Newsweek offers an interview with Dr. Yaron Brook, head of the Ayn Rand Institute, about the meltdown, free markets, and Alan Greenspan.
I should say that I am just pleased as punch with my 'Alan Greenspan as Smoky the Bear' metaphor from yesterday's Stiglitz critique but a cursory pass with Google debunks any illusions I had of originality. This is from January 2001, making the identical point:
For a period of time, the U.S. Forest Service actively attempted to prevent all forest fires - a "no burn" policy. This was highly effective for a period of time, except that this no burn policy allowed a great deal of underbrush and dead wood to accumulate that normally would have been periodically cleared in natural forest fires. Eventually, a fire occurred that was uncontrollable, fueled in part by the unburned debris, burning for weeks/months and taking out a fair portion of Yellowstone National Forest. The lesson was that "no burn" didn't work - fires were a part of nature and needed to be allowed to occur in a controlled fashion. (this also has its drawbacks - i.e., the fires that nearly took out Los Alamos and the nuclear facilities - originally a planned burn).
Why all this talk of forest fires? Well, if you see the federal reserve as the forest service and the attempt to control the economy as a "no burn" policy, the question becomes - will there eventually be a fire so large that the federal reserve will not be able to stop it? And will in fact its actions now actually contribute to the severity of the fire later? Or are they engaging in a "controlled burn" policy?
Eerily prescient. I blame the Long Term Capital Management bailout in 1998 for promoting the notion that anything and everything is too big to fail. That said, the Lehman switcheroo in Sept 2008 was insane - at this point, the time for "Burn, baby, burn" is later.
Dr. Brook offers a similar defense of free markets:
What we need to do is really make the case to the American people—and I think it's an easy case to make—that this is not a failure of free markets, this is not a failure of capitalism, but this is a failure of the exact opposite. It's a failure of the regulatory state. It's a failure of all the government policies of the last eight years. Actually, the last 95 years.
Why do you say the last 95 years?
I believe that the No. 1 cause of the current crisis is Federal Reserve policy. [The Federal Reserve was created in 1913.] The Federal Reserve, by necessity, creates economic problems; no matter how good a Federal Reserve chairman is, he's going to create cycles of booms and busts.
How did the Federal Reserve create today's mess?
The current crisis was caused by the housing bubble, and the primary cause of the housing bubble was the Federal Reserve keeping interest rates at 1 percent in 2003. They were asking people to borrow money, basically begging them. The financial problem we face today was a problem of overleverage, of too much debt—but that's exactly what Federal Reserve policy encouraged.
Since we seem to overlap on this point I yield to him my Lincoln quip from the Stiglitz critique - "these markets cannot permanently endure half regulated and half free". Of course, since the regulatory framework and the large government role in the economy won't be going away, I prefer to remain in denial about the long term implication of that thought.
MORE: A teeny bit of Yellowstone background. I am not letting facts undermine a great metaphor.