Machan's Musings - Alan Greenspan's Open Secret
by Tibor R. Machan
When some time back one of the Archbishops of Canterbury -- I can’t remember which one it was -- reportedly told the world of his doubts about God, it was big news and something of a scandal. Certainly unbelievers and heathens everywhere welcomed it, and the faithful in the UK expressed a good measure of trepidation. Understandably so. Just imagine the Pope professing something like this -- it would certainly make the headlines, maybe even bring down the Vatican.
In 1997 Alan Greenspan, the Chair of the U.S.'s Federal Reserve (or "central") Bank, gave a talk at the Association for Private Enterprise Education, which was held in Northern Virginia, just outside Washington, D.C. In this talk, titled "The Evolution of Banking in a Market Economy," Published in Volume XII (1997), pp. 195-203, of the Journal of Private Enterprise, Dr. Greenspan pretty much did something akin to what the Archbishop reportedly had done ... namely, he announced his skepticism of central banking. He made clear, after giving a rather detailed account of the organization he had been appointed to 10 years ago and chaired for nine of it, that, "The federal safety net for banks clearly has diminished the effectiveness of private market regulation and created perverse incentives in the banking system."
What did he have in mind when he made this observation? "To cite the most obvious and painful example, without federal deposit insurance, private markets presumably would never have permitted thrift institutions to purchase the portfolios that brought down the industry insurance fund and left future generations of taxpayers responsible for huge losses." In short, when the feds lower risks, they encourage people to take them at the expense of other people, and this certainly proved to be the case during the crises that brought the thrift industry to its knees. Greenspan admitted that "the safety net undoubtedly still affects decisions by creditors of depository institutions in ways that weaken the effectiveness of private market regulations and leave us all vulnerable to any future failures of government regulation."
But Greenspan went even further than raising these skeptical points. "I should like to emphasize that the rapidly changing technology that is rendering much government bank regulation irrelevant also bids fair to undercut regulatory efforts in a much wider segment of our society." On and on he went, raising doubts about the very organization that he has chaired and where he has gained so many accolades -- as well as criticisms -- during several political administrations. (The man, after all, was appointed during the Ford Administration and is still heading up the Fed!) His rather comprehensive history of central banking didn’t paint this darling institution of the establishment in the favorable light in which so many hold it. Nor did he blame the Great Depression on the free market, which is one way the Fed has gained its support, that is, through a distortion of the history of American banking. Even without his own explicit opinions, Greenspan’s recounting of the monetary history of the U.S. and the role of central banking showed that the institution of central banking is very far from the safety net so many believe it to be.
Free market champions have, of course, had their complaints about Greenspan, most of them expressing perplexity -- some virulent hostility -- given his early unapologetic support of the gold standard and total laissez-faire, combined with his subsequent lack of hesitation in heading up a government agency that is completely anathema to the free market theory of free money. The argument Greenspan’s defenders have advanced has been, mainly, that if you cannot avoid a dictator at the Fed, it is better to have one in power who admits to his own lack of qualifications to do much, say, about the monetary system, and is trying, in the main, to urge decisions at that body that he believes lead to results the free market itself would have produced. (I actually remember Greenspan saying something along these lines in a long interview he gave to Edwin Newman of NBC-TV News on a public affairs program many moons ago.)
What is most interesting to me, though, is how silent the Washington press corps has been on Greenspan’s views of central banking. Maybe they all like the Fed so much, they do not want to broadcast the fact that the Pope himself doubts whether the church is even needed or doing any good at all.
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