Invoking the name of objectivist/libertarian writer-philosopher Ayn Rand [1], hardly a common citation in television
news, ABC's Jake Tapper, on Sunday's This Week, confronted former
Federal Reserve Chairman Alan Greenspan with how he recognized a "flaw"
in his perspective as he had conceded "markets cannot necessarily be
trusted to completely police themselves." Tapper wondered:
But isn't it more than a flaw? Isn't it an indictment of Ayn Rand and the view that laissez-faire capitalism can be expected to function properly, that markets can be trusted to police themselves?
Of course, "laissez-faire capitalism" was not allowed to police
itself by letting poorly-run firms fail (other than Lehman) and allowing
rewards to successful for firms which did not make bad judgments.
Greenspan rejected Tapper's assumption: "Not at all." He proceeded to
point out "there is no alternative if you want to have economic growth
and higher standards of living in a democratic society to have
competitive markets."
Indeed, "if you merely look at the history since the enlightenment of
the 18th century when all of those ideas surfaced and became applicable
in public policy, we've had an explosion of economic growth, and
especially in the developing countries where hundreds of millions of
people have been pulled out of poverty, of extreme poverty and
starvation basically because we have competitive markets."
The exchange on the Sunday, April 4 This Week on ABC:
JAKE TAPPER: You'll be testifying about the financial crisis on Wednesday before the financial crisis inquiry commission. When you testified before Congress in October, you said that you finally saw a flaw in the way that you looked at markets, that markets cannot necessarily be trusted to completely police themselves. But isn't it more than a flaw? Isn't it an indictment of Ayn Rand and the view that laissez-faire capitalism can be expected to function properly, that markets can be trusted to police themselves?
ALAN GREENSPAN: Not at all. I think that there is no alternative if you want to have economic growth and higher standards of living in a democratic society to have competitive markets. And, indeed, if you merely look at the history since the enlightenment of the 18th century when all of those ideas surfaced and became applicable in public policy, we've had an explosion of economic growth, and especially in the developing countries where hundreds of millions of people have been pulled out of poverty, of extreme poverty and starvation basically because we have competitive markets.
So it's not the principle of competitive markets, which really has no alternative which works, it is a strict application as I presented in a Brookings paper fairly recently in a somewhat technical area. The major mistake was assuming what the nature of risks would be, and the reason it was missed is we have had no experience of the type of risks that arose following the default of Lehman Brothers in September 2008. That's the critical mistake, and I made it. Everybody that I know who works in this business made it, and it means that basically we have to work our way back to understanding what we're under, and as I argue, what we need is far more required capital for financial institutions than we've had.
- Brent Baker is Vice President for Research and Publications at the Media Research Center. Click here [2] to follow him on Twitter.