US heading closer to a fresh financial meltdown

Alan Greenspan, former chairman of the US Federal Reserve. Photo: Bloomberg

The man who brought us the global financial crisis, Alan Greenspan, has spoken out on how to fix the system. Of all the advice he might give, he has given the most unexpected. In essence, he has said: "Don't even try."
In one of the most remarkable statements of our time, the former chairman of the US Federal Reserve has argued that it is inherently impossible to usefully regulate a modern financial system, telling us to relax because "the global invisible hand" of the free market has created a stable economy over the longer run.
Greenspan went further. In an opinion piece in London's Financial Times, he suggested that an ever-growing and unmanageably complex financial system might even be "a necessary condition of growth".

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Illustration: John Shakespeare

Incredulous, the US congressman who has led the regulatory reform effort, Barney Frank, responded that while many had suggested ways of improving regulations, "until last week no one had seriously suggested that we should have done nothing in response to the financial crisis".
Frank reminded Greenspan of the cost of his failures: "His rosy view overlooks a monumental crisis that threatened the foundations of the American economy, led to soaring unemployment, a continuing foreclosure crisis and weakened economies in the US and Europe."
It is breathtaking audacity that the chief arsonist should scold the fire brigade, saying: "Put away your hoses and enjoy the fire". Even more so because there was a day in late 2008 when he did seem remorseful, accepting that he might have made an ideological error in refusing to adequately regulate banks: "Yes, I've found a flaw. I don't know how significant or permanent it is. But I've been very distressed by that fact."
Greenspan seems to have made a full recovery from his distress. A highly intelligent man, he knows that his system broke. He knows that it can be fixed. He knows that it's entirely possible to have a free-market financial system that does not suffer inevitable and catastrophic collapse. Australia and Canada are living, growing proof.
So why is Greenspan opposed, as a matter of principle, to any attempt at reform? Four possibilities come to mind. First, he is senile. But although he is 85, his statements were not the product of a wandering mind. Second, he is in the thrall of the big banks that oppose change. But while he has been taking handsome speaking fees from them in recent years, he has never been interested in money, selling his profitable Wall Street business to work at the Fed on a relative pittance.
Third, he is a blind ideologue who will not concede that any regulation could be good regulation. This is entirely possible. But he knows full well the terrible damage he inflicted on his country.
Or fourth, he is not a fool but a fox, playing a double game.
Greenspan's view is so absurd that it tempts us to wonder. In 10 days we will see the premiere of a movie of the Ayn Rand novel Atlas Shrugged. This cult 1957 novel is a warning against government intervention, a sermon on the virtues of laissez faire, and a reminder that Alan Greenspan was once a close acolyte of Rand and her Objectivist movement. Her 1966 book Capitalism: the Unknown Ideal included an essay by Greenspan on the virtue of the gold standard.
The young Greenspan advocated a return to a system where a government could only issue currency backed by a physical hard asset - gold. He wrote that "gold and economic freedom are inseparable". He derided the current system of fiat money, where a dollar is backed by nothing more than a government promise to honour its debts, as "paper reserves".
In Atlas Shrugged, the libertarian heroes smoke cigarettes branded with little gold-coloured dollar signs. It's unsubtle. The cigarette represents freedom of choice over government regulation; the dollar sign is a campaign message for economic freedom in the form of a gold standard.
It has often been observed that it was ironic that Greenspan, a leading critic of the paper money system, went on to become its chief, his signature appearing on every dollar bill.
But maybe it wasn't historical irony. What if Greenspan never did change his view, instead covertly dedicating his life to destroying the system he so despised? Could it be that he remained a secret agent of Ayn Rand all these years?
If so, he certainly wouldn't want to see any changes now. Because the US today is in the process of repeating Greenspan's essential error.
It wasn't just that Greenspan failed to properly regulate banks. His deeper underlying error was in the sheer volume of money he allowed to be created in the first place. He held interest rates so low for so long that cheap money flooded into house prices, and created a bubble that burst.
And the current chief of the Fed, Ben Bernanke, is doing it again. Official interest rates are at zero. Not content to make money free, the Fed is also forcing more money into the system with its program of "quantitative easing".
Once again, cheap money from the Fed is creating bubbles, this time in global commodity and food prices.
A dissenting voice inside the Fed spoke out last week. The president of the one of its 12 regional banks, Thomas Hoenig of the Kansas City Fed, approaching retirement and apparently feeling liberated to speak his mind, said: "Once again, there are signs that the world is building new economic imbalances and inflationary impulses. The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth."
The crisis of 2008 will be only the precursor of the next and bigger crisis if the Fed continues as it is. Greenspan today seems to be quietly cheering: "Bring it on."


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