Hello to the new interventionism

… those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined.

This is techno-speak for “we trusted Nero” and can’t believe that he has let the city burn. Greenspan’s remarkable disclosure is a reflection of the ideological extremism that has dominated US policy for so long. Either he has been locked in an underground bunker for the last few years, or he simply chooses to see longstanding US traditions of corporate fraud and corruption as unfortunate market distortions.

The case of Enron (which occurred under Greenspan’s watch) might have been sufficient to suggest that rapacious self interest might require policy checks and balances. Yet there is no mention in Greenspan’s utterances of the culture of corporate greed, the absence of ethics, or of moral bankruptcy. His mindset is clear about the essential problem:

The consequent surge in global demand for US subprime securities by banks, hedge, and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem.

“Boys will be boys” apparently, but the problem for Greenspan and his ilk is that public “common-sense” is not buying these “under pricing of risk” or “unrealistically positive ratings” lines of argument. Instead, Jo Public sees fraudulent endorsements of obviously suspect mortgage applications, corrupt pursuits of brokerage rewards, and culpably irresponsible lending. Jo sees Greenspan and his acolytes as fervent disciples of a “market freedoms” ideology that is now on the run. The “greed is good” gang is not to be trusted.

Greenspan was a well known ideological advocate for a deregulated financial sector. Take for example remarks made at his 2003 presentation to the Financial Markets Conference of the Federal Reserve Bank of Atlanta, Sea Island. In seeking maximum freedom for the markets Greenspan noted that: “… an excess of rules - in the extreme case, central planning - has also been shown to stifle initiative and produce economic stagnation.” He wisely recognised the “tension” between governmental rules and market mechanisms, but erred on the side of minimal government: “if our market system is to function smoothly, the vast majority of trades must rest on mutual trust and only indirectly on the law.”

Market fundamentalists like Greenspan have a problem in how to attribute their failure of economic foresight. Was the whole neoliberal ideological position wrong or can it be maintained by blaming too much intervention rather than too little? Greenspan answers by rationalising that, rather than an ideological or personal failure:

The whole intellectual edifice … collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria.

In a curious, perhaps romantic, nod towards the supposedly self regulatory powers of the “free market”, Greenspan noted that: “[Current] markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”

Greenspan’s radical neo-liberal detractors see too much reticence in the overlord - indeed, they blame him for too much interventionism! They argue that protective fiscal policies are a bit like protective welfare policies in that each reduces the sense of risk experienced by individuals and each impoverishes self reliance and entrepreneurship. Just as free welfare provision programs reduce an individual’s motivation to work, so fiscal and even monetary policy reduce the negative consequences of bad economic decision-making and encourage risky behaviour. Thus the only way to prevent market distortions and crises is to stay out of the market altogether.

In a last ditch effort to rescue their ideological juggernaut neoliberals the world over have mounted arguments which suggest that the crisis was caused by some policy decisions made nearly a decade ago when, for example, Bill Clinton tried to assist families into home-ownership. Any intervention is bad intervention it seems, and thus they claim an unassailable position where any market problem is explained away because of some previous intervention.

In the ideal neoliberal world there should have been even less policy intervention than there was even through the last comparatively-unregulated policy period. As there never seems to have been a time when the market has been entirely free enough for the neoliberal fundamentalists it is doubtful whether their elusive Utopia will be achieved. Perhaps the real problem started when Jesus overturned the tables in the temple and gave moral justification to economic interventionism. Or could it be that neoliberals distrust democracy, which they see as beholden to interest-groups and therefore detrimental to free market mechanisms?