Alan Greenspan is surprised ... by human nature.
There was a kind of lion-in-winter quality to the testimony the former Federal Reserve Board chairman delivered to Congress on Thursday. Summoned before the House Oversight and Government Reform Committee, which is investigating the Wall Street meltdown, the onetime oracle of the global financial system told Chairman Henry A. Waxman (D-Beverly Hills):
"I 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 in the firms."
Greenspan, 82, who relinquished leadership of the Fed just two years ago, said the collapse of the sub-prime mortgage industry -- and the vast, mostly hidden trade in derivative financial instruments it spawned -- exposed a "flaw" in his categorical reliance on free markets.
Over the last two decades, fortunes have been made and lost parsing Greenspan's Delphic declarations, but there's a breathtaking example of ideological blindness embedded in that first sentence. Does Greenspan really believe that banks, brokerages, rating agencies and insurance companies act of their own accord? Even he has to understand that the people who run them decide how they respond, even to market forces.
There are no autonomic reflexes in finance. Did Greenspan really believe that the people in power, presented with a chance to make a killing, would put the interests of their institutions and stockholders ahead of their own?
Put aside for a second the fact that the former Fed chairman spent more than 20 years of his life as a disciple of the novelist-turned-barely-baked-philosopher Ayn Rand, whose concepts of "rational egoism" and "individualism" put the "R" in ruthless and have provided generations of gullible undergraduates an intellectual rationale for their lingering adolescent self-absorption. Has Greenspan lived through the same times the rest of America has recently experienced?
The idea of loyalty -- or of just a sort of reciprocal obligation, for that matter -- simply doesn't operate on Wall Street or much of anywhere in American business any more. The notion that CEOs and other executives would forgo a chance to enrich themselves to keep their institutions solvent or their stockholders' investment whole seems quaint in today's environment. That's true even when the executives' good conduct is supposedly guaranteed by an equity stake, as it is in investment banks.
