Alan Greenspan: Homewrecker
Alan Greenspan, who served as chair of the Federal Reserve from to 1987 to 2006 and who died on Monday, was the Henry Kissinger of economic policy. Both men caused enormous harm and suffering for which they were never held accountable. Like Kissinger, Greenspan was mistakenly considered a genius. Reporters, business leaders, and many members of Congress hung on his words - more accurately, his jargon-filled word salad, which obscured more than it explained - to understand what was going on in the economy. Despite the fact that his policies, like Kissinger's, were a blatant failure, he was, also like Kissinger (who also died at 100), still taken seriously by the media during and after his government service.
Like Kissinger, Greenspan moved back and forth between government and the private sector and made a lot of money as a business consultant. Greenspan served on the boards of several Fortune 500 corporations, including Mobil Oil, J.P. Morgan, the Aluminum Corp. of America (Alcoa), Morgan Guarantee Trust Co., Automatic Data Processing Inc., Capital Cities/ABC, Pittston Company, and General Foods.
The biggest influence on Greenspan’s thinking was rightwing writer and philosopher Ayn Rnd, author of "Atlas Shrugged" and "The Fountainhead." He was an acolyte and part of her inner circle. It wasn't just a discussion group. It was a cult. Greenspan absorbed her belief that selfishness was the highest principle. It was that view that guided his economic policy, including when he was Fed chair, and before that, chief economic advisor to President Gerald Ford.
The core of Rand's influence was Greenspan's belief that government should play no role in regulating business. He believed that corporations could police themselves without any government rules. He reflected Rand's idea that corporations' self-interest and greed, and those of major shareholders, would lead them to behave responsibly.
Greenspan was appointed Fed chair by Ronald Reagan in 1987 and reappointed by George H.W. Bush, Bill Clinton, and George W. Bush.
Greenspan's influence, along with the intense lobbying by the banking industry, provided much of the justification for the dismantling of dismantling of decades of government bank regulations, providing lenders with the leeway to engage in an orgy of mergers, speculation, and risky and racist lending practices that ultimately led to the collapse of major Wall Street firms.
In the 1980s, the Reagan administration and Congress loosened restrictions on the kinds of loans banks could make. In 1999, Congress (with the support of President Bill Clinton) repealed the 1933 Glass-Steagall Act that had imposed a regulatory separation between traditional banking and higher-risk investing activities. In doing so, they tore down the last remaining legal barriers to combining savings-and-loans, commercial banks, investment banks and insurance companies under one corporate roof. They soon became part of a giant “financial services” industry.
The banking industry's greed - its insatiable appetite for profits and wealth - led to the 2007 mortgage meltdown, the implosion of the housing market, the near-collapse of the financial industry, and the breakdown of the whole economy, including widespread layoffs and foreclosures, from which we have still not fully recovered. But it was made possible by the see-no-evil views of Greenspan and his ilk.
In the late 1990s, during Greenspan's watch at the Federal Reserve, banks and private mortgage lenders began pushing subprime mortgages, many with “adjustable” rates that jumped sharply after a few years. These risky loans comprised 8.6 percent of all mortgages in 2001, soaring to 20.1 percent by 2006. That year alone, 10 lenders accounted for 56 percent of all subprime loans, totaling $362 billion. These loans were a ticking time bomb, waiting to explode.
Starting in 2007, housing prices fell by a third. Americans lost $7 trillion in wealth. Over 5 million Americans lost their homes. The drop in housing values affected not only families facing foreclosure but also families in the surrounding communities, because having even a few foreclosed homes in a neighborhood brings down the value of other houses in the area. The neighborhood blight created by the housing collapse was much worse in African-American and Hispanic areas because they were the primary victims of subprime loans and almost twice as likely as whites to lose their homes to foreclosures.
Brooksley Born, chairwoman of the Commodity Futures Trading Commission from 1996 to 1999, wanted her agency to regulate derivatives and other exotic financial investments (including credit default swaps) that she accurately predicted were too risky and would lead to disaster. But Greenspan, along with President Clinton’s Treasury Secretary Robert Rubin and economic advisor Larry Summers, stopped her from exercising the kind of regulatory authority that would have prevented the calamity. In 2000, Edward Gramlich, a Federal Reserve Board member, repeatedly warned Greenspan about subprime mortgages and predatory lending, which he said jeopardized the twin American dreams of owning a home and building wealth. He tried to get Greenspan to crack down on irrational subprime lending by increasing oversight, but his warnings fell on deaf ears.
Greenspan was the leading culprit of the policies that led to the economic collapse. He allowed the banks' short-sighted gluttony to cause enormous human suffering.
It wasn’t until the system imploded that Greenspan gained any insight about the fundamental flaw of his belief that greed is the best operating principle for the economy. In 2008, testifying before the House Committee on Oversight and Government Reform, Greenspan admitted: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief…. This modern [free market] paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.”
Of course, there was plenty of evidence throughout history that big corporations do NOT behave responsibly unless they are required to do so by government regulations and enforcement. This has been especially true of banks. But because Greenspan was such a libertarian ideologue, in thrall to Rand and others, he could not, or refused to, see what was right in front of him. For the millions of Americans who lost their homes, their jobs, and their small businesses through no fault of their own. Greenspan's self-awareness came much too late.
Peter Dreier is E.P. Clapp Distinguished Professor of Politics Emeritus, Occidental College. His latest book is Baseball Rebels: The Players, People, and Social Movements That Shook Up the Game and Changed America (University of Nebraska Press, 2022) – coauthor with Robert Elias.