Alan Greenspan on the Self-Regulatory Market

Two days after the LTCM bailout was agreed to in 1998, a worried Alan Greenspan, leaning toward raising rates at the time, cut the federal funds rate. It was not enough to calm the markets, and he cut it again three weeks later. . . . It was not the self-correcting powers of the markets but aggressive central bank intervention plus a new round of irrational speculation that provided a floor under the downward financial prices and the calamitous consequences of bad Wall Street decisions. It was not even the LTCM rescue alone by private banks that saved Wall Street” Madrick, p. 281). “Alan Greenspan learned no lessons from these events about the inherent instability of a completely free market in finance. He still insisted markets regulate themselves” (Madrick, p. 282).

Analysis:

Milton Friedman believed that government regulation keeps markets from being efficient; he assumed that the market mechanism is capable of regulating itself. That increasing uncertainty and risk might reach a point that a market mechanism would freeze up, or collapse, rather than simply incorporate the increased volatility through pricing is a point extrinsic to the efficient market thesis. That theory submits that markets tend toward equilibrium, rather than spiraling out of control.
Testifying before Congress after the credit crisis of 2008, Alan Greenspan was asked by Henry Waxman (D-Calif) whether the government-averted credit-market collapse had prompted any revision of the retired Fed Chairman’s economic paradigm. Greenspan admitted to a flaw in the ointment of self-regulatory market theory. In spite of 40 years of evidence to the contrary, official Washington’s font of economic wisdom had drawn a blank.
Lest the human mind be left without an operative paradigm by which one can make sense of the world, by mid June 2011, Greenspan had mentally reduced the fly in the ointment to a mere footnote. Asked by Charlie Rose on The Charlie Rose Show what how the crisis had changed his understanding of the market mechanism and economics, Greenspan admitted his surprise that bank CEOs do not always operate their banks so as to keep them solvent. This is how the financial crisis of 2008 had changed his view of the market mechanism after all. Of course, such a fault could be attributed to distortive government regulation (e.g. regulation Q limiting deposit interest) rather than to some inherent weakness in the market mechanism being able to regulate itself.
Greenspan had backtracked; he had unlearned his lesson much like an alcoholic “forgets” that he or she has admitted to having a drinking problem.  Faced with a fundamental flaw in a paradigm on which it relies, the human mind can succumb to retreating to the safety of denial. In his Structure of Scientific Revolutions, Thomas Kuhn tells us that it can be a generation before the downfall of a reigning paradigm is finally recognized, after the current proselytizers have passed and the people to come, without a vested interest in the prevailing paradigm, have taken their place. Perhaps it is only the human mind writ large (i.e, intergenerational) that advances, or really learns.
Lest we have to wait for the dead to bury themselves, we can affirm and acknowledge right now that the market-mechanism is not inherently self-regulating, and that this flaw is not caused by government regulation. Instead, markets can collapse—just as a human being freezes up from fear when risk and uncertainty hit a certain threshold—only to be revived by governmental intervention.  

Source:

Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knoff, 2011).

See also Skip Worden, Essays on the Financial Crisis, available at Amazon.

Questioning Universal Basic Income

The gist of basic income is that a government “distributes cash universally. As the logic runs, if everyone gets money—rich and poor, the employed and the jobless—it removes the stigma of traditional welfare schemes while ensuring sustenance for all.”[1] The “logic,” I submit, is flawed even if the basic idea is solid.

The notion of a basic income sprung from the desire to “reimagine capitalism to more justly distribute its gains.”[2] Justice here translates into the ideological belief that sustenance itself is a basic human right, and thus should be guaranteed to everyone. The obligation of government follows from this right. Interestingly, the laissez-faire economist, Milton Friedman, “embraced the idea of negative income taxes that put cash in the hands of the poorest people.”[3] But as the poorest may not fill out tax returns, cash payments by governments may more fully realize the objective of a basic income-floor (i.e., no one gets less than the floor-amount).

I submit that just as making sure that every adult has the basic, or floor, income, the notion of such a floor does not justify a government giving cash to everyone—rich or poor, employed or jobless. Adults whose income already exceeds the income-floor do not need additional income to get up to the floor, for such people are already above it. As for the stigma of welfare, which is very real in states like Arizona, the notion of a basic income can appeal to people whose income is above the floor, for they would be free of the anxiety of possibly falling through the cracks of a checkered social net should even a high income end amid continued high expenses. In the wake of the financial crisis of 2008, for instance, many people whose income exceeded a basic floor oriented to sustenance lost their homes when they went under water as real estate markets collapsed—especially in Florida and California.

Orienting the give-out of cash only to adults whose existing income is zero or otherwise below an established floor (i.e., a floor sufficient that sustenance can be achieved) would render such a program more fiscally stable. Whereas Stockton, California, began a test program in 2018 whereby 100 families would get only $500 a month—an amount clearly below sustenance—the requirement of a full-fledged program wherein only adults below the floor would get cash could more easily afford to set a floor that truly allows for substance.  Then nobody, rich or poor, would have to fear not being able to survive.

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1. Peter S. Goodman, “Inequality? California City Is First in U.S. to Try,” The New York Times, May 30, 2018.

2. Ibid.

3. Ibid.

Real or Incremental Change?

On October 13, 2010, Fox News reported a poll that found that women were turning on Obama.  The reason cited was that they feel there has been too much change—that it has been “jarring.”  I was stunned—wondering if I was listening to a broadcast from another planet. I remembered that when I had been sampling a fattening food item in a grocery store in my antiquated home town in Illinois; the old woman who gave me the sample, said, “We have lots of devils here!” as she was handing me the sample.  She was referring to the array of food samples in the store that day a few weeks before Thanksgiving.  My reaction, which I charitably did not share with her, was, Oh, horrors! I wondered what century she was from (probably Calvin's, I concluded privately as I chewed a “devilish” olive). I wondered, moreover, why some people magnify little things into horrendous sins. Such people, I concluded, cannot seem to let go of what is to the rest of us so utterly antiquated and get with it. That is, why are some people so resistant to change? Why do they perceive small, incremental changes as somehow momentous—even jarring?

In a preface to one of his books, Milton Friedman wrote, "Only a crisis—actual or perceived—produces real change. When the crisis occurs[,] the action taken depends on the ideas that are lying around.” That is to say, human nature is not exactly designed in favor of substantial change—being more inclined to the incremental variety. When a culture says that real change is to be feared and people don’t bother to come up with a broad array of ideas, even a crisis may not result in real change. Such can be said of modern American society, even as “change” shows up consistently in American political campaigns.

In terms of the jarring change being reported on Fox News, the journalist pointed to the health-insurance reform law as a case in point.  In spite of its purported “socialism,” the law relies on private health-insurance companies, whose lobby pressured Obama into dropping his “public option” requirement and adding a mandate that requires Americans to become customers of those companies.  If relying on extant private companies—giving them a guaranteed and vastly enlarged customer base—is somehow “jarring” change, I have to start wondering about whether some people have a pathological issue with change itself.

One need only point to the Dodd-Frank financial regulation law of 2010, which subjects banks deemed too big to fail to additional capital requirements and requires the banks to develop liquidation contingency plans. This “change” pales in comparison to breaking up the banks having $1 or more trillion in assets so they do not pose a danger while extant. That some people might find increasing capital requirements as jarring boggles the mind. Are such people familiar with real change—even if they voted for it in 2008? I suspect they would not recognize it if it jumped up and bite them on their asses, and yet political campaigns are ostensively all about change—or the illusion thereof—but just enough to tell people what they want to hear.

Not surprisingly, much of the campaigning in the 2010 midterm elections was oriented to incremental change on a variety of issues, rather than to real change, even though the latter would have been more fitting given the systemic negative effects of the financial crisis of 2008. Even in states bordering on bankruptcy, like California, Florida and Illinois, campaigning as usual belied any purported crisis. 

For example, I watched a candidate forum that was being held in Illinois and one of the main questions was why a candidate’s business was so successful.  Meanwhile, the last governor had been impeached and removed from office by a nearly-unanimous vote in the legislature, and the government was borrowing $18 billion in 2010 alone.  The forum struck me as an exercise in “rearranging the deck chairs on the Titanic” as if the ship of state was not on the verge of sinking.  In other words, it was business as usual in a context that demanded substantial change. Clearly, the candidates knew of Illinois’s fiscal (and corrupt) condition. It occurred to me that they were either bereft of ideas or too accustomed to going along on the track of status quo to proffer any real alternatives. Lest one heap all the blame on the candidates at the forum, it is important to note that it was a citizen of Illinois who asked about the candidate’s business. Perhaps the society in Illinois is too entranced by custom and thus insufficiently equipped for real change—ironically even as one of Illinois’ former U.S. senators was serving as the “real change” president of the United States.

Lest the pallid phenomenon be presumed to be limited to the heartland, the California Governor’s race between Jerry Brown and Meg Whitman also evinced politics as usual. The two candidates had a chance in their debates to persuade a California-wide audience that they could turn around the economically-troubled republic. Instead, they resorted—at least in their third debate—“to many of the personal attacks that have dominated the last few weeks of the campaign,” according to MSNBC, whose verdict can be said to apply to American politics even in the wake of a crisis: “Neither candidate presented any new ideas.”

Source:

Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knoff, 2011).