The Greatest Depression | 10/24/2008 6:00 am

Greenspan Shrugged? Did Ayn Rand Cause Our Financial Crisis?

By Deborah Jones Barrow, Editor-in-Chief, wowOwow

Photo illustration by wowOwow; Alan Greenspan, AP

"Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief."

So said former Fed Chairman Alan Greenspan in his dramatic testimony before the House Committee on Oversight and Government Reform, as he was grilled by committee members on the causes of the nation’s financial crisis. Greenspan, whose laissez-faire capitalist leanings led him to reject decades of calls for more robust government oversight of financial markets, was repeatedly interrupted by the lawmakers in a contentious exchange that clearly shows the gloves are off in regard to the former chairman’s legacy.

In his startling admission, the former head of the Federal Reserve reveals that his long-held and controversial notion that enlightened self-interest alone would prevent bankers, mortgage brokers, investment bankers and others from gaming the system for their own personal financial benefit has, as the English say, come a cropper.

Bankers ruled by anything other than greed?

Where did Greenspan ever get that idea?

Ayn Rand.

To readers of Atlas Shrugged, Ayn Rand’s 1957 magnum opus, Greenspan’s hands-off philosophy of marketplace management sounds very familiar. At its core, the book supports a radically utopian political-economic system called Objectivism, which suggests that the morality of rational self-interest, as opposed to religious or government intervention, should be the foundation of the ideal political structure.

According to a short description of Objectivism given by Ayn Rand in 1962, "The ideal political-economic system is laissez-faire capitalism … In a system of full capitalism, there should be (but, historically, has not yet been) a complete separation of state and economics, in the same way and for the same reasons as the separation of state and church."

In other words, Ayn Rand’s theory of the "morality of self-interest" exactly parallels Alan Greenspan’s testimony today about his now-shaken belief in the ability of "self-interest of lending institutions to protect shareholder’s equity."

Early in his career, Alan was an avid Rand acolyte, a frequent guest at the Manhattan salon of the novelist and philosopher, and those who gathered to hear the litanies of like-minded notables were loosely known as "The Collective." It was there that the Rand philosophy of Objectivism was discussed in the context of current events, world markets and religion.

Today, 40 years after the heyday of those gatherings, Greenspan surprised many with his "Yes, I found a flaw" response to a grilling from the Committee. Responding to the clear failure of the notion of "enlightened self-interest" to stop the cascade of financial catastrophies that have roiled world markets, he said, "That is precisely the reason I was shocked, because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Greenspan’s critics have long charged that his refusal as Fed Chairman to impose greater government regulations on mortgage lenders is one of the causes of the sub-prime mortgage meltdown.

Committee Chairman Harry Waxman (D-CA), in a heated exchange told the former Fed Chairman that he had "the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others, and now our whole economy is paying the price.”

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Very interesting series of comments for me. I was immersed in Ayn Rand and her so-called Objectivism in 1966-68, until I turned 20. As an 18-yr old coming out of a conservative culture, Rand’s philosophy - beginning with The Fountainhead - was attractive and seemed at the time to address a whole host of questions which a young idealistic person might have. Objectivism is a cult of rationalism, and its economic orientation seems much like that of libertarians. Both lack understanding or respect for Rousseau’s Social Contract. Within its own framework, Objectivism seems rational and well-integrated, like a chess game, and just as disconnected from reality. Greed is really not part of the cult on any conscious level. The way generosity and such were rationalized was by adding “enlightened” to self-interest, and Greenspan’s use of that term really rang the Rand bell in my memory. The enlightened aspect was always a vague idea for me, even during my Rand period. I believe they had trouble eliminating the “greed” implications, which they truly did not feel or desire to be associated with. The followers of Rand bought into this idea because they were “true believers” ala Eric Hoffer, and they needed to make their religion work. As for me, my deprogramming was catalyzed by a stay in Karachi, and tripping on hashish. Greenspan probably never benefited from anything like that. It may seem simplistic to say that, and probably it is, but I feel that this rocking of my boat helped to shake off my “true believer” fixation. Whatever the case, I became a progressive liberal and have only grown more so over the last 4 decades. But Ayn Rand is no joke. The evangelical right is no joke. It may seem like a comedy to some, but it reflects the propensity of human minds to cling to what they believe, even in the face of contradictory facts. Greenspan, no doubt a brilliant man, falls into that category. Somehow, he escaped deprogramming. He had a lot of company. Others fell into line, motivated by greed.

By Berry Ives on 10/26/2008 1:56 pm

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Berry, Karachi, hashish, your face looks familiar, i think we met before……but in Beyrouth Lebanon! (LOL)

By sibelle daubigne on 10/26/2008 3:30 pm

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I was only in Beirut for a few minutes at the airport. I got off the plane and went to the restroom, and didn’t meet anybody. I was on my way home to New Mexico from Mauritius. I did know a Sibelle in Mauritius. You’re not from there, are you? [sorry, off topic!]

By Berry Ives on 10/26/2008 6:09 pm

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http://notforeveryoneformadmenonly.blogspot.com/

By Berry Ives on 10/26/2008 8:16 pm

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Regardless of whether someone is tagged with the “blame” in my opinion and observations, it still all boils down to greed! Greed has caused the “payoffs” “kickbacks” the housing debacle, jobs being taken out of the country, CEO’s et al receiving millions of dollars for what? Disgraceful, disgusting, dastardly deeds! Republican leadership caused the loosening of ‘regulations’ and, it really is all about greed, and criminal activity - even if the criminals are never charged, America will never be the same again, because of the activities of the past nearly 8 years. People can argue and say what they will, but this administration has created the most disgraceful atrocities against WE the PEOPLE, than any other before them. And, what will happen from here? A big slap on the wrist and, “Now don’t do that again!” It just breaks my heart how badly this country has been used and abused by the policies of the present administration. I am so disgusted. And, I cannot still believe those who would defend those that have acted so cold, and heartless, and with malice aforethought.

By Ro H on 10/27/2008 2:42 am

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I agree that greed had everything to do with the financial crisis, whatever naive mindset Greenspan and some others may have had regarding deregulation. And my feelings of disappointment are similar to yours. However, the Democrats share in the blame big time. It was under Clinton that the Glass-Steagall Act of 1933 was repealed, with Clinton’s support. One must realize, as Nader is constantly saying, that both parties have been, and continue to be, under the heavy influence of major corportations including those in the finance industry. Here’s an article, written in 1999, about that act. It is from a socialist web site, but I don’t consider myself a socialist: http://www.wsws.org/articles/1999/nov1999/bank-n01.shtml Disillusionment can lead to cynicism (impotence) or to new illusions, and we need to be both bold and careful in our thinking.

By Berry Ives on 10/27/2008 8:40 am

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Berry, thanks for both web sites. I love “the sky is falling”……and it’s not the end……

By sibelle daubigne on 10/27/2008 10:35 am

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Thanks, Sibelle. I agree, it’s not the end; nor was there a beginning. Please feel free to post comments on my web site.

By Berry Ives on 10/27/2008 1:03 pm

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No beginning, no end……as an alternative investment, i recommend the practice of Tai Chi. Younger you start, easier it is. See you!

By sibelle daubigne on 10/28/2008 1:37 pm

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Nearly ALL of the postings I have read here have got this subject completely wrong! The CAUSE of the current meltdown IS NOT REGULATION. There was plenty of it. All of it was thwarted by THE DEMOCRAT CONGRESS. They are on video, repeatedly performing their malfeasance. The Republican Executive branch is ON RECORD repeatedly HAMMERING these accounting transgressions at Fannie & Freddie. They share ‘some blame’ for not putting the Justice Department in charge of investigating those in Congress who had obvious conflicts of interest. There is NO OTHER SYSTEM other than FREE MARKET CAPITALISM that can determine the correct PRICE of goods and services. It REQUIRES that government NOT DISTORT THAT PROCESS with interference. Government CAUSED THIS MELTDOWN, just like it CAUSED THE GREAT DEPRESSION. To any of you willing to ‘learn’ about the Depression and Government failure in it’s handling you’re in for a treat. It is a sad commentary that so many of you ‘intelligent’ people are actually advocating policies that are proven failures. Keynesian Economics has been completely routed intellectually and in fact. Yet here we are with ignorant populists screaming the usual ‘get the bastards’ mentality while simultaneously advocating the ‘same old Liberal solutions’ that are driving more of our freedoms and economy into the ground. ———————————- FACT: If the government WAS NEVER in the mortgage business to begin with, business would asses RISK properly because the consequence of failure is BANKRUPTCY. The correct ‘free market solution’. FACT: If the government LET THE REGULATORS DO THEIR JOB the failures of those Congressman would be readily apparent and their conduct exposed for the fraud and corruption they promoted.

By Susan Duffy on 10/27/2008 11:21 am

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You sound just like another neocon, spouting rationalizations, even despite the contrite Greenspan, who was one of Rand’s inner circle, uttering things about “enlightened” self interest, which turns out to have been his naive illusion regarding greedy Wall Street brainiacs. The Randians have always hated Keynesian economics, and even some socialists have totally dissed it, but it remains valid for treating high unemployment through creation of jobs in public works. I used to read everything that Rand and Brandon wrote, including Greenspan’s articles in the Objectivist newsletter. You - like I once was - are a true believer. I’m not against regulated capitalism - and some industries should be “socialized” e.g. single-payer health care - but laissez-faire capitalism is certainly not the be-all and end-all of economics and approaches to improving social welfare. Laissez-faire is a theory that runs askew of social realities. But there will be no persuading you; you’ll have to discover the basic idea of “The Social Contract” for yourself. Think about this: —“As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.” ~Albert Einstein and interpret: “As far as the laws of laissez-faire capitalism are certain, they do not refer to reality.” People are not theoretical entities.

By Berry Ives on 10/27/2008 12:54 pm

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You, unfortunately, ignored the single most important part of my post and one of the most important economic principals: “……There is NO OTHER SYSTEM other than FREE MARKET CAPITALISM that can determine the correct PRICE of goods and services. It REQUIRES that government NOT DISTORT THAT PROCESS with interference…..” Determining the correct PRICE of goods and services has been the SINGLE MOST DIFFICULT task of every system devised but one…Laissez-faire Free Market Capitalism. There is an inherent reason why Wall Street and eBay are so successful. Their ‘auctions’ determine PRICE at a moment in time where knowledge of supplies and demand come into equilibrium with emotion, reason and risk. Equally important is the ‘legal framework’ from which derives ‘trust in the trading activity process’. If ebay allowed ‘rigged bidding’ or ‘insider knowledge of reserved prices’ they would undermine the integrity of their auctions. It would go down the tubes. We found out with Wall Street’s recent debacle the elements of risk were distorted by government backed securities that the private sector standards would never have allowed to exist. Compounding this problem was Wall Streets ‘lack of traditional fiscal curiosity and basic lending principals’ that gave ‘trust’ to these government enterprises. Their ‘correct logic’ being that these securities are Government Backed and so posses reduced risk was offset by their ‘incorrect analysis’ of supply in relation to how much could the Government handle. They proved the United States Government has limitations that do not make it risk free. Yet instead of letting these enterprises fail via free market principals, we prop ‘em up again. One humongous Ponzi Scheme. ————- (1) ‘…some industries should be Socialized…single payer health care…’. (A) We are all entitled to our opinion, however, the Constitution does not back up your ‘belief’. We have the ‘amendment process’ to tack on to the existing Constitution the kind of ‘social engineering’ you desire. Just like the Volstead Act of 1919 and Prohibition of Alcohol. I firmly believe that if ‘anyone’ can ‘convince the majorities necessary’ to pass Constitutional muster than so be it. But not through the legaleeze of slow drip statutes and mandates that undermine ‘real law’. You might have noticed in the news (what little there really is) that Hawaii, being the only state with a form of universal health care, is abandoning the programs because those ‘needed who pay now’ have ‘stopped paying’ in order to get their benefits for free. ——————————- (2) ‘…laissez-faire is a theory that runs askew of social realities…’ (A) Laissez-Faire Free Market Capitalism is the benchmark principle of social realities. It’s total focus on self interest creates the foundation of those societal realities. No one can get ahead unless ‘their self interest in doing’ has an existing ‘self interest in receiving’. No one is forced ‘against their will’ to pursue endeavors that would not maximize their ‘natural talents, predispositions, and personal self interests’. It is freedom to choose. Until someone comes along and meddles with it. It starts by your fellow citizens telling you that you ‘ought to do this’ or ‘you ought to do that’ because ‘that is what we think or feel’. This is despotism. No different than hiring organized crime to ‘force protection or compliance’ on your competition, or electing Government Bureaucrats to provide the same: “Do what we say or else..It’s for your own good”. Our Founders understood, based on their own self interests, that within a legal frame work that protects against criminal activity between citizens, and ensures equal protection of the law, we the people could go about our lives in the ways we saw fit with the full understanding that life is inherently unfair, there are no guarantees in life, that no one is more responsible for you, than you. God gave us America, our ‘sandbox for citizens to play in’. The Founders gave us the Constitution, our ‘rulebook and referee to ensure we play fair in that sandbox’ Nothing more.

By Susan Duffy on 10/27/2008 3:50 pm

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Well said Susan, You are enlightened on this subject. You sound like a good Ron Paul supporter! Like me! pb

By Paul Buchanaa on 10/28/2008 4:33 am

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That is so naive. It is bothersome to respond because it takes me back to what might be an embarrassing period of my life, when I was indoctrinated by Ayn Rand, Brandon, Alan Greenspan, et al. But…no regrets for our youth. What is the market price of the air pollution impacting a poor neighborhood, if, as in laissez-fair, there is not even a market? Oh yeah, people who can afford to buy their way out of the ghetto will pay the higher price of homes in areas where they have clean air. The market works perfectly! Why is the market price of labor is so far below a living wage? You can say that is the perfect price, but that is a callous viewpoint that does not account for the many social costs of poverty. Or do you even recognize the reality of those social costs? Is the price of health care perfect when it leads to 50% of the personal bankruptcies and home loss and family displacement? I could go on and on, and I’m sure you’ll come up with your laissez-faire-religion market response. I’ve already heard all of that, and I grew out of it 40 years ago. You are living in LaLa land. I notice that you believe in God, unlike Rand et al. Interesting. Do you have a rational basis for that belief? I guess your god fits into the market by allowing religions to buy the government, since the government would be a function of economic power, essentially fascism, under a pure sense of laissez-faire. Bribery, you know, is a market mechanism. You get what you pay for. (I’m not criticizing those who believe in god, only Objectivists who believe in god.) Why is the Not-So-Randy Greenspan contrite if he was right all along? If you think America is like a “sandbox for citizens to play in”, I need say no more. What about the dog poop?

By Berry Ives on 10/27/2008 5:35 pm