Too Much Trust in Greenspan Led to Bad Economy

Possibly one of the clearest public statements ever uttered by the notoriously opaque Alan Greenspan came in late October, when he admitted he had "found a flaw" in the laissez-faire ideology he had promoted for decades. "I don't know how significant or permanent it is," he told a congressional committee, "but I've been very distressed by that fact." That this icon of the financial world should falter, even if only for a moment, will live to be one of the most enduring symbols of the 2008 economic and financial crisis. In more than 18 years as chairman of the Federal Reserve, he became the trustworthy face of global capitalism. "With Greenspan, we find comfort," Bob Woodward wrote in "Maestro," his 2000 biography of the central banker. "He helps breathe life into the vision of America as strong, the best, invincible."

But as 2009 begins America no longer looks quite so invincible. The icons of capitalism have fallen around Greenspan with such bewildering speed it bears repeating: Bear Stearns, Lehman Brothers, AIG, the Big Three automakers—all have suffered enormously. Bernard Madoff, a pillar of his community and former NASDAQ chairman, stands accused of leading a $50 billion fraud. The victims: many of the world's most sophisticated investors. Alas, still more will fall in the months to come, names that are smaller and bigger. And in this twilight of the capitalism gods moment, the picture emerging is not one of greed, not of the Gordon Gekko variety, anyway. No, what is becoming clear is the astonishing trust the world put in a handful of gray-haired men and institutions. Even a fellow like Woodward, a dogged reporter famous in America for stories that helped bring down Richard Nixon in Watergate, seemed to believe that Greenspan, despite his lack of clarity, or perhaps because of it, was somehow omnipotent.

But now, with Alan Greenspan caught in a moment of self-doubt—and pilloried by newly confident critics—it is hardly surprising if the rest of us are questioning the received wisdom about markets, too. The people in which the market put its faith—those like Greenspan, Robert Rubin, Hank Paulson and the CEOs of the world's biggest companies—demonstrated that even they had doubts or at least significant gaps in knowledge.

Soon, a new batch of big brains will come into power. Lawrence Summers, heralded as the top economist of his generation, will become Barack Obama's chief economic adviser. Treasury watchers have called Timothy Geithner, nominated to take the department's helm, "a solid choice in many ways." And Obama himself, it is often said, has the right combination of brains and temperament to lead the United States through the crisis.

But expecting too much from any of these individuals, or putting them on a pedestal, is perhaps the exact wrong lesson of 2008. As brilliant and well intended as they are, they, like Greenspan and Paulson and all those smart, rich guys allegedly snookered by Madoff, don't know what they don't know. No more icons, please. Trust, but verify.