Punchinello’s Chronicles

October 23, 2009

Greenspan, Ayn Rand and Federal Regulation

Filed under: View from the Bottom — Punchinello @ 3:39 pm
Tags: , , ,

I just watched a Front Line episode called “The Warning.” The full program is available for online viewing, having been aired on October 20, 2009. This month, in other words. The show examines the concept of over-the-counter derivatives (OTC derivatives) used by Wall Street banks and hedge funds. The current estimates are somewhere in the $600-TRILLION area, although some people say the total liability may only be $200-TRILLION. Considering that the entire output of the world economy may be somewhere around $55-trillion, that’s quite a difference.

Near the start of the show, which is about a small Washington regulatory agency, we learn about the major players in the attempt to regulate the financial industry. The key “titan” is Alan Greenspan, the previous head of the Federal Reserve. The head of the CFTC attempting to exert some controls over the OTC market is Brooksley Born. At issue is the concept of free-market capitalism.

We use the terms free-market capitalism, laissez-faire capitalism, regulation and deregulation to describe a fundamental idea about money, business, intellectual property and economics. In theory, the mass of buyers in a market, each acting in his or her own interests produce the original natural principle: survival of the fittest. Charles Darwin borrowed this concept and applied it to the theories of evolution, but the original concept came out of economics.

The major philosophic question is whether or not a government should be involved in regulating the natural workings of the market. Should a government act as a protection against such things as fraud.

Ayn Rand, in her book “Capitalism: The Unknown Ideal” laid out the philosophy of totally unregulated markets. As she says in the video, she is absolutely committed to the total separation of state and economics. Alan Greenspan became one of her staunch supporters and used this total separation as the foundation of his economic philosophy.

One confrontation between Born and Greenspan suggests that Greenspan even held that no regulation should be applied to financial fraud. Following the Lehman Brothers collapse of 2008, then the multi-trillion-dollar bailouts that have now wrecked the economy, Alan Greenspan says that he’s discovered a flaw in his world-view and that he was wrong.

The problem is that the implication is that because Greenspan subscribed to Rand’s philosophy, that Ayn Rand ALSO was wrong! Ergo, the conclusion we’re led to believe is that free-market capitalism can’t work. Additionally, we’re led to believe that capitalism itself cannot, will not, and has not worked. The “evidence” is the financial meltdown in the OTC derivatives market.


All we have to do is examine the decision to cut executive salaries in companies that accepted TARP money. Without any kind of intellectual examination, we’re told that a) these executives should still be in their jobs, and b) that the pay cuts are a natural consequence of their mismanagement.

What would have happened had the government NOT interfered with the collapsing banking industry? Well, obviously America and the rest of the world would have had a massive financial collapse. Pain and anguish would have run rampant. AND…all these executives would have ZERO salary! Their institutions, their jobs, and their assets would have been totally wiped out.

And what about the concept of bailing out other corporations, hedge funds and “too-big-to-fail” banks? Who forced through all that government intervention? Alan Greenspan, that’s who!

The fact of the matter is that some regulation should indeed take place. It’s true that if a company sells tainted beef and people die of food poisoning, the company “eventually” will go out of business. It would take only a few deaths and the company would be sued into bankruptcy. But we shouldn’t have to wait for people to die before the market wipes out the offending party. As such, we should have limited regulation to prevent abuse of the public. But only severely limited.

Even there, in the realm of public safety, we might make a case that the regulations cause more problems than having some number of people die. But that’s not the major argument. Instead, we see that financial institutions in a totally unregulated fashion have now put at risk every single dollar you and I own or ever will own. Is that any different than a meat company releasing Ebola into the population? What’s the difference between physical death and total financial ruin?

Ayn Rand laid out a philosophy of economics based on the principles of capitalism. The first principle is that each individual owns the fruits of his or her own mind. It’s the foundation of property rights and individual ownership of property. That has nothing whatsoever to do with greed! Greed is part of human nature, but it isn’t a founding principle of capitalism, regardless of how many people want to say so.

Alan Greenspan had the opportunity to honestly follow his own principle rule of laissez-faire economics. He had the opportunity to allow a trillion-dollar hedge fund to fail. He had the opportunity to watch as thousands (if not millions) of American citizens lost their entire savings to unregulated gambling on the part of international banks. But…it would have been limited to a trillion dollars!

Yes, many people would have had pain and anguish. Ripples and tidal waves would have washed through the world economy, and countless businesses and individuals would have been financially wiped out. Those people would have immediately stopped all further transactions with these “too-big-to-fail” banks. And the results? The executives would have had ZERO salary, ZERO bonuses, and ZERO credibility!

The entire world economy would have “hit the reset button,” so to speak. After many disasters and much pain, the entire illusion of OTC derivatives would have fallen apart. It would have come to a screeching halt! But no; instead, Mr. Greenspan and the Federal Reserve, together with the US Treasury has continued onward in bliss and ecstasy, printing money like there was no tomorrow.

Tomorrow is about to become today. One of Rand’s predictions was the no matter how long it took, no matter how much regulation or non-regulation, the overall markets will and must eventually control events. In the Soviet Union, it took about 90 years. Countless people were destroyed, with millions of people being murdered. That nation demonstrated the fundamental failure of communism and its control over the individual.

Capitalism has nothing whatsoever to do with greed! Capitalism is a moral system that sets the value of the individual and sets NO value on the consensus (society, state, group). Capitalism does NOT set the value of the individual higher than the society! Nor does it set the value of the individual on a par with the society. Capitalism sets NO value on “groups.”

We’ve seen the US Supreme Court examine whether or not a corporation has a right to privacy! There is no such thing as a “corporation” as a living entity. It’s only a legal concept. A corporation is an abstraction. Yet, in today’s insane world, we’re giving an abstraction rights that supersede those of living, breathing human beings. That’s not capitalism!

Free-market corrections are painful, but the number of people who choose to invest their money without having any understanding of that investment is limited. There can be mobs, and there can be fads with many people getting caught up in the moment. But that “moment” is mostly about getting something for nothing. It’s about unreasonable and impossible gains. It’s about getting 40% returns when any rational person would expect 8% returns.

When those people are wiped out during the corrections, should that be the reason for a government to take control of the markets? Many, if not most people today would shout a resounding Yes! Alan Greenspan made a fortune on Wall Street. If he had let the original correction (and collapse) take place, he would have lost that fortune. So instead, he used government force to shut down Ms. Born.

The result set the stage for the Lehman Bros. collapse, and the ensuing gasoline-on-the-fire of today’s bailouts has set the stage for a total collapse of the entire economy. Ayn Rand never, in all her writings advocated the kind of massive federal intervention coming from the Federal Reserve! The “flaw” in Mr. Greenspan’s world view has nothing whatsoever to do with Ayn Rand! It has to do purely with Mr. Greenspan’s greed, arrogance, and his decision to interfere with America’s free markets.


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