Alan Greenspan will present a paper at Brookings tomorrow (I didn’t get an invite) on the causes of the financial crisis. According to the New York Times, Greenspan acknowledges that there was a bubble, but says that there would have been no way to identify it or pop it. Instead, he writes,
Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging their aftermath seems the best we can hope for.
Isn’t this similar to the argument that Karl Marx made 160 years ago? Or Minsky 60 years ago?
Greenspan’s solution is certainly different, and he doesn’t believe that the contradictions that necessarily cause these bubbles will also cause capitalism to end. However, the diagnosis is distinctly Marxian/Minskyian. It certainly doesn’t seem Hayekian.
Nick, I’m not persuaded that this is the case. Minsky observed that in the third stage of the financial cycle dominated by Ponzi finance, not only unethical practices begin to abound, but also illegal ones, abetted by corruption. John Kenneth Galbraith called this “the bezzle,” short for embezzlement, in The Great Crash: 1929. William K. Black calls it “control fraud” and “regulatory capture.”
I was on the ground in California during the big run up in RE. It was obvious to anyone paying attention that fraud was rampant, for example, in addition to all the rest of Ponzi finance, i.e., finance based on increasing asset prices.
There were laws and regulations in place to prevent this. The Fed is supposed to be the master regulator. Greenspan was purposely looking the other way, Other agencies were similarly compromised or asleep at the switch.
This was not primarily a problem with markets. Nor due to the Fed’s keeping low interest rates too long. Nor a political problem arising out of CRA, Fannie and Freddie. While there were many contributory factors, this was chiefly a crime scene, as William K. Black and others have documented.
The problem with so-called free market capitalism is not free markets. It is the perversion of free markets through the rise of monopolies, oligopolies, trusts, etc., on one hand, and capture of the apparatus of the state, on the other. FIRE did this because they thought they could get away with it, and so far they have, big time.
The US is riddled with corruption due to money in politics and the revolving door. So far, it cannot be fixed because of state capture.
Too little, too late Greenspan!
See, I thought it was actually VERY Hayekian. He called for the denationization of money for this very reason – bureaucrats don’t possess the knowledge to properly control the money supply. The only difference is that Marx and Minsky saw business cycles as something endogenous to capitalism, Hayek pointed the finger at Central Banks.
Josh, the money supply is both exogenous (currency issuance) and endogenous (credit extension). The endogenous money supply is by far the greater in quantity and effect, and it is under the control of the private financial sector that extends credit, not the “bureaucrats.” It’s part of the free market.
Government currency issuance plays only a minor role in nongovernment finance, and the Fed has little control over private credit extension, regardless of what you read about monetarism in the mainstream text books. Reserves pertain to interbank settlement and do not materially influence the commercial lending process. All the Fed does in effect is influence the overnight interbank rate that influences spreads.
Government budgetary balances are influential with respect to sectoral balances, however. If C+I+NX are insufficient to support utilization of real output capacity, an output gap will open up if G doesn’t make up the difference, unless the public goes into debt.
Tom,
I’m not persuaded by the crooks and liars argument.
Josh,
I’m not clear on how denationalizing the money supply would prevent the ebbs and flows of financial capitalism.
Bill Mitchell, Monetary policy was not to blame
First, Mitchell dispenses with the notion that loose monetary policy resulted in the bubble. See the conclusion for what he considered the causes.
It is pretty clear also that if the compromised rating agencies were not complicit in providing AAA ratings, the securities built on the dodgy mortgages would never have hit the market as the form they did.
Here’s another on fraud. This one by James K Galbraith, specifically in relation to Greenspan’s self-defense.
Oh, Please