What Greenspan’s Comments Really Mean

Today, Alan Greenspan, the former chairman of the Federal Reserve, testified before Congress.  He said he made errors in judgement and was “shocked” by the outcome of the Fed’s policies.

Honestly, I do not see how a person in charge of the the money supply of the United States can be shocked about any action he makes.  With that kind of responsibility, you must consider all possible outcomes with every decision.  I guess I’m just disappointed that a person in that position isn’t as smart as we think he should be.

What gets me more riled up than anything else though, is how the members of Congress and Greenspan keep talking about the failure of the “free markets” and how “deregulation” led us to this crisis.

The American economy is anything but a free market!  The Federal Reserve wouldn’t exist in a free market in the first place!

The failure was based in the monetary policies of the Federal Reserve and the American government’s aversion to economic slowdowns or recessions.  In our economy, you have to let the down cycles bottom out.  If you do not, you only prop up a system that is bound to fail.  By not letting the economy recover after the dot-com bust and 9/11,  and lowering interest rates to 1%, the Fed pumped the economy to historic heights.  This just made the bottom (now) that much lower.

If the Federal Reserve did not keep rates at 1%, the credit bubble would not have gotten so big.  If the market had set interest rates, they would have been higher because they would need more in return for their risk of losing money.  It was the intervention of the Fed that led to the crisis.

Now, everyone is convinced how capitalism and the free market has failed and how we need more regulation.

Some of this is true.  We do need regulation of the derivatives market.

However, we do not need the excess intervention from the government we are experiencing now.  We do not need “Helicopter Ben” and the Fed pumping hundreds of billions of dollars into our economy and we do not need $700 billion bailouts.  We also do not need the nationalization of Freddie Mac, Fannie Mae, and AIG.  This is only making things worse.

The moral hazard that is being set is disasterous.  After the bailouts of the auto industry, the precedent was already set for government saving dying companies.  Now, banks know if they take too much risk and fail, they will have Uncle Sam and the taxpayers there to pick up the pieces.

Maybe once the bottom has been found and we are on the upswing again, we can implement well thought out regulation that will help us avoid the mess we got in here.  The point is that the bottom has to be found, and we can’t have the government helping prop everyone up.

Greenspan should have said that he was a part of the problem, but that the actions his successor and the government is taking now is going to bring the whole ship down.  Instead, we got the idea that more government intervention is good, and capitalism is bad.

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