So Alan Greenspan, the formerly omniscient oracle of all things economical, now admits he discovered a "flaw" in his thinking:
I made a mistake in presuming that the self- interest of organizations, specifically banks and others, were such (as that ?) they were best capable of protecting their own shareholders and their equity in the firms... So the problem here is, something which looked to be a very solid edifice, and indeed a critical pillar to market competition and free markets, did break down. And I think that, as I said, shocked me... I've found a flaw... Flaw in the model that I perceived as the critical functioning structure that defines how the world works, so to speak.Ya know, just found a flaw in how the world works, ya know? No biggie.
Just to be clear, finding that the self-interest of banks wasn't enough to compel them to make rational decisions and protect their shareholders is a bit like a Christian saying God is not omnipotent or an atheist acknowledging the existence of some supernatural being. That's not a "flaw." That's destruction. That's capitulation. A critical pillar of free market ideology has crumbled in the mind of Alan Greenspan.
In science, (and I believe the goal of economics is to become fully scientific) reality never has the power to fully confirm a theory, but real-world events play a crucial role in disconfirming false theories about the world. We don't believe the world is flat because we've sailed around it. We don't believe the Earth is the center of the universe because we've orbited satellites in space. False theories are destroyed by real-world experience. So now, much to the chagrin of Alan Greenspan and Ayn Rand, we can officially file the ideology of perfectly free markets in the "Loony" Bin.
The unsupervised, unregulated markets of credit derivatives and other massively complex financial instruments have proven to be unstable. These markets closely approximated the "free markets" that Greenspan proposed (fantasized about), and they collapsed precisely because, without prudential oversight, cutthroat competition for profits and rosy groupthink overrode the more rational impulses towards hedging risk.
I, for one, couldn't be happier to see it go down in flames. To think about the massive army of super-intelligent number crunchers that sold their souls (and their free time) for six-figure salaries at investment banks, and to imagine the sheer volume of wasted energy -- innovating new ways to find "arbitrage" opportunities, making money for the pure sake of making money, with no attachment to any sort of productive activity -- it's a good thing to relegate this era to the history books.
Now, hopefully, those same genius kids will go into science and engineering, our military and our schools, helping to solve the great problems of the future: energy, disease, and poverty.
The "free market" never really existed. The few existing ones imploded. The market is an incredibly powerful human creation, like the wheel. And in order to function properly, we know that certain forms of oversight and law enforcement are necessary in order to sustain a level of trust and predictability, in order to establish the "rules of the road" that allow people to safely drive on the road at the same time.
