The end of laissez-faire (again)…
Posted on October 28, 2008 by Richard Beddard
Filed Under Markets |
Is this the most gripping financial confession ever?
REP. HENRY WAXMAN:
The question I have for you is, you had an ideology, you had a belief… and this is your statement — “I do have an ideology. My judgment is that free, competitive markets are by far the unrivalled way to organize economies. We’ve tried regulation. None meaningfully worked.” That was your quote.
You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price.
Do you feel that your ideology pushed you to make decisions that you wish you had not made?
ALAN GREENSPAN:
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Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.
And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
I think so, albeit partly because financial types so rarely fess-up.
Along with the personal tragedy of a reputation in tatters, the former chairman of the US Federal Reserve’s testimony to congress marks the end of an era. Governments are being dragged further into finance and economic management and it’s possible the balance between state and market will be altered for decades.
Is it a good or a bad thing? Economists are arguing about it. Politicians are wrangling about bailouts, stimulus packages and regulation. I don’t have to reach far for historical parallels because I’m still reading The Rediscovered Benjamin Graham. As well as founding the field of investment analysis, Mr Graham invested through the Great Depression until the 1970’s.
In a speech in 1956, he described the difference between American capitalism then, and in 1929. On the eve of the Wall Street Crash, the laissez-faire principle was supreme, fortunes were concentrated in the hands of tycoons, welfare was mostly philanthropic and the government had a relatively minor role in economics and social welfare.
Sound familiar?
By 1956 legislation and regulation was supreme, tycoons made way for corporations, Government paid social security and helped business in times of trouble.
Businessmen opposed many of the changes, but Mr Graham, as concerned for the future of capitalism as any of them, was sanguine:
My own view is a more optimistic one.
He said,
I think we have found that the basic welfare activities of government – those centring in various forms of social security, including unemployment insurance – are worth to business more than their cost in high taxes. Nothing is more beneficial for business as a whole than the improvement in the living standards and the purchasing power of our poorer people.
In quoting Peter Drucker, he said, laissez-faire had gone too far:
No policy is likely to benefit the business itself unless it benefits society.
On Friday James K. Galbraith, an economist, and son of John Kenneth Galbraith expressed similar views on US television. Talking about his new book, and his Father’s old one, The Great Crash of 1929 (published in the year of Graham’s speech), he said:
The situation today is very similar to the moment of panic and collapse that we saw in 1929. And for very similar reasons. An abandonment of the supervisory responsibility that should have been applied to keep the speculation and the fraud and the abuse from getting out of control. So there’s going to be a major period of correction. And dad, in writing this in 1955, talks about how memory fades and how eventually, although so long as people remembered ‘29 it wouldn’t be repeated, eventually it would be forgotten and the underlying speculative impulse would come back. So the book, in addition to being a great read, is really prescient in a very balanced way.
But he, too, is optimistic*1:
…we have an enormous advantage over our predecessors in 1929. We have the fact that the New Deal happened. And we have the institutions of the New Deal, though they have been badly damaged in the last decade, they are still with us. We have deposit insurance. We have Social Security. We have a government which is capable of acting as the lender of last resort, which can borrow and spend as needed to deal with this crisis.
As Graham said*2:
The more it [the stockmarket] changes, the more it’s the same thing.
He might have been talking about capitalism.
Footnotes:
- About American prospects, he thinks the Europeans are “winging it” – watch the interview.
- In “Stock Market Warning: Danger Ahead!” – a speech at UCLA in December 1959.
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6 Responses to “The end of laissez-faire (again)…”
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what a dick ! Of course , if you let banks lend to people who do not have the income to pay it back safely is irresponsible.
It is this simple !
An excellent short article. Pithy and to the point. It sums up my attitude precisely. Let’s hope the market does not run out of control ever again. The realisation must stay with us that government participation in the markets is essential; alert but not heavy handed. The over-reachers and crooks will always cause eventual chaos if not controlled with some form of sanction.
How did laissez-faire happen in the UK under a LABOUR GOVERNMENT?!! I agree with the article but not quite with the level of hope expressed. Now, circa 2008, it’s 1929 greed and imbalaneces but magnified + with added economic sophistocation. I am so disgusted that in 2008 there is a greater level of taxation and economic control of the poor. And the Government (both UK and US) bail-out looks like it will be for bankers!
Yet again, Beddard, you have got things right.
There is a crime in the US of “reckless endangerment”. Think of Michael Jackson dangling his baby off a balcony. You’ll get the picture.
There certainly has been what amounts to fraud, and/or scams, and/or simple self-delusion.
So far as I know, ‘reckless endangerment’ only applies to possible physical damage to other human beings, not to their bank accounts.
It would simplify things enormously if as well as all the itty-bitty regulations, all the stuff about compliance, there could be a law against “reckless endangerment of other people’s assets”.
If you were driving along with one hand on a mobile, listening to loud music and arguing with your passengers, and forgot to put on your headlights, no-one would argue that you actually intended to kill the poor sucker who happened to be driving in the other direction on a narrow road at night.
But it is definitely reckless endangerment. The compensation for the widow is a matter for the civil courts, but I do think a criminal law - that is a law which is intended to protect all of us, not just each specific victim in turn arguing their own case long after the event - makes sense.
It has some precedents - we now accept that not every death is simply the result of one person’s failure, but may be the result of a whole company’s recklessness, from the top down, so there is the idea of “corporate manslaughter”, in which the people who are supposed to be in charge, and who draw the greatest money each year, must also face criminal penalties for any serious harm done. This is never going to be a risk to those who those who do their jobs reasonably well and carefully, but should be a risk to those who do their jobs recklessly, and hope to pass off the blame to an underling if things go wrong.
Just sitting on the shoulders of giants Richard, but thanks for the compliment. I’m pretty much in agreement with everyone so far.
1. In retrospect, Ron’s astonishment seems like fair comment but at the time there were many, many enthusiasts for a laissez-faire system, myself included! We’re all beneficiaries of a welfare state now, but some of us thought that should be a social objective, and we should leave the markets alone.
2. Janet - absolutely! How could it happen under a Labour government? But then, as an apologist for Blair as well as Greenspan, I think he changed Labour to precisely the kind of ideology that exacerbated the problem: free markets with a social conscience aka The Third Way.
3. M Condon, Richard. The answer appears to be Government intervention but that sends shivers up my spine! I’m not sure if Government and regulators can be part of the solution until they realise they were part of the problem. So hats off to Mr Greenspan - he seems to have taken a big step in that direction!
[...] Investors in Madoff, banks, and any business that isn’t viable in a recession, take note. By 1956, though, in a speech on The Ethics of American Capitalism, he was lauding a kinder, gentler capitalism. [...]