Updated at 4 p.m.
Here’s a fascinating exchange between Alan Greenspan and Representative Henry A. Waxman from today’s hearing on Capitol Hill (as reported by Michael Grynbaum):
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
Over the last 30 years or so years, the world has been deeply influenced by a laissez-faire economic philosophy, which has shifted the world toward an embrace of markets. And markets certainly do many things very well. (Can you name a country that has prospered without relying to a great extent on an open, market-based economy? Or at least moving toward one?)
But it certainly seems as if this country, at least, went too far toward laissez-faire economics. I wonder whether we might now be at the beginning of a period in which we move back somewhat in the other direction. And I wonder if historians will someday look back at that exchange between Mr. Greenspan and Mr. Waxman as a sign that the change was coming.
My earlier post on the testimony appears below:
Alan Greenspan is up on Capitol Hill today, apparently issuing a bit of a mea culpa. (Our colleagues at DealBook are live blogging the hearing.) Mr. Greenspan said he had believed that banks would do a good job of protecting their own financial interests, which was largely why he didn’t try to put a stop to the explosion of risky mortgage lending. He is now in a “state of shocked disbelief” that banks failed to do so.
This is an honorable thing for him to do. Mr. Greenspan was wrong about several important things, and I’m not sure whether he will acknowledge all of them. But it’s also worth saying that standing up in front of Congress and admitting error cannot be easy.
Here is a big question for the future: Will the Federal Reserve be willing to attack the next bubble? Maybe so.
We have now established that companies do not always act in their own best interests and that bubbles can happen. Identifying them isn’t easy. But it is sometimes possible. By 2005, there should not have been any doubt that the real-estate and mortgage markets were in a bubble — and that tougher regulation was needed.
Next time, I hope regulators pay more attention to economic fundamentals (like the ratio of house prices to incomes). In both the housing and dot-com bubble, the fundamentals were flashing bright red.