Greenspan, Bubbles, and Responsibility



We are now in the season of scapegoats. The brays for justice and villains grow daily, and this week has seen a walk of shame as various participants in the credit debacle sit in front of Congress to be scolded and upbraided for their sins. Many of the goats today, and none more than former Chairman of the Federal Reserve Alan Greenspan, were heroes only a short while ago - yet another vivid illustration of the ancient words of the mythical king Croesus: “Count no man happy till he’s dead,” or to put it another way, “it ain’t over till it’s over.”

We have seen this passion play before, when J.P. Morgan, savior of the world in 1907, hero for single-handedly corralling the leaders of Wall Street to make sure the financial system remained solvent, was hauled in 1913 in front of Arsene Pujo, a Louisiana Democratic congressman whose committee was investigating whether the so-called “money trust” had corralled a disproportionate share of the nation’s wealth. Shockingly, Pujo concluded that it had, to the benefit of the few and the harm of the many. A familiar lesson, soon forgotten. Morgan was humiliated and already in ill-health and died soon after his appearance.

The same fate is unlikely to befall Greenspan, who in addition to being somewhat haler also acquitted himself better than the truculent Morgan. But the arc is similar, as it was for lions of 1990s capitalism such as disgraced Enron executives or even Jack Welch, the once-idolized but then criticized titan who led General Electric through acquisitions and mass-layoffs until his retirement just as the bubble burst in 2000 and 2001.

Greenspan’s testimony was remarkable in many ways. He took responsibility for his mistakes, including not just specific policy errors but fundamental flaws in his own ideology. But he also tried - to uncertain avail - to shed light on the ease of hindsight and the difficulty of foresight. Yes, we want and perhaps need villains when things go sour, and yes, there often are venal, corrupt individuals who can wear the crown of thorns that we collectively desire them to wear to expiate our sins. Yet after the punishments and the shame, we are left with the harder truths of collective guilt and responsibility, and the devilish difficulty of forecasting future outcomes of present decisions with any degree of certainty.

True, there was something startling about a man of his experience confessing to shock that the self-interest of financial institutions led not to rational calculus of risk but to irrational pursuit of profit. That Wall Street (and yes, Main Street) is driven by greed as much as anything else should not have been surprising to anyone steeped in a sense of the past and an awareness of the world at large. But that is the sinkhole of ideologies - they can be maintained in all their rigidity only by turning a blind eye to manifold aspects of reality that don’t conform. Or as the old joke about economists goes, never let reality get in the way of a good theory.

Still, there was something sad and noble about Greenspan, who seemed genuinely contrite and aware of his role, more than the bland former executives who seemed either in denial or despair and offered little in the way of insight about how we might learn from their faults other than “don’t be an arrogant jerk.” True, true, but that should have been learned long before. From Greenspan, we glean the perils of intellectual castles of sand, which however gleaming, are often blown away in the face of human passions that hover, always, ready to deconstruct the gossamer threads of civilization and ready as well, thankfully, to weave them delicately back together.