Alan Greenspan was one of the gurus of free-market economics, resisting effective regulation of the financial and banking systems and following fiscal policies that fuelled the greed spree which led to the biggest bust in the financial system, possibly ever. Of course, Mr. Greenspan did not achieve this alone, nor was he the worst offender. Behind him has been a large coterie of free-market economists, politicians, greedy industrialists and bankers, fulsomely supported by such influential media organs as the 'Economist', which has followed a free-market line for many years.

What differentiates Mr. Greenspan from many of those around him is that he has had the intellectual honesty to admit that he got it wrong, that he was mistaken about one of the fundamental precepts of free-market economics, that greedy people, following their own self-interest, will somehow each moderate their behaviour so that the end result of all their activities will be benign. This is the 'science' behind Game Theory, one of the theoretical bedrocks of market fundamentalism. Free-marketeers have long asserted that light regulation was the recipe for innovation and would ensure endless growth. This nonsense, which totally ignores the fact that some people are greedy, self-interested and, once they have wealth and power, will distort any economic system to serve their own selfish interests, has led to the worst crash of modern times, one that will disadvantage millions and cause misery, poverty and probable starvation to many millions more.

Below is a short report of a Congressional hearing in which Mr. Greenspan admitted that he had made some fundamental mistakes. We praise him for his intellectual and personal honesty and integrity.

WASHINGTON - For years, a Congressional hearing with Alan Greenspan was a marquee event. Lawmakers doted on him as an economic sage. Markets jumped up or down depending on what he said. Politicians in both parties wanted the maestro on their side.

But on Thursday, almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he told the House Committee on Oversight and Government Reform.

From: NYTimes

Of course, some have for long been highly sceptical about the claims of free-marketeers about the benefits bestowed by unregulated financial markets and a lack of government involvement to protect the interests of those who elected them.

One of these has been Nobel Prize winning economist Joseph Stiglitz:

"Our financial system has failed us. Part of the reason it has performed so poorly is inadequate regulations and regulatory structures. Everybody agrees that lack of confidence in our financial system is a problem. But how can there be a restoration of confidence when we have simply given the banks more money to lend recklessly? We have changed neither the regulatory structures, the incentive systems, nor, in the US, even those who are running these institutions. As we taxpayers are pouring money into these banks, we have even allowed them to pour out money to their shareholders.

It is hard to have a well-performing modern economy without a good financial system, but financial markets are not an end in themselves. They are supposed to mobilise savings, allocate capital and manage risk, transferring it from those less able to bear it to those more able. In America, and some other countries, financial markets have not performed these functions well. They encouraged spendthrift patterns, which led to near-zero savings. They massively misallocated capital. And they created risk, did not manage it well and left huge risks with ordinary Americans, who are now bearing huge costs because of these failures. These problems have occurred repeatedly and are pervasive. The failures in financial markets have effects that spread out to the entire economy".

From: the guardian

If only others were as honest and open-minded......

Janet Daley, Daily Telegraph, 29.09.08

The Tories will not just be running against Labour and its current leadership. They will be running against a reinvigorated soft Marxist ideology which will infect the news coverage and analysis, against those who are saying: "You see, this is what comes from allowing the economic fate of the people to be determined by the market: ruin and instability followed by the inevitable need for government intervention. Greed and personal irresponsibility have been permitted to run rampant and the free market has now been utterly discredited."

If Janet Daley wasn't trying to be ironic, we would hail her as being spot-on in her observations!

Free-market economists mount a counter-attack

A group of economists has attacked the government's Keynesian strategy to spend its way out of the recession as "misguided and discredited". Further big increases in public-sector spending would make the state's role so dominant it would stunt the private sector's recovery, they say in a letter in yesterday's Sunday Telegraph. The economists, including Professor Tim Congdon, Trevor Williams, chief economist of Lloyds TSB corporate markets, and Ruth Lea, economic adviser at Arbuthnot Banking Group, were responding to Alistair Darling's comments that he wanted to help kickstart recovery. The economists said it was misguided of the government to believe it could second-guess which sectors would shrink and by how much. "Thus the government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources." They said slowdowns were natural and necessary features of a market economy and, if a managed response was to be adopted, "the best tools are monetary and not fiscal ones".

Words fail us! If this group of economists think what millions of people are suffering is the result of a natural slowdown and not an orgy of greed and speculation fostered by a fatally flawed free-market system, then they live in a strange bubble, cut off from real life.

But equally concerning is their binary view of the world, which seems to go 'Government bad, unregulated free markets good'. There are many countries that have capitalist market economies, but have found ways of engaging the most important stakeholders in society with government in formulating and implementing economic policy. The Nordic countries, the Netherlands, Korea and China are countries that follow a capitalist creed but do it differently from the neo-liberal model obviously favoured by the sixteen despite the evidence of its failure. They should listen to wiser counsel from men such as Warren Buffett, George Soros and now, Alan Greenspan.

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