Sunday, October 19, 2008

Newsweek attempts alchemy: turning Alan Greenspan into a Libertarian

Yes, once upon a time Alan Greenspan was a Libertarian, a devotee of Ayn Rand and gold-based currency--back when Senator Robert Byrd was still wearing a hood and Ronald Reagan was a Democrat.

Nonetheless, says Slate's Jacob Weisberg in Newsweek, Greenspan (along with Phil Gramm and Chris Cox) is decisive proof that Libertarian ideas brought down the financial markets:

We have narrowly avoided a global depression and are mercifully pointed toward merely the worst recession in a long while. This is thanks to an economic meltdown made possible by libertarian ideas. I don't have much patience with the notion that trying to figure out how we got into this mess is somehow pointless—Sarah Palin's view of global warming. As with any failure, inquest is central to improvement. And any competent forensic work has to put the libertarian theory of self-regulating financial markets at the scene of the crime....

Neglecting to prevent the Crash of '08 was a sin of omission—less the result of deregulation, per se, than of disbelief in financial regulation as a legitimate mechanism. At any point from 1998 on, Bill Clinton, George W. Bush, their administrations or congressional leaders with oversight authority might have stood up and said, "Hey, I think we're in danger and need some additional rules here." Had the advocates of prudent regulation been more effective, there's an excellent chance that the subprime debacle would not have turned into a raging financial inferno.

This wasn't just a collective failure. Three officials, more than any others, have been responsible for preventing effective regulatory action for a period of years: Alan Greenspan, the oracular former Fed chairman; Phil Gramm, the heartless former chairman of the Senate Banking Committee; and Christopher Cox, the unapologetic chairman of the Securities and Exchange Commission. Blame Greenspan for making the case that the exploding trade in derivatives was a benign way of hedging against risk. Blame Gramm for making sure derivatives weren't covered by the Commodity Futures Modernization Act. Blame Cox for championing Bush's policy of "voluntary" regulation of investment banks at the SEC.

Cox and Gramm are often accused of being in the pocket of the securities industry. That's not entirely fair; these men took the hands-off positions they did because of their political philosophy, which holds that markets are always right and governments always wrong to interfere. They share with Greenspan, the only member of the trio who openly calls himself a libertarian, an aversion to any infringement of the right to buy and sell. That belief, which George Soros calls "market fundamentalism," best explains how permissive lending standards during a boom led to a global calamity that spread so far and so fast.

This account is so riddled with inconsistencies and non-sequiturs that I'm sure it will become immensely popular with those who like to place economic and political blame without having even the slightest concept of economics in the first place.

1.) Let's start by noting that the evil Libertarian cabal of Greenspan, Gramm, and Cox could have been derailed at any point from 1998 on, according to Weisberg, by Bill Clinton, Dubya, or Congress. I'm not sure what it says if these three individuals, all by their lonesomes, diverted the entire US economy, especially as Cox did not become SEC Chair until 2005. Or that Phil Gramm has been repudiated by Republicans both running for President and (right now) while chairing John McCain's run for the White House. Let's assume nonetheless that they did, and let's assume they were actually Libertarians for a moment: wow! we're such a nation of wussies that we rolled over to three guys--with Bill Clinton happily re-appointing him twice during the 1990s--who held such ridiculous Libertarian ideas. Imagine the disaster that might have occurred had there been five such hideously powerful Libertarians running amuck!

2.) Weisberg does an amazing piece of prestidigitation when he dismisses the self-interest of Cox and Gramm, especially Gramm. It's unfair to Gramm, Weisberg says, to attribute his legislative ideas to self-interest--he did it because he was a Libertarian. We'll just forget that gigantic intentional avian loophole he wrote into law for his wife at ... Enron. Nothing to see here, folks, keep moving. Just a Libertarian ideologue, not a dishonest, self-interested politician.

3.) But the primo piece of deception that Weisberg employs (although I guess it could be just monumental ignorance) is the idea that Alan Greenspan as Chair of the Federal Reserve somehow functioned as an Objectivist, Ayn Rand-style, Capitalism worshipping Libertarian. There is a term for this characterization: utter horseshit. As Fed Chair, Alan Greenspan employed a consistent strategy of meeting virtually every crisis not by either regulation or a hands-off approach, but by repeatedly debasing the currency through aggressive interest-rate cuts designed to keep the bubbles going.

Here's Becky to explain this in detail:

Prior to the reign of Greenspan the country had been bubble free for fifty years. However, the Federal Reserve under Greenspan was largely responsible for the S & L bubble, the real estate bubble of the late eighties, the dot com bubble at the turn of the century and the Mortgage uber-bubble, which is bursting all around us—bringing the American economy to its knees.

Greenspan's solution to any blip in the economy was to debase the currency. And when problems developed from that (eg. the dot com bust) he would just lower interest rates even more.

As the Fed printed money, they made the inside sponsors of the bubbles fabulously wealthy. After the pop the middle class and poor burned their credit card receipts to keep warm.

His never ending infusion of cheap debt and debased dollars into the system built the house of credit cards that the American economy became. Credit was cheap— and everyone knew if there was ever any problem Greenspan would bail them out—with more cheap money—consideration of risk was a thing of the past.

Greenspan destroyed capitalism, by suppressing the normal cyclical downward business cycles. Everything from stock to real estate came to be overvalued---not because of technological and productivity advances as Greenspan always explained . Rather it was simply oversupply of money.

So in the end we were left with an economy based on overvalued stock, real estate, mountains of debt—and a nonproductive economy—supported by selling houses to each other and purchasing imported Chinese crap at Wal-Mart that we never actually wanted and certainly never needed—bought with plastic or the equity line on our homes.

Rather than balancing their checkbooks, and considering whether they could actually afford that new house, ordinary Americans began to use government budgetary polices—debt and deficits don't matter.

This is one of the reasons that, a few years back, the government stopped the routine release of the M5 number--the actual circulating money supply. Thanks to Greenspan, we've essentially been using computers as printing presses for two decades.

4.) Perhaps the quintessential piece of crapola in Weisberg's piece is citing George Soros as the critic of unregulated markets. Let's remind those who have forgotten (or never knew) of part of George's history prior to becoming the patron financial saint for Democratic politics:

On Black Wednesday (September 16, 1992), Soros became immediately famous when he sold short more than $10 billion worth of pounds, profiting from the Bank of England's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.

Finally, the Bank of England was forced to withdraw the currency out of the European Exchange Rate Mechanism and to devalue the pound sterling, and Soros earned an estimated US$ 1.1 billion in the process. He was dubbed "the man who broke the Bank of England."

The Times of Monday, October 26, 1992, quoted Soros as saying: "Our total position by Black Wednesday had to be worth almost $10 billion. We planned to sell more than that. In fact, when Norman Lamont said just before the devaluation that he would borrow nearly $15 billion to defend sterling, we were amused because that was about how much we wanted to sell."

According to Steven Drobny, Stanley Druckenmiller, who traded under Soros, originally saw the weakness in the pound. "Soros' contribution was pushing him to take a gigantic position," in accord with Druckenmiller's own research and instincts.

In 1997, during the Asian financial crisis, then Malaysian Prime Minister Mahathir bin Mohamad accused Soros of using the wealth under his control to punish ASEAN for welcoming Myanmar as a member. Later, he called Soros a moron. Thai nationals have called Soros "an economic war criminal" who "sucks the blood from the people"....

In 1988, he was asked to join a takeover attempt of the French bank Société Générale. He declined to participate in the bid but did later buy a number of shares in the company. French authorities began an investigation in 1989, and in 2002 a French court ruled that it was insider trading as defined under French securities laws and fined him $2 million, which was the amount that he made using the insider information.

Punitive damages were not sought because of the delay in bringing the case to trial. Soros denied any wrongdoing and said news of the takeover was public knowledge.

His insider trading conviction was upheld by the highest court in France on June 14, 2006. In December, 2006 he appealed to the European Court of Human Rights, claiming that the 14 year delay in bringing the case to trial precluded a fair hearing.

So, let's see: George Soros is considered a financial outlaw by England, France, Thailand, and Malaysia [not to mention still being pursued by France through the European Court of Human Rights], so he's obviously the man to raise moral questions about market fundamentalism. Good stuff, Weisberg. Next time quote Al Capone on tax policy.

There is a tremendous distinction between actual Libertarian beliefs and the self-interested, bubble-producing market-manipulations practiced by Greenspan, Gramm, Cox--and even Soros. These men did not practice free-market capitalism, they practiced market manipulation for their own advantage [Gramm, Cox, and Soros for their own profit; Greenspan for his ego and reputation as the century's greatest financial guru].

Unfortunately, they often used either the term Libertarian or certain buzzwords associated with Libertarian philosophy to justify and sell their actions. This created the false impression--but one relished by managerial capitalism progressives--that Libertarian economic ideas have actually been tried and founding wanting.

This is another one of those conveniently produced falsehoods of the political season generally known as The Big Lie.

[h/t to both Real World Libertarian and Libertarian Republican]


Eric Dondero said...

Steve, this Newsweek slam will only serve to unite all us libertarians together to fight the Left.

And it also cements our long-term relationship with our conservative cousins.

Big loser in this blatant Leftist attack on the libertarian movement?

Left-libertarians like George Phillies, Mary Ruwart, Tom Knapp, Todd Andrew Barnett, GE Smith They now have some "splainin'" to do.

Steven H. Newton said...

You've got a positive gift for missing the point.