Printable View
ALAN Greenspan,has finally conceded that the free market philosophy he championed for 40 years has fundamental flaws.
http://www.theaustralian.news.com.au...00-643,00.html
Frankly amazing.
I now Respect this man more than I did before.
At least this man has now admitted that he was wrong.
Z
Greenspan has never been into the "free market system" - in free market there would be no FED - it's quite unconstitutional and it's stealing money from the poor and transfer those to wall street. That's the only function of FED. No country needs a central bank.
What makes that quite funny was that the reason to this downturn was Greenspans interest rates...they were below market rates and therefore
1) people did have less incentive to save (cause of less profit!)
2) Company's and individuals had more incentive to invest.
And that equation doesn't match: you need savings for investments. If you don't have savings, well then you can't finish your investments nor you can upkeep your current consumption. And basically that's the whole thing, malinvestments and what needs to be done now is liquidation of some investments to upkeep the comsumption.
For example it wasn't too long a go when Bush declared "government should support housing" - we'll their idea was that everyone should have their own house. Hows that made possible? Well, they changed the interest rate so low that people had more incentive to buy house and take a mortgage. With so low interest rate to housing, it's almost stupid not to buy a house.
And then you had new anti-freemarket legislation to give loans to everybody. And well, banks wouldn't do that in free market, because they want to be sure that they can get their money back, they wouldn't take exorbitant risks. But in this case they were happy to borrow to all latino's and poor black ppl, because they could sell those trash loans to Freddie Mac and Fannie Mae (government own Company's).
And when the bubble was about to burst something like this happened: some of those poor ppl noticed that they had taken a mortgage and they had paid $5000 cash and they had $95 000 loans from that house. But the value of the house had dropped down to (for example) $80 000 - so why would they repay the loan when they just can announce that they are poor and let the bank have the worthless house. (because with new $95 000 loan, they could have better house than the previous)
And of course many ppl had already a quite expensive house, and before the whole thing, housing prices were rising, they were brave enough to take more loans ( 1) the money was cheap, cause Greenspan injected new money into the economy all the time and law of supply&demand define prices and then there were big supply of money. And yeah, interest rate is the price of money, if you didn't know 2) their rising house value give them false security feeling that they could take more loans) meaning even more consumption and less actual resources.
So the lessons to learn in here is
1) Do not mess with the interest rates
2) Greenspan was never free marketeer
3) Capitalism isn't to blame - it's central planning.
4) America needs recession/depression or it will turn out later to be the Great Depression II. How that is done is getting real with the interest rate (raising it - or abolish fed)
5) Capitalism still rules!
If there is artificial boom, there will be bust as well.
In this case Greenspan was making the boom - he had the interest rates just too low during most of his time in Chairman. It created boom in consumption and investment.
But in these cases don't look just for the money, its only paper. think of the actual resources.
In free market economy, interest rate is determined by savings (they don't consume all the resources) - the more there are free resources (savings) the more there is resources to invest. If the interest rate is high, then people don't have much resources to allocate to investments and they then don't invest that much.
In free market economy interest rates allocates available resources to it's best use.
Greenspan Boom could be compared to situation like this:
you have one pile of bricks, and Greenspans is the guy who determines how many buildings can be build from that pile. And he says six. Then the economy starts to boom and many ppl start to work, building all those six buildings. But when the pile is getting smaller and smaller, to many economists, it seems that maybe they cannot finish all those buildings. And when the pile is empty, they have six unfinished buildings in front of them.
Then they need to liquidate some of the buildings, to finish even some. And to be realistic as possible, i would say that they need to liquidate two of those, so they can even finish four. Liquidation is expensive and some or the brisk will get destroyed. In free market system where the resources is not allocated by Bernanke or Greenspan, but free interest rates, they could have build five!
So its better to have steady growth than boom bust - cycles. With steady growth you can build more buildings.
The reason why the bust didn't come earlier was that Greenspans interest rates were quite close to market preferences. In the same way, it was quite close amount of buildings what Greenspan planned than markets. But if he would have decided to build 20 buildings out of the one pile, the destruction would have been worse and more sudden.
Hmm...
You make some good points Cappy...
Perhaps what I have been seeing as Capitalism is not really Free Market Capitalism, but instead what I see in North america is USA style Neo Capitalism.
So maybe free Market Capitalism is not so bad a thing...
I have in recent years been a supporter of Socialism/Capitalism Balance, much like we have in Canada...
Perhaps Free Market only with no socialism would be good...
But if we try for it right now, things would be messy, people would be dieing and sick and in poverty...
Maybe after 50+ years a true free market society would be born and equality would bear out, and things would be ok...
But on the other hand... now would be a good time (but they passed this Bailout bills :-()
because all the burden is on the banks now...
but anyway...
thank you for your analysis Velli-Matti,
It helpes me understand...
I still feel however certain things are good about socialism. Basic rights, Like out Universal health care in Canada is good.
Z
Well yeah yeah. I understand that you have your fetism with socialism, and i cannot turn your head....well, during the years i've known you, mostly i haven't even tried.
But I my point was that i see something wrong with greenspans idea that "he was laissez faire and thats why everything went wrong, and now he realizes that free marker was to blame and we need regulation so deeply".
Facts just do not support that idea.
But to what you said your last post, in my opinion some social reforms aren't that bad compared to neoconservatives reforms. If neocons and mccain fanatics would rule US, i wouldnt even want to come there. Now US still seems like a place i could live in, but the direction where they are going is wrong.
ps. i need a job