Ayn Rand: The Fountainhead of Greenspan's Errors

Rand's name is regularly invoked when calling into question the Federal Reserve's actions in the years leading up to the crisis. Rand's strong free-market views, as expressed in her most famous works, "Atlas Shrugged" and "The Fountainhead," were the basis for the ideology Greenspan followed as he let the markets run free from any sort of regulation. This freedom meant that the derivatives markets and their extremely complex structured financial products operated in a wild west style world where the law had yet to show up.
As we now know, that lawless culture contributed significantly to last year's financial meltdown. A year ago, Greenspan offered a mea culpa and admitted that he was at least partially mistaken in his view of the superiority of free markets over government regulation.

Greenspan's conversion is recent. In 2005, he told an economic group in New York that "we don't perceive that there is a national bubble, just a little froth" in the housing market. He added that there were a lot of local bubbles around the country, but that he did not see any cause for concern at the national level. Greenspan's low-interest rate policy certainly propelled the housing boom -- in some parts of the country, housing prices rose at double-digit rates for several years running. Much of this growth was speculative and fueled by irresponsible lending practices -- all overlooked by the regulators --- that converted these mortgages into riskier and riskier financial securities that we know as credit default swaps but which Warren Buffett calls weapons of financial mass destruction.

Despite clear weaknesses, Greenspan consistently opposed imposing any sort of regulation on the booming market in financial derivatives. Greenspan firmly and consistently rebuffed any moves toward government regulation -- most famously when Brooksley Born, then-chairman of the regulatory body with responsibility for regulating derivatives, argued in 1998 for some oversight of the opaque derivatives market. Greenspan felt that self-regulation through the markets would do the job. Investors' and bankers' interest in self-preservation, Greenspan believed, would prevent them from taking actions that could lead them to financial ruin.

Boy, was he wrong. Now, he says that the views he held for 40 years were at least partially off-base. His free-market-based fight against regulation of derivatives was misguided, and self-interested financiers did not adequately protect their shareholders and investments.

Not only did they not protect their own shareholders, their actions had disastrous consequences for the rest of us. Self-interest was nowhere near strong enough to curb disasters such as the collapse of AIG, Lehman, and Merrill Lynch. The $700 billion that the U.S. taxpayer has made available to support the financial system is incontestable proof that the markets failed.

Greenspan was hailed as a genius and a rock star when he left the Fed in 2006 after 18 ½ years at the central bank. His book, "The Age of Turbulence," rarely provides a word about how his policy choices may have led to the real market turbulence that erupted once he left office.