NY Times columnist Krugman: Blindly into the Bubble

[Rourke]

Thought the people here would get a huge kick out of this column blaming Alan Greenspan and his devotion to Objectivism for not heading off the subprime lending crisis. Here's an excerpt:

So where were the regulators as one of the greatest financial disasters since the Great Depression unfolded? They were blinded by ideology.

“Fed shrugged as subprime crisis spread,” was the headline on a New York Times report on the failure of regulators to regulate. This may have been a discreet dig at Mr. Greenspan’s history as a disciple of Ayn Rand, the high priestess of unfettered capitalism known for her novel “Atlas Shrugged.”

In a 1963 essay for Ms. Rand’s newsletter, Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

It’s no wonder, then, that he brushed off warnings about deceptive lending practices, including those of Edward M. Gramlich, a member of the Federal Reserve board. In Mr. Greenspan’s world, predatory lending — like attempts to sell consumers poison toys and tainted seafood — just doesn’t happen.

Edited December 22, 2007 by Rourke

[softwareNerd]

Greenspan definitely shares culpability for the sub-prime mess.

As far as the rest (from your quote, I doubt I'll read the article), it's the oft-repeated false idea that when things go wrong in a mixed economy, it is because of the still-free (aka unregulated) aspects. A mess like we have today in sub-prime is far less likely to occur in a system that does not harbor the illusion -- created by government -- that the Fed is there to bail out anything that goes really bad. In fact, the financial press had a term for this illusion: it was called "The Greenspan Put". When a regulator creates an insurance scheme like that, people see that there is a floor to how far things will go before he will bail them out, with money taken from those who did not need the insurance.

Of course the private players are to blame, but it is important to understand in what sense. The worst ones understood the government's guarantee and played it to their benefit. The system is built to encourage cheating, evasion and ignorance, since it is these types of behavior that it guaranteed against abysmal failure; the folks who are knowledgable, who do not evade and who do not cheat will pay the bills!

Almost every aspect of the current mortgage mess can be traced to Greenspan. (Not that he was the prime-mover of each, but that he is partially culpable in them all.) For those who really want to worry about something, a bigger mess, in which he also shares culpability, is a few decades down the line: Social Security. Or, in the more medium-term, worry that people also speak of a (slightly different type of) "Bernanke Put": that could be a clue to where the next debacle will hit.

[DarkWaters]

Thought the people here would get a huge kick out of this column blaming Alan Greenspan and his devotion to Objectivism for not heading off the subprime lending crisis.

This sounds like typical anti-free market vitriol from Paul Krugman. However, I am amused that Ayn Rand is on his radar now. Krugman periodically blames Milton Friedman for whatever he considers to be "market failure". Here is an example, where he blames the economic thought of Milton Friedman for the various tainted imports from China.

At least Paul Krugman recognizes the importance of yesterday's intellectuals in shaping tomorrow's public policy.

Edited December 24, 2007 by DarkWaters

[agrippa1]

Almost every aspect of the current mortgage mess can be traced to Greenspan.

Does anyone know any good sources for economic systems analysis? (I'm talking systems analysis applied to economics, not analysis of economic systems)

In control theory, the outputs of a system is fed via a feedback loop into one or more of its inputs in order to control system behavior. For instance, an aircraft altitude control system would measure altitude and feed surface controls to climb or descend in order to keep altitude steady. One of the principles of control theory is that resonances normally exist in an untuned system. In the example, if there is a delay between the climb/descend command and the actual climb or descent of the aircraft, you end up with a porpoising effect caused by overcorrections.

In free-market economics, the system feedback is provided by money supply. As investments soar during a growth spurt, the amount of money available from banks drops, interest rates rise to reflect a shifting supply/demand point for loans, and the attractiveness of the investment decreases, stalling the bubble. The phase relationship of interest rates to economic growth sets up the porpoising resonance known as the business cycle. (Simplification, but the principles hold true)

One mistake in control theory is to try to control the system too tightly. In the airplane example, this would be illustrated by a system which pitches up sharply to climb, then when passing through altitude, immediately pitches down to descend. Looking at an altitude indicator, you might see a system which is holding very tightly to its altitude profile, but stepping away from that one parameter, you would see an aircraft pitching violently up and down in order to keep the one parameter steady. This is a system in resonance, and it will continue in this mode until the resonance becomes too violent to counteract, at that point, the system "blows up" (figuratively and literally).

A properly designed system is analyzed for all physical forces and actions and "tuned" to remove resonances. It allows some looseness in control as a trade off for stability.

Taking this back to the economic world, the proper role of the Fed (assuming you see no value in a natural business cycle's purging of inefficient businesses), is to tune the economy so that the business cycle is dampened out and the economy can grow steadily. Two ways of doing this:

In a proper tuning approach, you would try to sync the phases of the money supply and business activity so that money supply started dwindling sooner in the growth phase. This reduces, but does not eliminate the business cycle resonance, and creates a stable economy (not necessarily growing).

In a tight control approach, you would jerk the controls up and down in response to the week-by-week behavior of the economy, not looking at long term stability, but only trying to hold one specific parameter in place.

I believe we are in a tight control paradigm, and while the economy may seem pretty steady (though a little jittery) the controls are in a violent resonance that seems to be growing, and seems to have been growing since the late 90's.

Now the question:

Did Greenspan know so little about control theory that he allowed himself to be sucked into a tight control approach in order to maintain economic activity?

Or,

Did he analyze all the interactions and intentionally start a slow growing control resonance, knowing that it would be beyond control by the time he left the Fed, and that it would go critical long enough after he left to avoid serious blame?

Or to put it simply: Did Rand's "Undertaker" cast himself as D'Anconia?

[DarkWaters]

Or to put it simply: Did Rand's "Undertaker" cast himself as D'Anconia?

If this means, was Alan Greenspan acting as an Objectivist and intentionally bringing down the system from within, then I would say almost certainly not. An Objectivist Youtuber who posts as qtronman has posted two videos on Alan Greenspan's memoirs The Age of Turbulence. You can view them both here and here. Greenspan indisputably admired Ayn Rand and Objectivism in his earlier days. However, in his memoir, he seems to describe Objectivism as something that he grew out of and goes on to suggest that it is not that useful in real life. So yes, I doubt that he casted himself as Francisco.

Edited December 25, 2007 by DarkWaters

[Thomas M. Miovas Jr.]

Next thing you know, they'll be blaming us for the next natural disaster -- you know, because nature to be commanded must be obeyed.

Of course, most of us know that the boom and bust cycles are caused by governmental force being introduced into the economy. This includes the Feds controlling interest rates and printing money, tax incentives, etc. Those who disagree need to read or re-read Capitalism:The Unknown Ideal.

It's not an issue of controlling too tightly or controlling too loosely, but of trying to control the economy at all. An economy is comprised of individual men making their own decisions on what to do for a living; and either succeeding or failing based on how well they focus on what will make them money (preferably doing something that is for man's life as the standard and what they love to do). Introducing force into that decision causes all sorts of reactionary actions, including economic bubbles and those bubbles popping.

In a free economy, specific businessmen may well go out of business, but other businessmen will step in and produce what needs to be produced at a profit. For example, the horse and buggy days are behind us due to businessmen such as Ford who brought us the automobile; and the candle and kerosene lamps as primary lighting is behind us due to businessmen such as Edison who brought us the light bulb. While the horse and buggy and kerosene lamps went under, whole new industries arose. And that's the way it works in a free economy-- the best and most productive ideas tend to win out in the long run.

Introduce force into that, and the whole economy moves in a direction that is not economically viable, such as offering incentives for banks and other loan officers to loan money to people who were not economically viable -- i.e. a long-term profit could not be made by granting loans to people who either cannot or will not pay them back.

I suppose, in a way, it could be argued that things would be even worse without Greenspan -- since he tended not to make really big shifts in the interest rates and such -- but the negative effect is still there, and he didn't promote a free market once becoming the Fed -- which he should have acted within his knowledge and power to shut down completely insofar as it was interfering in the economy.

So, a mechanical analogy, like flying airplanes, doesn't apply, since no one wielding force has the right to throttle the creative individual.

As I've said, please read Capitalism: The Unknown Ideal so as not to be influenced into throttling the individual with the threat of force.

[agrippa1]

If this means, was Alan Greenspan acting as an Objectivist and intentionally bringing down the system from within, then I would say almost certainly not. An Objectivist Youtuber who posts as qtronman has posted two videos on Alan Greenspan's memoirs The Age of Turbulence. You can view them both here and here. Greenspan indisputably admired Ayn Rand and Objectivism in his earlier days. However, in his memoir, he seems to describe Objectivism as something that he grew out of and goes on to suggest that it is not that useful in real life. So yes, I doubt that he casted himself as Francisco.

I'd suggest you read the book. In it, he is very admiring of Ayn Rand, and his dismissal of Objectivism consists entirely of questioning Rand's proposal at voluntary funding, which we know was a placeholder, as she said, the last of many steps in creating a free society. Rand was in the Oval Office, along with Greenspan's mother when he sworn in as an economic adviser in Ford's White House. He was at Rand's funeral in 1982, and he apparently remained close to her her entire life.

He also speaks positively about the gold standard, saying its main weakness is that most people aren't ready to accept it again.

[agrippa1]

Next thing you know, they'll be blaming us for the next natural disaster -- you know, because nature to be commanded must be obeyed.

Of course, most of us know that the boom and bust cycles are caused by governmental force being introduced into the economy. This includes the Feds controlling interest rates and printing money, tax incentives, etc. Those who disagree need to read or re-read Capitalism:The Unknown Ideal.

It's not an issue of controlling too tightly or controlling too loosely, but of trying to control the economy at all. An economy is comprised of individual men making their own decisions on what to do for a living; and either succeeding or failing based on how well they focus on what will make them money (preferably doing something that is for man's life as the standard and what they love to do). Introducing force into that decision causes all sorts of reactionary actions, including economic bubbles and those bubbles popping.

In a free economy, specific businessmen may well go out of business, but other businessmen will step in and produce what needs to be produced at a profit. For example, the horse and buggy days are behind us due to businessmen such as Ford who brought us the automobile; and the candle and kerosene lamps as primary lighting is behind us due to businessmen such as Edison who brought us the light bulb. While the horse and buggy and kerosene lamps went under, whole new industries arose. And that's the way it works in a free economy-- the best and most productive ideas tend to win out in the long run.

Introduce force into that, and the whole economy moves in a direction that is not economically viable, such as offering incentives for banks and other loan officers to loan money to people who were not economically viable -- i.e. a long-term profit could not be made by granting loans to people who either cannot or will not pay them back.

I suppose, in a way, it could be argued that things would be even worse without Greenspan -- since he tended not to make really big shifts in the interest rates and such -- but the negative effect is still there, and he didn't promote a free market once becoming the Fed -- which he should have acted within his knowledge and power to shut down completely insofar as it was interfering in the economy.

So, a mechanical analogy, like flying airplanes, doesn't apply, since no one wielding force has the right to throttle the creative individual.

As I've said, please read Capitalism: The Unknown Ideal so as not to be influenced into throttling the individual with the threat of force.

Now, Thomas, I know we've established an adversarial stance on these forums, but please don't be so dismissive so quickly. Control theory certainly pertains to economics, and it puzzles me that someone as intricately analytical as Greenspan would be oblivious to the effects of resonant feedback. I believe he may be one of the few people in the world who fully understands how the money supply levers actually effect the broader economy, and his claims of ignorance don't ring true to me.

I've read Capitalism several times in the past few months. I was particularly interested in Greenspan's pieces on antitrust and the gold standard. I liked his "attack on integrity" piece too. I read his book after I had thoroughly digested his old essays, and with a specific eye to any changes in his outlook over the intervening 4 decades. Other than his dismissal of Rand's voluntary taxation (which he does not address in his old essays), I saw no evidence of a rejection of Objectivism. Quite the opposite, actually. I'd suggest you read his book. There's a lot there between the lines.

[agrippa1]

Of course, most of us know that the boom and bust cycles are caused by governmental force being introduced into the economy. This includes the Feds controlling interest rates and printing money, tax incentives, etc. Those who disagree need to read or re-read Capitalism:The Unknown Ideal.

It is government force trying to dampen out natural downturns that causes the great busts, but business cycle is part of the normal process of a capitalist economy. I think Rand refers to the boom-bust cycle as creative destruction (or something to that effect - basically, the busts clear out the weak businesses and open opportunities for the next boom).

(typo)

Edited December 25, 2007 by agrippa1

[softwareNerd]

Over the years, I've seen many Objectivists wonder if Greenspan was earnestly trying to change the system from within. By most accounts he thought so while going into it initially. Perhaps, he might even have felt he was still doing as much as he could, even till the end of his term. Regardless of how he felt, it doesn't change the fact that many other economists would have acted the way he did in the role. An old fashioned Keynesian, in Greenspan's place, might have done worse; but, the 1980's really saw the ascendancy of the Chicago school monetarists, and I doubt the better ones of them would have done anything much different from Greenspan.

So, even if he still believes in the Gold standard or in Objectivism, he was unable to translate that into action. When it came to action, he did what Fed Governors do -- not what the worst of them do, but not something great either. Maybe his epitaph can be: someone else would have screwed it up worse.

[John McVey]

Over the years, I've seen many Objectivists wonder if Greenspan was earnestly trying to change the system from within. By most accounts he thought so while going into it initially. Perhaps, he might even have felt he was still doing as much as he could, even till the end of his term. ... So, even if he still believes in the Gold standard or in Objectivism, he was unable to translate that into action. When it came to action, he did what Fed Governors do.

Is not the story of an agent getting too good at blending in with the enemy, resulting in him losing his true sense of identity and purpose, an old staple of spy thrillers? Just a thought, and probably not original either.

JJM

[John McVey]

At least Paul Krugman recognizes the importance of yesterday's intellectuals in shaping tomorrow's public policy.

So did Keynes himself, if only to abuse people with his observation through ad hominem.

JJM

[DarkWaters]

In it, he is very admiring of Ayn Rand, and his dismissal of Objectivism consists entirely of questioning Rand's proposal at voluntary funding, which we know was a placeholder, as she said, the last of many steps in creating a free society. Rand was in the Oval Office, along with Greenspan's mother when he sworn in as an economic adviser in Ford's White House. He was at Rand's funeral in 1982, and he apparently remained close to her her entire life.

This is very good to hear. Maybe I will look into it at some point. Thanks!

[agrippa1]

This is very good to hear. Maybe I will look into it at some point. Thanks!

Don't get me wrong about the conspiracy theory. It's just a thought that hit me while reading the autobiography and was fun to consider, and it seems to fit well into the story.

But there is no proof or hard (or soft) evidence that this is really what happened.

But, man, wouldn't it be great if things could really happen the way they did in AS.

(I did some googling and the theory has been around for at least a few years on odd sites here and there, so I guess I can't claim credit)

[Thomas M. Miovas Jr.]

Control theory certainly pertains to economics, and it puzzles me that someone as intricately analytical as Greenspan would be oblivious to the effects of resonant feedback. I believe he may be one of the few people in the world who fully understands how the money supply levers actually effect the broader economy, and his claims of ignorance don't ring true to me.

The problem is that when one speaks of control theory being applied to the economy as a whole and by the government, one can only mean the application of force or the threat of force applied to voluntary actions; which is evil. That's what I am arguing against. It doesn't really matter if Greenspan understood control theory or not, what matters is that he attempted to control the entire economy via interest rates changes and monetary policies that initiated force into the economy. I admit that he didn't do as bad as some other Feds before him -- for example, the 70's were racked by high inflation, which, at least, Greenspan kept low while he was in office. So, maybe he did what he could do; but doing something like bursting the Internet stock "bubble" was evil, and prevented the Internet from being even more developed than it is today; merely because he thought it was "irrational exuberance" instead of markets operating freely.

But my position is not so much either for or against Greenspan, but being most definitely against the government interfering with free markets -- or attempting to control the economy through a judicious application of control forces. Because the initiation of force -- whether it be increasing the money supply, or manipulating the interest rates, or regulations, or trying to cancel out transactions the government would rather not have, etc. -- is evil.

And no self-respecting Objectivist ought to be advocating something that is against freedom, including the economy. One might believe that control theory applies to economics, but if one advocates using governmental force to do so, then one is advocating an anti-objective application of force.

[agrippa1]

And no self-respecting Objectivist ought to be advocating something that is against freedom, including the economy. One might believe that control theory applies to economics, but if one advocates using governmental force to do so, then one is advocating an anti-objective application of force.

We're in complete agreement on this. I'm not advocating controls, I'm just trying to figure out how Greenspan could advocate them while still holding on to Objectivist principles (which I believe his book shows he does). There seems to be a contradiction there, and with AS still fresh on the brain, I made a connection that seemed to give an explanation.

But, peace. I admit it's a cockamamie theory, and it doesn't deserve any more of our time.

[Mammon]

On another note, Krugman is an intellectual monster. I read the article and he basically attacks the free market ever chance he gets. Was it Friedman who said attacking the free market was an attack on freedom itself?

There is even a clothing line detected to busting the monster...

http://www.cafepress.com/nationalreview/192118

[John McVey]

On another note, Krugman is an intellectual monster. I read the article and he basically attacks the free market ever chance he gets. Was it Friedman who said attacking the free market was an attack on freedom itself?

There is even a clothing line detected to busting the monster...

The KTS originated with Don Luskin and his readers. Krugman is such a nutcase that he thinks criticism of him is stalking.

JJM

[Mammon]

The KTS originated with Don Luskin and his readers. Krugman is such a nutcase that he thinks criticism of him is stalking.

JJM

Yeah, I know, that's where I found it at.

Seriously, Krugmans writing is always very vicious too. I think he really angry at something or someone and is using his position to get back... much like Toohey. I think he is a closet socialist.

[DarkWaters]

I'd suggest you read the book. In it, he is very admiring of Ayn Rand, and his dismissal of Objectivism consists entirely of questioning Rand's proposal at voluntary funding, which we know was a placeholder, as she said, the last of many steps in creating a free society. Rand was in the Oval Office, along with Greenspan's mother when he sworn in as an economic adviser in Ford's White House. He was at Rand's funeral in 1982, and he apparently remained close to her her entire life.

He also speaks positively about the gold standard, saying its main weakness is that most people aren't ready to accept it again.

I meant to follow up on this a few months ago, but evidently I forgot. Anyway, qtronman's Youtube broadcasts on The Age of Turbulence allege that Alan Greenspan references to the philosophy of Ayn Rand as "objectivism" (sic). Moreover, he sometimes called her a "libertarian" (probably fine if he used a lowercase 'l', but I am not sure if he did) and referred to her follows as "Randian" at least once. Given his close relationship with Ayn Rand, Greenspan should have definitely known that she strongly disproved of these terms.

Qtronman also reports that Alan Greenspan says that there are "contradictions in [his notions of Objectivism]" citing the Objectivist view of mandatory taxation for proper functions of government as one of the contradictions. Did he not realize that this is supposed to be one of the last steps in converging to an entirely laissez-faire society, one that first had an ethical revolution, amongst other things?

Although this evidence certainly does not suggest that Alan Greenspan lacked respect for the ideas of Ayn Rand (I believe he still deeply admires her), it makes me suspect how much he truly fathomed Ayn Rand's philosophy, say, compared to Leonard Peikoff.

[agrippa1]

Although this evidence certainly does not suggest that Alan Greenspan lacked respect for the ideas of Ayn Rand (I believe he still deeply admires her), it makes me suspect how much he truly fathomed Ayn Rand's philosophy, say, compared to Leonard Peikoff.

Then again, if you take Atlas Shrugged as a blueprint for how to deal with the inexorable looting of the American economy, what Greenspan has helped wrought on this economy is closer to what Rand would consider meaningful action.

You have to admit that, in hindsight, Greenspan's holding of the fed rate to 1% for a full year during a recovery could be seen as an intentional action to create an unrecoverable bubble. That rate was set from mid 2003 to mid 2004...

during a time when gdp growth exceeded 4% for two quarters (not seen since)...

and price inflation edged up to its highest point three years...

Not exactly the Fed's typical m.o.

The money that flooded in during that year helped pump housing prices up, an inferno that Greenspan fanned with his statements on option ARMs.

Given the AS-type collapse of the past few months, I think it's fair to raise the question more seriously:

Is Greenspan D'Anconia?

[softwareNerd]

Given the AS-type collapse of the past few months, I think it's fair to raise the question more seriously: Is Greenspan D'Anconia?

No, not really. You're repeating the theory you proposed once before, without new evidence.

By the logic of your argument, we should also assume that Madoff, Fuld and Mozilo were all Rand fans. So the principle is: anyone who did anything that caused huge market losses is an Objectivist!

[Thomas M. Miovas Jr.]

No, not really. You're repeating the theory [that Greenspan was acting as Francisco] you proposed once before, without new evidence.

By the logic of your argument, we should also assume that Madoff, Fuld and Mozilo were all Rand fans. So the principle is: anyone who did anything that caused huge market losses is an Objectivist!

Also, it must be kept in mind that Francisco destroyed his own company so that the looters would not benefit from his production -- he did NOT manipulate the entire economy. John Galt was offered the job of being the economic dictator, but turned it down. The closest character to Greenspan is Dr. Robert Stadler, the betrayer of rational principles. If Greenspan was to act in the role of Francisco, then he would have sought to destroy the Federal Reserve and its control over the economy, and there is absolutely no evidence that he was doing this. Maybe he thought he could control the economy more rationally than others in his position, but his effort to burst the dot.com bubble proved to me that he was not acting so. Of course, part of the bubble was caused by the Fed policy of having low interest rates, so that had to be corrected, but manipulating the entire US economy is not something a rational man would want to accept, at least without advocating that his position and the Federal Reserve be destroyed.

[agrippa1]

No, not really. You're repeating the theory you proposed once before, without new evidence.

Except the evidence of a collapsed economy.

By the logic of your argument, we should also assume that Madoff, Fuld and Mozilo were all Rand fans. So the principle is: anyone who did anything that caused huge market losses is an Objectivist!

That's a leap. By that same rationale, James Taggart, Wesley Mouch, et al., must have been working in cahoots with Galt's gang, after all, their efforts were leading to the same result, no?

The principle here is: there are no contradictions.

Madoff, Fuld and Mozilo are looters, and behaved like looters. No contradiction.

Greenspan, on the other hand, is a self-described Objectivist, who still believes in the Gold Standard. His entry into government economic manipulation, the christening of which was attended by Miss Rand herself, is itself a glaring contradiction. How can someone who believes in the Gold Standard justify being at the helm of the absolute antithesis of that standard? He can't. It is a contradiction. Either he doesn't believe in the Gold Standard, or he doesn't believe in the Fed. Since his actions have exploded the myth of the ability of the Fed to regulate the economy, and since his final adjustments to the levers virtually guaranteed a collapse of the fiat dollar, rejecting the premise of his belief in the Gold Standard leads to another contradiction: How could someone so skilled at studying and understanding complex relationships and causality in the economy (as proven by his track record prior to 2000) have so spectacularly missed the dangers of his course of action in the final five years or so?

So you must reject the premise of his intelligence and understanding of economics, and an Objectivist is left with yet another contradiction: How could Rand have missed the misguided nature of Greenspan's economic understanding? How could she have remained close to him even as he ascended into the heights of economic planning, first in the Ford administration? Did she approve of that course? Another contradiction...

Rejecting the premise of Greenspan as D'Anconia leads to contradiction upon contradiction. Accepting it eliminates the very first contradiction.

[softwareNerd]

Rejecting the premise of Greenspan as D'Anconia leads to contradiction upon contradiction.

Do you think it is a contradiction to say that a whore does not like her job?