Lawmakers in the US struggle to come to terms with the scale of the financial crisis, the Paulson solution, and the role of government in resolving this crisis. Republicans, particularly conflicted, sabotaged the $700 billion bail-out last Thursday. At this moment Alan Greenspan proferrs advice from the lofty heights of the pedestal he still, astonishingly, stands on. “As a practical matter” he and others write in the Wall St. Journal (26.09.08) and “at the current stage of the crisis, the only way that financial institutions can continue to function is for the government to provide financial support.”
I remind readers that only a month ago, on the 4th August 2008, Greenspan, writing in the Financial Times, celebrated the fact that “the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs” (my emphasis). He went on to conclude that the world faced a danger, not the danger of financial collapse, mind you, but “the danger that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs.”(See my blog on Greenspan, Putin and Hu in the August batch.)
Right now Congress, the White House and the Treasury, are struggling to ‘reassert their grip on economic affairs”. Indeed Hank Paulson and Greenspan’s successor, Ben Bernanke are prostrating themselves before lawmakers, figuratively and literally, in a vain attempt to reassert “government’s grip on economic affairs.”
It was Greenspan and his friends in the halls of economic orthodoxy, and in the finance sector, that helped loosen that grip. That celebrated de-regulation of credit creation, and the de-regulation of the finance sector as a whole. It is Greenspan that now has the audacity to call on government ‘to provide financial support so that financial institutions can continue to function’.
No wonder Republican lawmakers feel conflicted and embarassed by the flawed ideology, the double standards and the audacity of Alan Greenspan and his students, George Bush, Ben Bernanke and Hank Paulson. They have all compromised Republican electoral chances, but have also, unforgiveably, irreparably damaged the Conservative Republican ‘brand’, which if not threatened by extinction, can nevertheless look forward to a long sojourn in the wilderness.
I remember reading an article a few years ago (perhaps on the eve of his departure from the Federal
Reserve) that characterised Greenspan’s policies in very basic terms as “we’d better hope he’s right”, alluding to the budget deficit (not to
mention private debt) resulting from his policies.
We’re still in the relatively early stages of this crisis, and so shaking off the
“everything is fine, investors should still have confidence” mentality is going to be very difficult for people like Greenspan. Veiled warnings
about how unlikely the system will be able to survive without unprecedented Government intervention is as far as he will go so far, despite the
obvious rational analysis that surely must be going on in his head.
The extent of the policy re-design required is so far reaching that
most people in power will be suffering from inertia during the process of realisation. The challenge is communicating the collective action
required to make implementing the necessary changes as clean and efficient as it can be, whilst (i) not undermining democracy and (ii) not
fragmenting national responses across the globe.
Greenspan would be a great place to start in pursuit of this goal, but it must be a
conversation that is facilitated, as there are already plenty of people shouting.
I should like to see Income Tax charged at (say) 95%
on bonuses. Nobody would have to pay at that rate,
because they could instead ask their employer to make
the payment as part of salary, where it would only attract 40% (or whatever rate then
applied). This would
make employers think more carefully.