Former Fed Chairman Alan Greenspan, writing in the FT, went to bat this morning for free markets (and his battered legacy). Offering a brief description of the credit crunch and lamenting the recent call for political intervention, Greenspan urged governments to keep their hands off, insisting that regulation isn’t the answer:
The economic edifice – market capitalism – that has fostered this expansion is now being pilloried for the pause and partial retrenchment. The cause of our economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today’s crisis, has never been able to eliminate history’s crises.
Furthering his point, Greenspan wryly observes that the institutions that have born the heaviest losses haven’t been the unregulated hedge-funds, but rather the highly-regulated banks:
…When the current crisis emerged, it was assumed that the weak links would be unregulated hedge and private funds. The losses, however, have been predominately in the most heavily regulated institutions – banks.
Finally, Greenspan says that while plunging house and stock prices may be hard pills to swallow, calls for heavy-handed regulation must be resisted:
We may not easily confront or accept the price dynamics of home and equity prices, but we can fend off cries of political despair which counsel the containment of competitive markets. It is essential that we do so. The remarkably strong performance of the world economy since the near universal adoption of market capitalism is testament to the benefits of increasing economic flexibility.
What Greenspan didn’t address: How to remove moral hazard by reforming the GSEs and fixing incompetent banks deemed “too big to fail.” Nor did he offer hints as to how his successor might successfully straddle the line between rising inflation and the ongoing financial crisis.
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