but not learning the very same lesson about the banking and finance industry until 2008? It would seem that there are four possible answers:

• 1. There is some important and relevant distinction between the accounting and banking industries in terms of their ability to objectively regulate their own behavior.
• 2. Mr. Greenspan was lying last week when he said he just realized that bankers are best capable of protecting their shareholders.
• 3. Mr. Greenspan has some form of learning disability that prevents him from applying a lesson learned in one context to a clearly equivalent other context.
• 4. Mr. Greenspan has spent his entire adult life trapped in a tight-fitting ideology that prevents him from seeing or recognizing anything outside the bounds of that ideology.

Number one is ridiculous. I'll give Mr. Greenspan the benefit of the doubt on number 2. That leaves a learning disability and ideological blinkers. Instead of choosing one over the other, I'll just consider a rigid ideology a form of learning disability and explain his learning problem as a disability stemming from that ideological straitjacket.

I'm actually pretty sure that's right because Mr. Greenspan had at least one other opportunity to learn that self regulation by a business or industry works about as well as self-regulation of behavior by a 4-year old. Greenspan's tenure as Chair of the Fed ran from 1987 to 2006. That means he was front and center for both the "original" banking crisis that we refer to as the S&L scandal and the Enron insanity. The S&L scandal covered a lengthy period of time, spreading from the 1980s into the early 1990s, clearly overlapping Greenspan's tenure at the Fed. And the scandal was huge--more than 1,200 S&Ls failed--making it very unlikely that Greenspan somehow simply forgot that experience by the time the banks and financial companies starting making up securities and ratings in the early 21st century.

So Greenspan spanned the S&L crisis, the corporate accounting scandal and the early makings of the current disaster. All without really "learning" anything that conflicted with his Ayn Rand philosophy. And he told the world what his regulatory philosophy was long before he ever got appointed to the Fed. Back in 1963, a 37-year old Greenspan wrote an article called "The Assault on Integrity." Here's an excerpt of Jonathan Weil's description of the article for a piece in Bloomberg's:

Left to their own devices, it is alleged, businessmen would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. Thus, it is argued, the Pure Food and Drug Administration, the Securities and Exchange Commission, and the numerous building regulatory agencies are indispensible if the consumer is to be protected from the `greed' of the businessman.

But it is precisely the `greed' of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer.

What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.

Reputation, in an unregulated economy, Greenspan said, is thus a major competitive tool.

When you cling to a view that is repeatedly shown to be false in your own experience, you are an ideologue. When you do it in public as a powerful public servant and no one in power calls you on it, or takes you to task, you are one lucky ideologue.

So what has Greenspan's learning disability--the curse of Ayn Rand--cost us? Had Greenspan of 2003- 2006 listened to Greenspan of 2002, had Greenspan recognized the rather obvious fact that "banking" was no more ethical, honest, or capable of self regulation than the accounting industry, would this mortgage/credit/derivatives swamp been avoided? We can't say yes because there are way too many variable. What we can say without any hesitation or uncertainty is that had Greenspan listened to Greenspan, we'd at least have had a shot. Unfortunately, Greenspan of the S&L, Greenspan of the Enron debacle and Greenspan of the credit/finance/banking nightmare were all listening to someone else: Greenspan of 1963.