Comments (17)

• Jeremy L.

  King is confused about what Greenspan was admitting was his own error. I hope this is a forgivable offense: I was confused at first, too. All the mainstream headlines said Greenspan was admitting he was wrong to trust markets. That's not what Greenspan said. (Nor did he admit he was wrong to trust markets to respond as he hoped to his own regulatory actions. That's what we would have HOPED he could admit, but that's not what he admitted.)

  Greenspan says his mistake was to assume that the financial sector can govern itself so as to prevent widespread fraud without the need for regulations. My understanding of this part of the story is that high-risk loans were being passed off as a stable backing for low-risk assets. There was widespread misrepresentation of borrowers' financial standing and collateral. Loans were being created that could not have been created twenty-five years ago, when regulations were in place to prevent this kind of fraud. So, what Greenspan is saying is, it was a mistake to think that regulations as such were not necessary; it was a mistake to think the market could police itself.

  I know this admission goes against the ideas of many readers and posters to this site. But in this respect, maybe Greenspan (and maybe all of us) COULD learn something from Hayek. After all, in The Constitution of Liberty, Hayek is at great pains to distinguish bad regulations from good regulations. Bad regulations target parties to a transaction or try to fix an outcome, are passed without due consideration of the non-obvious costs and consequences, are not made generally known to the public, or are passed at the discretion of appointed bodies not directly dependent on the legislature or the government. But regulations may also be neutral or good, on Hayek's view, when they govern standards and procedures for the production of goods and services, when they are passed and publicized by an authority subject to democratic oversight and direction, and when they are passed with due consideration to the costs and consequences.

  On his conception of liberalism, economists should have a presumption against regulation UNTIL they have had a chance to consider whether the above conditions hold; and voters may decide, after the economists have informed them of the implications, that the latter kind of regulation is not evil, and maybe even not all that objectionable.

  His main discussion of this latter kind of regulation is CoL pp224-226. He specifically considers local building code regulations at CoL pp354-356. But it seems to me that the same reasoning applies to any matter of standards and procedures.

  Published: October 27, 2008 8:59 AM

• George

  Greenspan either doesn't have a clue or won't admit it.

  In Greenspans book, The Age of Turbulence, there's a passage on page 297
  where Greenspan describes his debate with Li Peng and says that the US
  tried price controls (under Nixon) but learned that they don't work.

  This conversation was during the period when Greenspan was head of the
  Fed and controlling US interest rates (price controls on money)..
  

  Published: October 27, 2008 9:50 AM

• fundamentalist

  Jeremy L. “But regulations may also be neutral or good, on Hayek's view, when they govern standards and procedures for the production of goods and services, when they are passed and publicized by an authority subject to democratic oversight and direction, and when they are passed with due consideration to the costs and consequences.”

  In theory, Hayek is exactly right. However, in practice Hayek’s good/neutral regulation is impossible to achieve. If you could go back in time and ask the people who wrote the failed regulations of the past about that regulation, they would always tell you that they have followed Hayek’s rules for good regulation. No one, as far as I know, ever intentionally writes bad regulations. The real problem is hubris, which Hayek points out in other writings. Because of hubris, writers of regulation think they know more than they do, assume their knowledge is sufficient when it isn’t, and pretend that they can control events that they can’t. Humility, which is an absolute requirement for wisdom, requires that the writers of regulation admit that they don’t have the wisdom, knowledge and foresight to write good regulations and therefore abstain from doing so. They should accept that millions of people deciding for themselves what is in their own best interest have the knowledge to accomplish their limited goals and that the regulators don’t have that knowledge. Millions of people deciding for themselves will produce better outcomes than would a handful of regulators trying to make those decisions for them.
  

  Published: October 27, 2008 9:52 AM

• Bill Ott

  The Beauty Contest Thing is not the biggest item in the article. The statement that Capitalism can not handle time jumps out at me.

  Capitalism is the only system that can handle time. It is just the judgements of the performance of the entity over time that people dislike. The author points out that business project take time. He does not point out that absence a free market there is no way to distinguish the good businesses from the bad ones. Take two awful businesses: Fannie Mae and Freddie Mac; the market destroyed these businesses only to have the government squander billions in tax payer dollars to revive these two malinvestments.

  Published: October 27, 2008 10:28 AM

• Michael A. Clem

  Exactly how did Greenspan expect the markets to police themselves as long as government was there to provide the moral hazard of protection? Furthermore, how could they regulate themselves when Greenspan, as Fed Chair was controlling the money supply and interest rates? Nobody could know the real, free market interest rate since Greespan was busy distorting it.
  
  Freedom without responsiblity isn't a free market, but license--it's not possible without government intervention. Greenspan's done a terrible disservice to liberty, first, as Fed Chair, and now with careless comments.

  Published: October 27, 2008 10:30 AM

• fundamentalist

  Boiled down, Greenspan said he expected bankers to act rationally while he acted irrationally. In other words, he expected bankers to be the designated drivers while he got drunk. Unfortunately, they got drunk with him.

  Published: October 27, 2008 11:21 AM

• fundamentalist

  PS, for “good” regulation to work as Hayek describes, the write, and probably the enforcers, of regulation would have to be able to see the future perfectly in order to perceive the effects of their regulations. But if they could see the future perfectly, we would not need regulations. They could simply tell us what the future had in store if we took certain actions and we could choose those actions that resulted in a perfect future.

  Published: October 27, 2008 11:41 AM

• Inquisitor

  LOL I bet this is the first time Greenspan has ever been referred to as a beauty. More like a beast...

  Published: October 27, 2008 1:04 PM

• Jeremy L.

  I think it's going too far to say that a regulator would have to be omniscient. Hayek and Mises argue that regulators can't anticipate the future any better than consumers can — but it doesn't follow that they can't anticipate the future at least as well as consumers can.

  As a matter of a priori principle, do use a simplistic example, it doesn't seem to me that regulators have to be omniscient to say someone shouldn't be allowed to sell food to the public that has rat poison in it, on the grounds that someone some day might need to buy food with rat poison in it. It becomes even sillier if we say that someone could sell whatever they want with rat poison in it, as long as it is clearly marked as poisonous and not put on shelves next to edible food: a regulation to that effect (or, similarly, a court precedent concerning negligence or fraudulent labeling practices on the part of food producers) may have the consequence of increasing the costs of producing food with rat poison in it; but no one will say that this interferes in a significant way with the desires of someone who really just absolutely MUST have food with rat poison in it, for cheaper than they can get it in a market so regulated, or with the desires of someone who wants to sell to anyone who will buy food with rat poison in it. Anyway it's not clear why these obscure and ridiculous cases should trump the obvious concern of the general public for their own safety as consumers.

  To speak to the case at hand: It's not clear to me why we should say, a priori, that it is bad to have regulations in place governing the standards and procedures for creating mortgages and also mortgage-backed securities, on the grounds that, for all we know, substandard and irregularly-created loans and securities might turn out to be more beneficial to the consumer. Taking that view, it seems to me, distorts Mises's and Hayek's arguments.

  Published: October 27, 2008 2:22 PM

• fundamentalist

  Jeremy L.: “I think it's going too far to say that a regulator would have to be omniscient.”

  To have the type of regulation that Hayek describes, they would have to be omniscient.

  Jeremy L: “…it doesn't seem to me that regulators have to be omniscient to say someone shouldn't be allowed to sell food to the public that has rat poison in it…”

  I guess we need a difinition of regulation. The example you give is not one of regulation, but of natural law. Capitalism has always been based on the rule of law with the necessary institutions to protect life, liberty and property. On the other hand, regulation as popularly used means the state intervenes in the free market and directs businesses toward specific goals.

  Jeremy L: “It's not clear to me why we should say, a priori, that it is bad to have regulations in place governing the standards and procedures for creating mortgages and also mortgage-backed securities, on the grounds that, for all we know, substandard and irregularly-created loans and securities might turn out to be more beneficial to the consumer.”

  To repeat, let’s separate law from regulation. If you’re talking about contract laws that protect property owners from fraud, we have had those for millenia and they are well understood. Regulation is the state intervening in free markets and directing them toward its own goals. For example, we had a free market in money at one time but it didn’t achieve the goals that people in government thought it should, so they gave a monopoly on money to the Federal Reserve, thereby committing theft against private holders of money. Then, when the Federa Reserve causes chaos in the financial world through its immoral manipulation of money, instead of doing the honest thing and returning to a free market, the state adds regulations to force what is left of the free market to do its bidding. Every intervention in the market by the state via regulation causes greater instability and demands for more intervention/regulation. Eventually, we end up with pure socialism, which was the goal of the state in the first place.

  Anything beyond the necessary laws to protect property and the right of contract is regulation and intervention in the free market. Not only is it immoral, it is very destructive and we’re witnessing its destructive power today.
  

  Published: October 27, 2008 3:16 PM

• Bruce Koerber

  This is very insightful and very descriptive of the 'science' of Greenspan as the Fed Chairman. He would 'sniff the air' to see what was in it and then react to it.

  The irony is that his behavior was based on his subjective impression of the action/reaction in the market as a result of the whimsical signals sent by the 'maestro.' To him subjectivism was his whims and the chaos that they created. Talk about an ego-driven interventionist - he distorted and perverted subjectivism so that it was all about himself and the rest of the dollar-bound world bending to his capriciousness.

  As to whether Greenspan trusted the market: in his ego-driven mind he was the market. Being Fed Chairman is the quintessential position of glory for the ego-driven interventionists in this the Dark Ages of economic science. And from that seat of authority he (and now it is Bernanke) admininisters the plague of counterfeiting and corruption and theft.

  Published: October 27, 2008 5:53 PM

• Jeremy L.

  I'm using Hayek's terminology. It is also the same as Mises's. They do not subscribe to a natural law philosophy; they subscribe to a Wertfrei theory of positive law. A regulation, in their usage, is any statute or administrative order stipulating what productive or commercial activity is lawful, and under what conditions, versus what activity is not lawful. "No rat poison in food" could be an example. Standards and procedures for creating debt, or creating financial instruments, could be other examples.

  Regulations are not necessarily evil, any more than statutes are necessarily evil; it all depends on what the content is, and how they are implemented.

  Regulations are distinct from contractual terms, which must be explicitly agreed upon by the parties to a given contract. They are also distinct from legal principles articulated in a judge's ruling at law or equity; regulations are formulated in general terms by a legislator or executive, whereas legal principles are formulated in response to individual cases when there is a complaint. In some contexts we might distinguish regulations properly speaking from statutes; statutes would be the general laws articulated by the legislature, whereas regulations would be general orders articulated by an administrative body to whom the legislature had deferred authority. The latter distinction is not relevant to Hayek's discussion of regulation in Constitution of Liberty; again, I refer you to pp224ff. (I'm perplexed that you would criticize Hayek's view of regulations without attending to HIS definition.)

  I'm not saying that the Federal Reserve's money expansion was not the root cause of the crisis. I am certainly persuaded that it is. That is the mistake Greenspan SHOULD be admitting to. I suspect, however, that if there was a massive and indiscriminate dismantling of regulations concerning the proper standards and procedures in place to prevent fraud when creating mortgages, and/or when creating mortgage-backed assets, then the resulting state of affairs could have exacerbated the crisis and made it very difficult to reappraise the value of assets now that the bubble has burst. That is the particular mistake that Greenspan admits.

  This is all I need to say to clarify my point. I'm not inclined to argue with self-described fundamentalists, least of all on the Internet! But thank you for the exchange just the same.

  Published: October 27, 2008 11:00 PM

• Stanley Pinchak

  Jeremy L.,
  It is impossible to create public policy which is Wertfrei. All regulations will necessarily be based on some values. Rothbard demolishes the concept of a utilitarian basis for values in the Ethics of Liberty. Even taking as a goal for regulation that they should enhance the overall psychic profit of the society would be imposing a set of values (and a very dangerous one at that) which can not prevent arbitrary application of force against non-violent and otherwise property rights respecting actors. I see regulation which transgresses beyond natural law as just a back-door for tyranny. Any regulation contained within the bounds of natural law is superfluous in a society with functional courts.

  Published: October 28, 2008 1:37 AM

• fundamentalist

  Jeremy L. “Regulations are not necessarily evil, any more than statutes are necessarily evil;”

  “Regulations are not necessarily evil, any more than statutes are necessarily evil;”

  No one is making a moral argument about regulations. The argument is practical, the same argument that Hayek and Mises repeatedly made. If you want to conflate regulations with laws that protect property, that’s fine. But Mises and Hayek made a distinction between laws that protect property and laws that try to direct the economy toward specific goals or micro-manage specific industries. They favoared the former and opposed the latter. No one on this site will argue against laws/regulations that protect property. If over the millenia that courts have dealt with contracts and fraud they haven’t been able to define fraud sufficiently, then certainly legislation is necessary, but I doubt that is the case.

  Jeremy: “I'm perplexed that you would criticize Hayek's view of regulations without attending to HIS definition.”

  I wasn’t criticizing Hayek’s views of regulations. I meant to say that the qualifications he placed on sound regulations made them impossible to achieve. I haven't read that book of Hayek's but I have read several others and many of his articles and I think I have a good idea of how Hayek understood regulation of the economy and he opposed it, not on moral grounds, but on the practical grounds that it would not achieve the desired goals of the regulators.

  Jeremy: “I suspect, however, that if there was a massive and indiscriminate dismantling of regulations concerning the proper standards and procedures in place to prevent fraud when creating mortgages, and/or when creating mortgage-backed assets, then the resulting state of affairs could have exacerbated the crisis and made it very difficult to reappraise the value of assets now that the bubble has burst.”

  Again, no one advocates lowering standards for fraud. I don’t understand why you keep making that argument. All Austrian economists would agree with you completely that if you eliminate laws/regulations that protect property you invite chaos and lawlessness. But at the same time you seem completely unable to see the whole forrests that have fallen in order to print the vast regulations of the financial sector that have nothing to do with fraud and everthing to do with micro-managing the industry.

  Jeremy: “I'm not inclined to argue with self-described fundamentalists…”

  You don’t like talking to honest people? Using your first name gives me no clue as to where you might stand on issues and forces readers to have to guess where you’re coming from, what ideological baggage you carry. Based on your comments, I would guess that you are a typical “third way” type of guy. You believe that capitalism is a wild animal that the state must domesticate. On the other hand, by my tag you know up front that I’m a fundamentalist on important issues. I focus on the fundamentals in American football. The teams that block and tackle the best win. I’m a fundamentalist when it comes to analyzing stocks and don’t care much for technical analysis. I’m a religious fundamentalist in that I believe in the fundamental truths of traditional Christianity. In philosophy I’m a fundamentalist in that I believe in objective truth and reason. Finally, in economics I’m a fundamentalist because reason and history have proven that sound money, free markets with the rule of law, and honest institutions, the fundamentals of economics, create prosperity and the flourishing of civilization.
  

  Published: October 28, 2008 8:51 AM

• Jeremy L.

  I do want to make myself clear, and I would like to focus on the issue precisely.

  "no one advocates lowering standards for fraud"

  As I understand the situation, what Greenspan is saying is that he DID advocate this, or something amounting to this. He believed that the financial sector did not need to have any kind of regulations at all, not even those that would require transparency in the standards and procedures for reporting risk in debt-backed derivative creation, because the financial sector could "police itself", ie. be trusted not to allow widespread misrepresentation of risk to occur without needing laws to tell them explicitly how, precisely, to report it. Now he says that was a mistake, that maybe some sort of regulations (not ANY sort, but SOME sort) may have been appropriate after all. I think we may have Hayekian grounds for agreeing with him. At least, there is no a priori economic counter-consideration that I can see.

  This is not to say that it was Greenspan's only mistake, or his worst mistake. This is just the one he admits.

  I'm not defending all the regulations in the world. I'm not saying that, eg., the CFTC and the SEC can do no wrong. My only point is that we should take Hayek seriously when he says: bad regulations are bad, but good regulations are good (and possible), there are rationally demonstrable conditions that make them bad or good, and a smart society should understand the difference. The devil is in the details.

  As for where I'm coming from: I'm acquainted with Rothbard's arguments, and I'm not convinced by them. My views about the object of economic analysis and its role in policy formation are much more in harmony with those of Mises and Hayek. I'm emphatically not a third-way guy.
  

  Published: October 28, 2008 11:25 AM

• parsimonia

  "Loans were being created that could not have been created twenty-five years ago, when regulations were in place to prevent this kind of fraud. So, what Greenspan is saying is, it was a mistake to think that regulations as such were not necessary; it was a mistake to think the market could police itself."

  I don't necessarily disagree with this statement but the bad loans were the result of the Boston Fed's research claiming to be evidence that standard loan practices (i.e. evaluating a person's creditworthiness by looking at income, whether they had past bankruptcies, credit history) that were followed with success up until the early 90s were ridiculously restrictive and an obstacle to growth in minority homeownership. As a result of this, lenders were strongly encouraged to violate good business practices in order to meet a political goal. They made bad loans, housing prices went up because just about everyone now qualified for a mortgage. You know the rest of the story. The only possible check on the distortion in the market being a halt to the false rise in home prices. Regulation at another level of the resulting scheme maybe would've reduced the damage, maybe not.

  "This is all I need to say to clarify my point. I'm not inclined to argue with self-described fundamentalists, least of all on the Internet! But thank you for the exchange just the same."

  Do you have some theory of everything that causes fundamentalist's discussion of economic theories to be invalid because you believe his theory of god/religion is invalid? I'm not following you here. I hate to burst your psuedo-intellectual bubble but there are many fundamentalists who have genius IQs others who aren't so gifted are amazing with money. There's also research indicating that the most functional people aren't necessarily the most "rational" people with regards to religion or even just expectations for a better life in the future. I think a good analogy might be the fact that in driving you will be more likely to have a wreck if you are looking at the car right next to you, less likely if you look far ahead to see where you are going. So maybe it all gets down to a trick of perception but it works.

  Don't mistake following a formula (being atheist/agnostic, wearing black, having a certain hairstyle, reading certain books, holding certain opinions) that you believe makes someone smart for thinking.
  

  Published: October 28, 2008 1:10 PM

• Jeremy L.

  Hi parsimonia,

  I didn't mean my remark to be an attack on anyone's personal beliefs, or a disparagement of anyone's intelligence. I only meant to say, I prefer to avoid implicating myself in arguments on the internet generally, especially if our respective premises are irreconcilable. I tried to be up-front about my own premises, as "fundamentalist" has been, and to the extent that we have different ideas about the role, intent, and method of economic analysis, I think the best we can do in blog comments is clarify our points, without necessarily expecting to persuade one another of anything. The only fundamentals I want to talk about when I come to Mises.org are the fundamentals of Mises, Hayek, and Austrian economic analysis. So I would like to excuse myself from anything more philosophical than that.

  I hope that clarifies where I'm coming from.

  Published: October 28, 2008 1:31 PM