Uncle Alan Greenspan's reputation is taking on water at about the same rate as the economy, which is to say, about as fast as the Titanic, and Alan's bailing away with a bucket at the Wall Street Journal claiming that he didn't know, couldn't have known that his decisions weren't just wonderful. Now normally I wouldn't bother kicking a man who's down on his knees begging for undeserved redemption, but the problem with Greenspan is that if he makes it off his knees so might his policies and ideas—policies and ideas which, in fact, have almost everything to do with where the US economy finds itself today.

Greenspan's deliberate obtuseness is understandable. He's 82 years old, his entire life was in the service of certain Randian ideas, and he wants to believe that his practical application of those ideas to real policy was the right thing to do. I would too because in the cyclopean fall of America's economy, Greenspan looks back and sees a life that spread ruin in the service of ideas which may well turn out to have lead to a replay of the 1920s, the scenario every Fed chairman strives to avoid.

The beauty of Greenpsan, the sick turpitude of it, is that he knew most of what he was doing. Take this passage:

The prevailing view among critics faults Mr. Greenspan on two main counts.

First, they say, his Fed lowered rates too much from 2001 to 2003 to cushion the economy from the bursting dotcom bubble. Then it took too long to raise them again. Low rates fueled mortgage borrowing, driving home prices to unsustainable heights...

...At the time, Mr. Greenspan expected his policy to boost housing because the rest of the economy was relatively unresponsive to lower interest rates. Based on decades of his own research, he believed a buoyant housing market would spur consumers to borrow against home values and spend more. This would not produce a housing bubble, he predicted, because it was difficult to speculate in homes and the memory of the 2000 tech-stock bust remained fresh.

What Uncle Alan is saying here is that he knew that people would boost consumer spending by borrowing against the value of their houses. He wanted consumer spending to be bouyed up, not by real earnings increases, but by consumer debt against their major asset class. So the credit lines which have caused so much hardship amongst Americans were specifically what he wanted. As for his claim that he didn't expect a bubble, well, perhaps he didn't. But many of us did, at the time, and predicted it at the time, including myself. It was predictable, because it was predicted. And in fact, even Greenspan doesn't really believe that he didn't expect a bubble...

Mr. Greenspan now admits he was wrong about the improbability of a housing bubble. Yet he has long maintained that bubbles are an unavoidable feature of a dynamic economy. He pulls out a 1999 speech and shows, underlined in green marker, passages in which he warned of recurring but unpredictable patterns of overconfidence followed by investor panic. He does not share some foreign central bankers' belief that their job is to defend against excessive asset-price inflation: No sensible policy, he maintains, could have prevented the housing bubble.

Greenspan knew that a bubble was possible. More than that he specifically did not believe that it was his job to stop asset price inflation. A housing bubble, or a stock market, is asset price inflation. Greenspan's attitude reminds me of an arsonist saying "I just spread the gasoline around, and if a spark lands on it, well, it's not my job to put it out. These things happen!" Greenspan poured the fuel on the ground in terms of generational low interest rates and left it there as long as possible. When it ignited, he first claimed that fires are a good thing, "hey they keep you warm" then said "well, it's not my job to put this out" and now he says "gee, who could have known. I mean fires happen, but they're so unpredictable!"

And Greenspan had ideological reasons for wanting to make mortgages as cheap as possible:

Mr. Greenspan generically defends the Fed’s action, writing: “I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support.”

Greenspan also largely sidesteps the larger issue of regulation, falling back on a weak claim of deferring to the bank's staff. As one of the most adulated people in the US during the 90's and early 2000's Greenspan was in a position to push, and push hard, but such evidence as there is indicates not only that he did no such thing, but in fact that the Randian preferred self-regulation to tight federal oversight. This history is long, and isn't a matter of a single episode as the WSJ claims, but of repeated deregulation supported by Uncle Alan. Seeking Alpha lists some highlights:

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the Glass-Steagall loophole.

In 1990, J.P. Morgan becomes the first bank to receive permission from the Federal Reserve to underwrite securities.

In 1991, the Bush administration puts forward a repeal proposal, winning support of both the House and Senate Banking Committees, but the House again defeats the bill in a full vote.

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting.

In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm.

All of this was to eventually result in the final, wholesale repeal of Glass-Steagall, an appeal which Greenspan favored and which if he had spoken out against it, would probably not have happened. The current financial crisis due to exotic derivatives and over-leverage (Bear Sterns was leveraged at over 30/1) would probably not have occurred if Glass-Steagall had still existed in its full and unadulterated original form.

And, as the WSJ itself admits:

In 2000, then-Fed governor Edward Gramlich, who was in charge of the Fed's consumer affairs, proposed to Mr. Greenspan that the Fed's staff examiners look for abusive lending practices in banks' lightly regulated mortgage affiliates.

In an interview with The Wall Street Journal last June, three months before his death, Mr. Gramlich said that at the time, he generally considered subprime loans a good thing. He didn't then know the extent to which the loans would become a problem, but he wanted the "Fed to be a leader" in cracking down on predatory lending.

Mr. Greenspan recalls that he demurred, saying that the Fed shouldn't have oversight of these lenders. Shady operations could portray their Fed-regulated status as a seal of approval, he suggested, giving them unearned credibility with customers.

When given a chance to regulate, Greenspan refused. He has almost always refused, because he is a disciple of Ayn Rand and he believes that markets discipline themselves.

That belief is why Greenspan refused to take asset bubbles seriously, allowing both the stock market bubble and the housing bubble to develop under his watch. In his view it was not his job to stop such things, no matter how much harm they might do. His belief that such bubbles are necessary in a dynamic economy we can dismiss with derision. Was the economy of the 50's and 60's, which didn't have such bubbles, worse than that of the last thirty years, which did? Certainly not for ordinary Americans, it wasn't. Dynamic appears to mean "the rich were getting filthy rich, and normal people were taking on debt" to Uncle Alan.

Greenspan's an old man, past his days of power, trying to make his life look like one which did more good than harm. The sad truth, however, is that his Randian beliefs directly lead him to not just ignore, but to help ignite two asset bubbles which did great harm to Americans. He methodically and deliberately helped remove the regulatory framework which might have prevented this most recent bubble from bursting in as damaging a way as it has. And this is even before we discuss, for example, his responsibility for shilling for George W. Bush's tax cuts for America's rich, causing the US to suffer massive government deficits or the changes he made to social security in the eighties which put more of the tax burden on the poor and middle class.

Greenspan lived his life in service to the idea that markets operated best that were most lightly regulated. His reputation will mirror how much currency that idea has going forward. For the sake of sane economic policies, let us hope that Greenspan's rehabilitation of his reputation falls as flat as the housing bubble he helped create.

Further Reading

Seeking Alpha's Timeline of Deregulation

No, Greenspan Doesn't Get To Rehabilitate His Reputation