The good news is that the once-respected chairman of the Federal Reserve admitted in congressional testimony this week that he had made a mistake. But the bad news is that it looks like he is at least partly mistaken about what he got wrong.
Greenspan appears to believe his big mistake was that he believed in the corrective power of self-interest in the marketplace. That belief was the keystone to his free-market ideology. Self-interest was supposed to ensure that banks and other companies didn't do anything that put their shareholders and their equity at risk.
And clearly he was wrong about that. If we have learned anything over the past year, it is that companies and individuals don't always make choices that advance their self-interests. Markets don't reliably self-correct.
The bad news actually comes on two fronts. First, even though Greenspan acknowledged this error, he didn't propose any significant changes to the financial system to make up for it.
But Greenspan appears to have made a more profound mistake, which was to confuse the importance of having an ideology with being ideological. It may be true, as he told Congress Thursday, that we all need an ideology to help us organize our approach to the world. But Greenspan, whose free-market ideology led him to fight meaningful regulation for his entire career, didn't use his ideology this way. Instead, he allowed it to govern all his decisions, even when the facts and logic contradicted it.
That's not having an ideology. That's zealotry.»
[MarketWatch's top stories of the week, WEEKLY ROUNDUP - OCTOBER 24, 2008]
«If I turn out to be particularly clear, you've probably misunderstood what I said.», Alan Greenspan, 1988 (Time)
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