On October 23rd, in a financial witch hunt, the House Committee on Oversight and Government Reform questioned Allen Greenspan,  the former chairman of the federal reserve, on the current market crisis.

Greenspan is quoted as saying that he “found a flaw” in his professed ideology that the free-market is best left to regulate itself. And that he was “partially” wrong in his opposition to regulation in the derivatives market, expecting that institutions would protect shareholders and there investments. He then went on to advocate increased regulation in the securities market.

While it is disconcerting at the least to hear the former fed chairman make these sort of retractions on the decisions with which he has been supposedly “guiding” the fed with. It is even more troubling that individuals will read some of the results of this witch hunt and believe the tripe that is being spouted.

During the heyday of the asset/realestate boom in the US and around the world, few seemed to care or even be concerned at the looming potential economic disaster that was being nursed along. Only now after the infant has emerged as an adolescent rebel and is causing havoc around the globe is it on everyone’s mind.

Let’s take a quick step backward and look at this crisis that everyone in power is quickly jumping to point the blame for, and do some basic analysis. We could step further back in time to show these effects over the past many years, but for the sake of the readers time we will just jump back to 2000. On the heels of the dot com bomb, the federal reserve lowers it’s interest rate to an all time low, in an effort to marginalize the impact of this upset in the financial industry. Then not long after on September 11th 2001 an attack on the financial district of New York sent the US and world markets into an uproar, fearing long term financial impacts the fed again lowers its rate to an all time low, and then continues to keep the rate abnormally low for the next 5 years.

Along with the low interest rates, the credit liquidity that the fed makes available for banks was exceptionally easy for them to tap into. And to add to the market abnormalities the US government had created laws that in an effort to get everyone who wanted a home into a home, made it even easier to qualify for various mortgage programs. So with easy credit liquidity and legislation providing low lending requirements, supposed “Predatory Lenders” and conservative lenders alike had customers knocking down their doors to get a “piece of the action”. There were programs that required so little that they only wanted to know the borrowers credit score, and that they had sufficient funds to pay only 2 months on the mortgage, with only that information they could approve the applicant on a loan up to 1.5 million dollars.

With credit so easy to come by, people naturally looked to a traditional asset like real estate as a method by which to tap into the credit, and create income streams based solely on the leverage of their own and others credit worthiness. The only thing which fueled this boom, was the ease of credit acquisition. As people bought homes, the prices raised as they would in a normal/natural free market. This allowed them to again leverage credit to purchase another piece of real estate at the increased market value and continue the process.

To say that this was an error in the way that the free-market runs would be to discount the effects that these market controls had on what has happened to our economy. A person or business operating within a completely free market relies on market indicators to determine the choices that they will make. The free-market naturally seeks for a point of equilibrium where the supply matches the demand in the market. But when some of the key market factors are arbitrarily controlled or forced into certain positions that they wouldn’t naturally be in a free-market (ie: Credit Liquidity, Interest Rates, Legislation requirements on the market) then that sends the other market indicators into a flux that doesn’t make any rational sense. Individuals in the market will naturally make their decisions for their own self interest based on those indicators, which would be in the path of the greatest profit for the least expense. This decision lead most people to decide on taping their credit to increase their profitability, because the requirements were kept artificially low.

A totally free-market would have naturally increased the interest rate and the requirements for getting the loans, thus normalizing the market long before we reached this crisis state. The market would have not allowed for this or many other similar economic catastrophes which have occurred over the last 95 years. These have been the result of allowing our market to be arbitrarily controlled and managed by a group of private bankers who are seeking for their own gain at the expense of the rest of the US. This group has created and managed the fed over that time period, they passed the fed as a method to avoid the market instability that a “free-market” offered, but as a result we have experienced much more frequent and more devastating economic troubles since it’s inception than we ever did from the creation of the United States until the creation of the fed in 1913.

I would agree with Greenspan and say that his philosophy has been flawed, not in the case of the market being the best regulator of itself, but rather in the assertion that the Fed should maintain it’s arbitrary control on the market.

The demon that created this disaster is now being hailed as the white knight with the ability to manufacture the funds to bail out our banks and potentially the banks of other nations rather than being held accountable for it’s role in perpetrating this nefarious blunder on the US people. If we are going to call for additional regulation as a result of this catastrophe, let us regulate the architects rather than the subcontractors, and call for the US house of representatives to exercise their constitutional responsibility to justly oversee the actions of the Fed and call for greater oversight of its actions.

Article Links:

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