Flawed Titan of the Fed

In the fall of 2008, with the global economy in shambles and panic spreading throughout the financial system, a seemingly humbled Alan Greenspan—the former chairman of the U.S. Federal Reserve—appeared before Congress and admitted the unimaginable: there was a “flaw” in his world view that had prevented him from foreseeing the worst credit crisis in American history.

And so begins The Flaw, David Sington’s new documentary about the origins of the financial crisis. The movie, which opened in London last week, makes a compelling argument that the nature of American capitalism has changed in recent decades, giving rise to unstable levels of inequality and a mistaken belief in the self-correcting power of free markets. The Flaw focuses largely on the housing market and offers a far less blistering critique of Wall Street than Inside Job¸ Charles Ferguson’s 2010 Oscar-winning documentary. Yet in both films, Greenspan, who spoke with NEWSWEEK at his office in Washington, D.C., is cast in a similar role—as someone who personifies much of what went wrong with the economy.

Since the housing bubble burst, and Wall Street teetered on the brink of collapse, Greenspan—once widely hailed as the oracle of the American economy—has seen his standing plummet. Most recently, Paul Krugman, the Nobel Prize–winning economist and columnist for The New York Times, wrote that Greenspan is continuing “to cement his reputation as the worst ex–Fed chairman in history”—a searing statement even for someone on the left.

And yet what continues to drive much of the criticism of Greenspan is not so much his record at the Fed but his recent political commentary. Despite his 2008 mea culpa, Greenspan has largely remained steadfast in his faith in laissez faire, arguing against the government’s stimulus package and recent financial regulation. As Congress continues to fight over long-term spending and the future of entitlements, it is precisely this sort of stubborn libertarianism that has enraged Greenspan’s critics and once again cast a spotlight on his legacy.

When Greenspan retired five years ago, his reputation seemed unimpeachable. Despite fears that he would govern the central bank as a conservative ideologue—he was once a disciple of the radical libertarian writer Ayn Rand—during the early ’90s, Greenspan proved to be a pragmatist and a highly successful technocrat, according to Brad DeLong, an economist at the University of California, Berkeley. One of the central bank’s two primary jobs is to keep prices stable and employment high. On both fronts, Greenspan’s record, from 1987 to 2000, was strong, according to friends, former colleagues, and even critics. “The years that Alan Greenspan was chair were years of unprecedented growth and price stability,” says Larry Summers, the former Treasury secretary.

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Source: Newsweek