Wednesday, September 07, 2005

Column on Alan Greenspan's open secret

Alan Greenspan?s Open Secret

Tibor R. Machan

When some time back one of the Archbishops of Canterbury?I can?t remember
which one it was?reportedly told the world of his doubts about God, it was
big news and something of a scandal. Certainly unbelievers and heathens
everywhere welcomed it and the faithful in the UK had their good measure
of trepidation. Understandably so. Just imagine the Pope professing
something like this?it would certainly make the headlines, maybe even
bring down the Vatican.

In 1997 Alan Greenspan, the Chair of America?s Federal Reserve (or
?central?) bank gave a talk at the Association for Private Enterprise
Education, which was held in Northern Virginia, just outside Washington,
D.C. In this talk, titled ?The Evolution of Banking in a Market Economy,?
Published in Volume XII (1997), pp. 195-203, of the Journal of Private
Enterprise, Dr. Greenspan pretty much did something akin to what the
Archbishop reportedly had done, namely, announced his skepticism of
central banking. He made clear, after giving a rather detailed account of
the organization he had been appointed to 10 years ago and chaired for
nine of it, that ?The federal safety net for banks clearly has diminished
the effectiveness of private market regulation and created perverse
incentives in the banking system.?

What did he have in mind when he made this observation? ?To cite the most
obvious and painful example, without federal deposit insurance, private
markets presumably would never have permitted thrift institutions to
purchase the portfolios that brought down the industry insurance fund and
left future generations of taxpayers responsible for huge losses.? In
short, when the feds lower risks, they encourage people to take them at
the expense of other people and this certainly proved to be the case
during the crises that brought the thrift industry to its knees. Greenspan
admitted that ?the safety net undoubtedly still affects decisions by
creditors of depository institutions in ways that weaken the effectiveness
of private market regulations and leave us all vulnerable to any future
failures of government regulation.?

But Greenspan went even further than raising these skeptical points. ?I
should like to emphasize that the rapidly changing technology that is
rendering much government bank regulation irrelevant also bids fair to
undercut regulatory efforts in a much wider segment of our society.? On
and on he went, raising doubts about the very organization that he has
chaired and where he has gained so many accolades?as well as criticisms
during several political administrations. (The man, after all, was
appointed in the Ford Administration and is still heading up the Fed!) His
rather comprehensive history of central banking didn?t paint this darling
institution of the establishment in the favorable light in which so many
hold it. Nor did he blame the Great Depression on the free market, which
is one way the Fed has gained its support, namely, through a distortion of
the history of American banking. Even without his own explicit opinions,
Greenspan?s recounting of the monetary history of the US and the role of
central banking in it showed that the institution of central banking is
very far from the safety net so many believe it to be.

Free market champions have, of course, had their complaints with
Greenspan, most of them expressing perplexity?some virulent
hostility?given his early unapologetic support of the gold standard and
total laissez faire, combined with his subsequent lack of hesitation in
heading up a government agency that is completely anathema to the free
market theory of free money. The argument Greenspan?s defenders have
advanced has been, mainly, that if you cannot avoid a dictator at the Fed,
it is better to have one in power who admits to his own lack of
qualifications to do much, say, about the monetary system, and is trying,
in the main, to urge decisions at that body that he believes lead to
results the free market itself would have produced. (I actually remember
Greenspan saying something along these lines in a long interview he gave
to Edwin Newman of NBC-TV News on a public affairs program many moons ago.)

What is most interesting to me, though, is how silent the Washington
press corps has been on Greenspan?s views of central banking. Maybe they
all like the Fed so much, they do not want to broadcast the fact that the
Pope himself doubts whether the church is even needed or doing any good at

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