It's not easy being Alan Greenspan these days. As the former Federal Reserve chairman, he urged government regulators to take a light touch while banks like Bear Stearns and Lehman Brothers buried themselves—and the economy more generally—under a mountain of debt. Now that his reputation is plummeting faster than the stock market, he's been forced to admit a "flaw" in his hands-off ideology.
Of course, things look entirely different to members of "free-market advocacy groups," as they like to be called. One such group is the Ayn Rand Institute, named after the matriarch of the movement, whose antigovernment and anti-regulation views are embodied in her best-selling novels "Atlas Shrugged" and "The Fountainhead." Indeed, Greenspan himself was a friend of Rand's, and a devotee of her extreme free-market philosophy, known as Objectivism. NEWSWEEK's Barrett Sheridan spoke with the head of the Ayn Rand Institute, Dr. Yaron Brook, about why he defends free markets while much of the rest of the world has turned away from them, and what he thinks of Greenspan today. Excerpts:
NEWSWEEK: Lack of regulation is being blamed for our current crisis, and free markets are in disrepute. Has Objectivism been dealt a deathblow?
Yaron Brook: No, not at all. From a public-relations perspective, it's been hurt. But in the long term there will be a backlash against what's going on in the markets today—the heavy government involvement, the nationalizations and the move toward socialism. If the free-market advocacy groups position themselves correctly, they can benefit from it.
How can they do that?
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.
But during that time, the head of the Federal Reserve was Alan Greenspan, a close friend of Ayn Rand and the world's most famous Objectivist.
Yes. Alan Greenspan was quite close to Ayn Rand in the 1960s and 1970s. But from pretty early on, Greenspan was a part of economic policies that I don't think Ayn Rand would have approved of. Yes, he wanted less regulation, but he never talked about rolling back regulation. He never talked about significantly meaningful ways to cut spending, cut taxes. I believe he sold his soul to the devil. Power corrupts, and absolute power—which I think is what you have at the Federal Reserve—corrupts absolutely.
So it sounds like you're not bothered by his admission that he found a "flaw" in his "free-market ideology."
No, the only thing that bothers me is that the press took it to mean, "See, capitalism has failed, even according to this guru of capitalism." He was never a guru of capitalism! At least he hasn't been a guru of capitalism since the 1980s.
Do you have any contact with Greenspan?
No, I don't.
Have Objectivists largely disavowed him?
I think so, but I think he's disavowed us, as well, so it's mutual. I don't think he would have dinner with me if I asked.
What do you think of the various and numerous bailouts?
They're horrible. I think that the biggest mistake that was made was probably the bailout of Bear Stearns. I think they should have let Bear Stearns fail. The fact that everybody else now wants a bailout makes complete sense. Why bailout AIG and not General Motors? General Motors employs more people.
like Ben Bernanke, current head of the Federal Reserve, says one reason the Great Depression was so severe was that government waited three years before intervening, and let scores of banks fail before then.
Unfortunately, just because economists understand what caused the Great Depression doesn't mean they understand what needs to be done to prevent one. People today mistakenly think that FDR saved us from the Great Depression. But from 1932 until at least 1940, the U.S. was still in a depression. Government grew during the 1930s more than in any decade in history, and yet at the end of the 1930s, we still had more than 15 percent unemployment. So government growth and regulation is not a solution to a depression. I would argue it's the exact opposite.
What does that mean for the current situation?
Everything that [Treasury Secretary Henry] Paulson and Bernanke have done since day one of this crisis has made things worse, not better, if only because they have been so panicky and hysterical, and changed their minds so many times and offered so many different plans. The market has come to the conclusion that they have no idea what they're doing.
You want to do away with the Federal Reserve, but something that radical isn't going to happen, at least not anytime soon. In the meantime, wouldn't more regulation of the financial sector make sense?
No, I think quite the opposite—more financial regulation would be a disaster. Financial regulations created this mess. The Community Reinvestment Act, Freddie Mac and Fannie Mae—they're the institutions and proposals that got us into this. Regulators are not good at managing financial institutions. Think about the [savings and loan] crisis: the S&L industry was the most regulated industry in the United States. Did that stop the crisis from happening? No. Regulations don't prevent crises; they cause them.
But AIG's downfall was due largely to credit-default swaps.
There's nothing wrong with credit-default swaps. If they'd let AIG fold, we would have discovered that. There's been no problem with the credit-default swap-market to date. It's actually working better than the securitized mortgage market, which is a government creation through Fannie and Freddie.
But AIG had too many credit-default swaps on its books, and almost collapsed as a result. Shouldn't we prevent that level of risk-taking?
Yes, AIG made mistakes. And the company should suffer for those mistakes. But do you think that if federal regulators were regulating the credit-default-swap market, things would be better or worse? I suggest that things would probably be worse.
With free markets now in disrepute, what's going to happen to the popularity of Ayn Rand's most famous book, "Atlas Shrugged"?
I think it's going to go up dramatically. I think it already has. [People] are saying, "We're heading toward socialism, we're heading toward more regulation." "Atlas Shrugged" is coming true. How do we get out? How do we escape? Unfortunately, there is no escape. Businessmen are panicking, and I think they should be panicking. Many of them understand that this was not a crisis of free markets. There was no free market to fail. What we have is a regulated market, and the regulated market has failed.