Alan Greenspan isn’t a capitalist but he plays one in the media — VOICES for REASON

Every time Alan Greenspan opens his mouth to blame some aspect of the financial crisis on free markets, rather than government intervention, many commentators gleefully proclaim it another nail in the coffin for laissez-faire capitalism. Even Alan Greenspan, the refrain goes, acolyte of Ayn Rand, lover of laissez-faire, admits that the current crisis was a failure of his free-market philosophy.

But Greenspan has no free-market philosophy. As Yaron Brook and I explained in “The Maestro vs. the Market,”

Greenspan, while once associated with laissez-faire philosopher Ayn Rand, hasn’t advocated genuinely free markets for decades. Remember, this is a man who for two decades reveled in being, as the New York Times put it, “the infallible maestro of the financial system.”…. Early in Greenspan’s tenure, some expected the onetime opponent of the Fed and supporter of a gold standard to minimize the Fed’s distortion of markets. Instead, Greenspan became our Manipulator-in-Chief, repeatedly inflating the money supply and artificially lowering interest rates to allegedly magnify prosperity…. Thus, when Greenspan speaks, he does so not as the voice of a (non-existent) free market in finance and housing, but as the voice of government central-planning–a voice with every incentive to blame the market rather than the Fed’s market-distorting policies.

Which brings us to Greenspan’s latest salvo against the free market — a call for government to break up institutions classified as “too big to fail.” According to a Bloomberg news story:

The former Fed chairman said while “just really arbitrarily breaking down organizations into various different sizes” goes against his philosophical leanings, something must be done to solve the too-big-to-fail issue.

Something must be done, to be sure–since bailouts of “too big to fail” institutions (Fannie Mae, Freddie Mac, Merrill Lynch, AIG) have put taxpayers on the hook for trillions of dollars. But there is a free-market elephant in the room that Greenspan evades. “Too big to fail” is a government policy. How about solving the “too-big-to-fail issue” by abolishing it?

To elaborate: “too big to fail” is an anti-market, implicit government promise to bail out large financial institutions deemed, well, too big to fail. Along with many other government bailout policies, it has rewarded and encouraged irrational behavior in the financial and housing industries. In a truly free market in finance, with no handouts (including artificially low interest rates from the Fed) or bailouts, financial institutions would be truly responsible for their actions, and would need to choose their structure, leverage, policies, and size to ensure long-term success. This is a point made repeatedly by laissez-faire commentators; my own piece on the subject, “Too Big to Bail,” is available here.

That Greenspan’s response to the wreckage created by a major government intervention is to propose an additional, major government intervention is no evidence against the laissez-faire position — it is simply the latest demonstration that Greenspan opposes laissez-faire capitalism.

Unfortunately, advocates of increasing government control have every incentive to perpetuate the myth that Greenspan is a capitalist; it allows them to pretend that real pro-capitalist positions do not exist on the issues of our day. For example, after Greenspan’s latest call for new controls, financial blogger Les Leopold of the Huffington Post called it an “enormous concession” from the pro-capitalist side. As Leopold elaborated:

For the apostle of free markets to admit that financial free markets are not self-correcting is an enormous concession.

Unlike the ideologues on cable financial programs, Greenspan has the intellectual honesty to say that this crash was caused not by government regulations or because other outside pressures interfered with inherently stable, self-correcting financial markets. To the contrary he is admitting that financial free markets crashed and burned on their own.

That a major contributor to a leading publication can claim in intellectual daylight that markets were “on their own” during the administration of George W. Bush and Alan Greenspan, when they were in fact under record amounts of government control, shows how the distinction between a truly free market and a government-manipulated market is now all but unknown to many people. Please, anyone who wants to have an intellectually clear debate about our predicament and how to answer it, stop associating Greenspan with the free market and argue against real free-market thinkers such as Ayn Rand, Ludwig Von Mises, and those who apply their principles today.

For those interested in examples of such analysis, see:

• The Financial Crisis: What Happened and Why by Yaron Brook
• The Government Did It by Yaron Brook
• America’s Unfree Market by Yaron Brook and Don Watkins
• A Call for the Separation of State and Economics by Alex Epstein

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