He used to be right, as when he wrote “Gold and Economic Freedom” in 1966.* What changed his mind since then remains a mystery.
Now he says:
“I made a mistake in presuming that the self-interests o f organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.” Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”But, as economist, Dr. George Resiman points out, it is not the free market that is to blame.
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied.
The actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to over come the collapse of the stock market bubble whose creation it had previously inspired...
In doing this, the Federal Reserve’s ultimate purpose was to stimulate both investment and consumer spending. It wanted the cost of obtaining capital to be minimal so that it would be invested on the greatest possible scale and for people to regard the holding of money as a losing proposition, which would stimulate them to spend it faster. More spending, ever more spending was its concern, in the belief that that is what is required to avoid large scale unemployment.
All this additional money is actually fictitious capital, leading people to believe they have more resources than they do. This causes investments and spending in areas which would not have occurred if the availability of money reflected the true state of wealth. Over-investment in a market sector not supported by real demand (which in economics is defined as the willingness and the ability to pay for something) is what creates a bubble. It’s called a bubble because it pops.
Many factors went into making the housing market the sector which experienced the bubble (Fannie, Freddie and their securitization schemes, the CRA, desire for a “real” investment following the dot-com crash, and more) but what made the bubble possible to the scale in which it occurred can be directly traced back to 2 major things (1) the infinite manipulability of fiat money, and (2) the failed central planning of the central bank system. Not until we return to the honest money system of the gold standard and the market discipline found in a free banking system will we be able to avoid the huge boom-bust swings of the past century, and the financial destruction they bring with them.
Greenspan is right to admit his system doesn't work, but it's ridiculously wrong to equate his system with a free market.
(*) In Capitalism: The Unknown Ideal by Ayn Rand