Greenspan Was NOT Free-Market
Ignorance about Laissez-Faire Persists
After writing a cathartic piece on misuse of the term laissez-faire, I didn’t expect to return to this topic for a while. But then William Pesek wrote this Bloomberg editorial. So I resume my effort to correct the anti-free-market crowd. Let’s start with a basic definition:
Laissez Faire: To allow events to take their own course, or to let people do what they choose. The term is a French phrase literally meaning “let do” or “leave it to be”. [link]
Mr. Pesek describes Alan Greenspan’s policies as both free-market and laissez-faire:
It’s to show that central bankers are full of bunk when they say bubbles can’t be identified. This is blasphemy to free-market fundamentalists. Yet why did Yale University’s Robert Shiller see what the Greenspans of the world either couldn’t or refused to?
The world could learn from Singapore’s speculation- management efforts. The U.S. can learn the most. This suggestion may raise blood pressures in the laissez-faire crowd.
Laissez-faire means NOT interfering with markets. How does he reconcile this with Greenspan’s actions? It’s hard to know where to start. First, free-market economists (Austrian mostly) are among the few who predicted this bubble. Go look at the archives of Mises.org, you’ll find hundreds of warnings. Heck, they go back to Mises’ warnings before the Great Depression. Second, Greenspan was a monetarist, the polar opposite of free or Austrian economists.
The Greenspan Put
I refer Mr. Pesek and others to a concept known as the Greenspan Put. The fact that Greenspan would bail out banks and others was so well-known on Wall St that it got its own phrase. What effect does this assurance have on the markets? It encourages speculation and recklessness, of course. This knowledge, combined with low interest rates led to many bubbles. More on the put from wiki:
The Fed’s pattern of providing ample liquidity resulted in the investor perception of put protection on asset prices. Investors increasingly believed that when things go bad, the Fed would step in and inject liquidity until the problem got better. Invariably, the Fed did so each time, and the perception became firmly embedded in asset pricing in the form of higher valuation, narrower credit spreads, and excess risk taking. It has been criticized as a form of privatizing profits and socializing losses, and as inflating a speculative bubble in the lead-up to the 2008 financial crisis. [link]
In a free market, companies would fail. Cheap money would not be shoveled to banks when the economy sours (most likely due to previous interventions), leading to reckless lending and malinvestment. So why on earth do people think Greenspan practiced laissez-faire policies? He grossly interfered with free-market function. Yes, Greenspan did fail at regulation. But that does not mean he favors free markets.
Greenspan was pretty “free-market”, in 1968
At one point in his life, Greenspan fought against inflationary Federal Reserve policies. His 1968 essay “Gold and Economic Freedom” is a must-read. But something changed. He went in a truly opposite direction. You can’t call the drastic government interventional policies he practiced “free” in any way, shape, or form.