Irrational Exuberance or Irrational Policies?

Former Fed chief Alan Greenspan seems blind to his role in the housing bubble, the financial crisis, and the recession.


The Map and the Territory: Risk, Human Nature, and the Future of Forecasting, by Alan Greenspan, Penguin Press, 388 pages, $36

If we saw a dramatic rise in traffic accidents in Manhattan during the lunch hour, the theory that something was wrong with the traffic lights would be much more plausible than the notion that New Yorkers had suddenly become irrational. If the lights all got stuck on green, the resulting accidents could hardly be blamed on the drivers; they were responding rationally to an erroneous signal. Likewise, you can understand the "irrational exuberance" of the years preceding the crash of 2008 as a rational response to the Federal Reserve Bank's artificially low interest rates.

But not if you are Alan Greenspan, the man who chaired the Fed from 1987 to 2006. In his new book The Map and the Territory, Greenspan never considers the possibility that his own actions contributed to the housing bubble and the ensuing financial collapse. Instead he focuses on government subsidies for housing, including implicit guarantees for government-sponsored mortgage lenders and congressional mandates that "historically underserved" populations get in on the home ownership binge. But that binge would not have been possible without cheap credit via low interest rates.

Greenspan blames an influx of foreign savings, combined with irrational herd behavior, for driving up housing prices and creating the risky financial instruments, such as mortgage-backed securities and their derivative products, that were at the center of the financial collapse. He does not raise the possibility that the Fed's expansionary policies had something to do with driving the inflation-adjusted federal funds rate—the rate that banks charge one another for short-term loans of reserves—below zero for almost two years.

Greenspan, like many behavioral economists, is quick to blame market actors for irrational choices rather than asking whether policy makers have distorted signals or incentives in ways that lead rational actors to bad outcomes. Rational responses to bad signals result in patterns of economic behavior that are ultimately unsustainable. The savings needed to support the level of investment in housing simply did not exist, thanks to policy-induced distortions in interest rates and other costs. Given Greenspan's belief about the cause of lower interest rates, the only explanation he can offer for over-building is irrationality. He never seems to consider the alternative hypothesis, that the Fed might have turned all the lights green.

Ironically (or maybe not), Greenspan is at his best when he is not talking about the Fed, money, and inflation. He effectively criticizes the response to the financial crisis, heaping particular scorn on the Dodd-Frank Wall Street Reform and Consumer Protection Act, which he warns will reduce capital formation and financial market efficiency. He is rightly skeptical of the bailouts, saying they have only worsened the problem of "too big to fail," the belief that a single bank has such a large influence on the financial system that it cannot be allowed to go out of business. He argues that in 2008 the failing banks "should have been put through the normal time-tested process of balance sheet restructure" associated with bankruptcy rather than bailed out.

When Greenspan turns to data-driven economic analysis, as in his chapter on "Productivity and the Age of Entitlements," he is as accurate as he is blunt. He argues that the increasing costs of benefits for the elderly in the form of Social Security and Medicare have come "largely at the expense of the lower income quintile households, almost wholly through suppressed wage rate gains." The resources necessary to fund entitlements have crowded out private savings, thereby reducing capital formation, leading to lower worker productivity and wages. He concludes that "short of major entitlement reform, it is difficult to find a benevolent outcome to this clash between social spending and savings in this country."

Shining a light on the limits to human rationality is a good thing, but that light needs to be turned on political actors as well as market actors. Much of Greenspan's economic analysis is on target, but he fails to acknowledge his own role, and that of the institution he ran for so many years, in putting us in the hole from which he now wants to help extract us.


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  1. Alan Greenspan chose to be with this:

    I think that sums the man up.

    1. When a man is old as Greenspan is, that woman is young pussy.

    2. Andrea’s looking a little Rand-ish, no? I guess that’s better than looking a little Misesian.

      Either way, they’re all the Fed Chair’s bitches now. “Kneel down and suck my fiduciary media.”

  2. …”Greenspan blames an influx of foreign savings, combined with irrational herd behavior, for driving up housing prices and creating the risky financial instruments, such as mortgage-backed securities and their derivative products, that were at the center of the financial collapse.”…

    I haven’t read the book but if this is true, the book is a CYA effort. Greenspan simply cannot be that misinformed.

    1. There is a good summary of the book in his Foreign Affairs article on their website. Believe me, it is quite sufficient. After reading it, you will be even more afraid. There remains the possibility that he’s more competent than either Bernanke or Yellen.

    2. I actually think Greenspan gets a bum rap on this. Low interest rates were a heck of a lot less important than low underwriting standards. In 2006 i could buy a house with no money down and no evidence of a job. Against that backdrop, whether interest rates are 10% or 10BP is mostly irrelevant. That the Fed did not do a particularly good job regulating the banks has been true for much of its history…monetary policymaking is so much more exciting, they forget about the other stuff.

      1. Too rational for this joint.

        The Peanuts think people were coerced into buying homes that had doubled in value in five years because interest rates were 6%.

        Checking credit is back into style now.

        1. Palin’s Buttplug|12.14.13 @ 8:12PM|#
          “Too rational for this joint.”

          Exactly as stupid as required for this ignoramus.
          Thanks shreek; your stupidity is always amusing.
          Go fuck your daddy.

      2. Except that the money was too lose and we knew it as early as 2000. Even if you give him 18 months from 9/11 — by 2004, he should have been tightening the money supply.

        1. Loose money wasn’t the problem – loose credit was.

          Why would a lender take “loose money” and loan it to a deadbeat?

          Because they had no risk standards as Beowulf claims. The Great Tulip Bubble part 14.

          1. Palin’s Buttplug|12.14.13 @ 9:13PM|#
            “Loose money wasn’t the problem – loose credit was.”

            Exactly as stupid as required for this ignoramus.
            Thanks shreek; your stupidity is always amusing.
            Go fuck your daddy.

      3. Don’t you get it? The low interest rates were a primary CAUSE of the low underwriting standards!

        If the banks are given more money to lend, then in order to lend it to more people, they have to lower their standards. The additional borrowers they lend to necessarily are ones who could not previously meet their standards.

        Look up the analogy Tom Woods makes of a sports team that is allowed to pick more additional players.

  3. Conservatives already misrepresenting the polygamy ruling.

    Oh, so polygamy ? the practice of which caused Texas to raise its age of consent from 14 to 16 in 2005 ? has now been recognized as a constitutional right by a federal court? Do we suppose that lawyers for FLDS will ignore the possible implications of this precedent?

    Yes. Saying that the government has no right to tell adults they can’t cohabitate is just like a cult that rapes children.

    1. The age of consent in Texas is 17.

    2. **Winston, paging Winston, for more dumbass “critiques”.**

  4. On this date in 1799, George Washington died. The doctors tried everything – bleeding him, giving him calomel, using a vinegar poultice, but nothing seemed to work., he only got worse. He died after asking not be buried for two days. Maybe he worried that the doctors, competent as they wrre, would declare him dead prematurely and bury him alive.

    His will provided for the emancipation of his slaves.…..washington

    1. Eh, just type “richard cavendish death washington” in the search box.

    2. Two days. Not a bad idea. It was not uncommon for people to be buried alive back in the good ole days.

      Many coffins were found to have scratch marks on the inside after being exhumed.

  5. Only 42% of people know that Bitcoin is a virtual currency, but 45% want it regulated.

    Total ignorance has never been much of an impediment to having a strong opinion about something.

    I wonder what percentage of people who know what it is said it should be regulated?

    1. I also love Bloomberg’s wording of the Bitcoin question:

      Bitcoin is an internet based form of global currency and a payment method and is not under any kind of governmental oversight or control. Do you think it would be better for Bitcoin to be regulated by governments, just like other currencies, or should it continue to be unregulated?

      What would pollsters do without leading questions?

      1. “What would pollsters do without leading questions?”
        Get answers they don’t like.

      2. I like how people are forced to choose between two extremes in that question.

        I don’t think Bitcoin should be COMPLETELY unregulated — there is a legitimate need to make sure it isn’t used to fund certain activities — but it certainly doesn’t need to be controlled like the dollar, pound, yen, etc. How exactly am I supposed to answer that question?

        1. Arresting people who fund “certain” activities isnt a form of regulating.

        2. What kind of regulations would you suggest? And how will they be enforced?

          Will you stop people from running the software on their computers? You’re probably need some pretty harsh laws to do that. Note that it already has options to run through TOR.

          Stop people from accepting it in exchange for goods and services? Again, pretty harsh laws needed.

          Stop people from trading Bitcoins for dollars, pounds, euros, precious metals? Okay, I suppose you could get the exchanges.

          Help me out on what kind of regulations you’d like to see. Oh, and if you have some regulations to propose to stop cash from funding your certain activities, too, I’d love to hear it.

        3. Zod knows you could never order a hit with cash.

        4. …”there is a legitimate need to make sure it isn’t used to fund certain activities”…

          No, there isn’t. No more than trying to keep gold from ‘funding certain activities’.

        5. I don’t think Bitcoin should be COMPLETELY unregulated — there is a legitimate need to make sure it isn’t used to fund certain activities

          Is this because highly regulated currencies don’t fund any of these certain (bad) activities? I don’t really see regulated currency having an edge there in actual practice.

          Indeed, regulated currencies seem to, by fiat, create some certain bad activities intrinsic to them.

        6. You must ask yourself why individuals cling to this notion that they need politicians and central banks (foxes) to regulate an individuals money, property, etc. (the hen house) and force Monopoly money upon the people, debauch the currency, and create all kinds of seen and unseen disaster in the name of “regulation” and control.

          Gold had a 6000 year history as money, it has outlasted religions and empires. It was tested on the market and won out as a medium of exchange, and was more efficient than barter. Free individuals made these choices. Silver was also used (many cases for smaller transactions).

          Throughout history, the only way the dollar, denarius, euro, and many others survived was through government force, legal tender laws, executive orders and threats or acts of violence. Why would anyone want a politician to regulate anything, let alone a media of exchange?

    2. Um, perhaps you could give us a brief tutorial on set theory and then restate your point.

  6. US and Chinese warships nearly collide amid tensions over airspace

    A US guided missile cruiser operating in international waters in the South China Sea was forced to take evasive action last week to avoid a collision with a Chinese warship, the US Pacific Fleet has revealed.

    The USS Cowpens had been operating in the vicinity of China’s only aircraft carrier, the Liaoning, at a time of heightened tensions in the region following Beijing’s declaration of an air defence zone farther north in the East China Sea, a US defence official said.

    1. Can we not turning a pissing competition into a war with China? Pretty please?

      1. Seriously dude. A war would be a major cockblock for me.

      2. We should just have a summit meeting with India, Japan, Vietnam, and South Korea. I bet China would start acting better pretty quickly.

  7. This which in turn links to here is a great example of satire..

    1. Damn, beat me to it

    2. Now hosted on BitBucket, as GitHub proves to be too misogynistic to support a feminist programming language.

      GitHub took it down — WTF?

      1. No idea. A friend sent me the BitBucket link. I wonder how long BitBucket will keep it up?

        1. Actually now that I think about it, it makes since. IIUC GitHub only allows free public repositories for open source software; the license is not open source.

    3. LMFAO, this is pure gold.

      Instead of “running” a program, which implies thin privilege and pressure to “work out”, programs are “given birth”. After birth, a program rolls for a 40% chance of executing literally as the code is written, 40% of being “psychoanalytically incompatible”, and 40% of executing by a metaphorical epistemology the order of the functions found in main().

      The traditional binary foundation of 1s and 0s is deeply problematic: 1 is inherently phallic and thus misogynistic. Also, some 1s are 0s, and some 0s are 1s. It is not fair to give them immutable labels. Instead, we have 0s and Os as our fundamental binary logic gates. They symbolise/-ize the varying, natural, and beautiful differences of the female vaginal opening.

      0 is to take the conventional value of 0.

      O is 50% of the time 0, and 50% of the time 1. The determination of this depends on how the underlying logic feels at the moment.

      Should there be any exceptions from running the program, C+= will throw a Trigger Warning.

      Control structures are abolished. Code may flow freely and choose its own path. Therefore check() is merely a guideline and the code flow is free to choose to consider its suggestions.

      There is no need for exit(), terminate() or atexit() as a feminist’s work is never done.

      1. This is satire, no?

        1. Yes, it is. Unsurprisingly, people are butthurt about it.

            1. This is absolutely atrocious. Feminism should never be subject to satire. This shouldn’t be allowed in a any modern society. This is toxic and dangerous. In an ideal world, everyone that contributed would be sent to re-education courses.

              Delicious tears!

              1. Maybe that’s satire too? Meta-satire if you will.

                1. Maybe that’s satire too? Meta-satire if you will.

                  It’s getting pretty hard to tell at this point, isn’t it?

                  When I used to see posts on DUh calling for Repugs to be sent to camps for reeducation I cast it off as somebody trolling (because I used to do the same thing on DUh) and I did the same for thumbs up and +1 posts. Now that I’m seeing some of the bigger blogs and lefty “thought” outlets use Soviet psychiatry logic I’m really starting to wonder.

                  The left appears to be beyond satire, which is really scary.

              2. Wow. I don’t even know what to say to that.

          1. So some butthurt twits are trying to get BitBucket and CloudFlare to take them down. *sigh*

            1. Now I realize the downside to some fun satire. There’s going to be talks and talks and talks at conferences about this. Maybe a whole tract of “How can we prevent misogynists from satirizing us in the open source community!?!?”

              Pledges to not contribute to satirical projects that have to be agreed to in order to attend the conference. Instant banishment if someone is found to have made a fork of it.

    4. “The traditional binary foundation of 1s and 0s is deeply problematic: 1 is inherently phallic and thus misogynistic. Also, some 1s are 0s, and some 0s are 1s. It is not fair to give them immutable labels. Instead, we have 0s and Os as our fundamental binary logic gates. They symbolise/-ize the varying, natural, and beautiful differences of the female vaginal opening.
      0 is to take the conventional value of 0.
      O is 50% of the time 0, and 50% of the time 1. The determination of this depends on how the underlying logic feels at the moment.”

      As funny as that is, it is sometimes difficult to tell parody from reality with those people. They really are that wacked out.

      1. Apparently this is their non-satirical inspiration:

        The idea came about while discussing normative and feminist subject object theory. I realized that object oriented programmed reifies normative subject object theory. This led me to wonder what a feminist programming language would look like, one that might allow you to create entanglements (Karen Barad Posthumanist Performativity).

        I realized that to program in a feminist way, one would ideally want to use a feminist programming language. So what is a feminist programming language? Well I took a look at the major programming paradigms, the following are the four main groups a programming language can fall into: imperative, functional, object-oriented, and logic. I decided to explore feminist logic such that a feminist programming language could be derived.

        1. …”feminist logic”…
          I really don’t want to hear someone try to explain what this might be.

          1. The “pick up artist” crowd has the concept of “chick logic”. Maybe that’s what they mean.


        2. I tried reading the “Feminism and Programming Languages” article. I couldn’t finish it.

      2. Until I read that, I wasn’t sure it was parody.

    5. Having spent the afternoon knee deep in source code to build up the Patriarchy, this is awesome.

      //Frankly I feel that line escape codes could be problematic

      1. I’m surprised they chose a C language, though. I’d have thought their Object Orientation would be problematic. Objectifying code is patriarchical code.

        1. You need to read more of it; that’s covered.

          1. Ah, you’re right; I missed it when I first scanned through it.

            No class hierarchy or other stigmata of OOP (objectification-oriented programming). In fact, as an intersectional acknowledgement of Class Struggle our language will have no classes at all.
            On the off chance that objects do mysteriously manifest (thanks, Patriarchy!), there should be no object inheritance, as inheritance is a tool of the Patriarchy. Instead, there will be object reparations

    6. //Frankly I feel that line escape codes could be problematic


    7. Thanks man. This is hilarious.

  8. Roseanne Barr tells parenrs to turn off their TVs so the kids won’t see all the “vast invisible sexism, classism and racism that pervades network television”

    She fought sexism in her 1980s sitcom, but – “it is literally impossible for me to do that mow” because of sexism.


    1. Confucius or one of the early Confucians like Mencius argued that reading allowed people to get to know others beyond their immediate scope which increased empathy and by increasing empathy, increased social harmony. I don’t see how TV would function any differently.

    2. From the link:
      …”By age 18, a teenager will have seen 350,000 commercials; 100,000 may be advertisements for beer!”…

      I’m calling bullshit. That’s not even true of male-targeted sports.
      This will get the repetition given the lie about the number of women battered during Sup(ooops) The Big Game.

  9. the economic hole from which he now wants to help extract us.

    Let me guess:

    “We’re gonna need a bigger shovel!”

  10. Greenspan is a very interesting case. The usual way is for youthful Platonic idealism to give way to bitter, cynical, pragmatic subjectivism; Greenspan is the opposite. In his youth, Greenspan was a rational idealist, an Objectivist, and he wrote what is one of the best writings on the necessity of sound money to economic freedom, “Gold and Economic Freedom”. This essay includes a scathing polemic against fiat monetary systems and the motivations of those who champion and create them, and in-general against the statist-collectivist imperative of meddling in economics.

    He obviously changed his mind about a great many things. By the time he became a Fed Chairmen, Greenspan was obviously a Keynesian, and now that he has presided over this giant credit bubble, he has also adopted the postmodernist view of economics, which is to claim that everybody and everything is irrational, and there’s no way anyone can ever know why anything happens or why who does what. Now he sounds like an economic Humean, if ever there was such a creature.

    In my senior economics class in the year 2000, I remember the teacher wowing us with the central planning genius of Alan Greenspan, constantly refering to him as “the Maestro”. The statist imperative is everywhere, and few possess the temper to resist it.

    1. Has NOTHING to do with a “statist imperative”. It has to do with individual human beings in positions of power way too long. This was also true of people like Hoover and his FBI.

  11. Greenspan couldn’t even come up with an original title.…..129&sr=1-1

  12. An interesting polemic, devoid of facts or substance. The author ignores two central facts.

    1) Clinton pressuring lower lending standards from Fannie and Freddie — to pressure lenders into more subprime loans.
    2) Greenspan’s call for regulating the now-hazardous Fannie and Freddie — is what he did. One may disagree with that as an optimal solution, but it’s a lie to claim he did nothing.

    Clinton converts trash mortgages into safer investments than Google, but that’s not why they became over-invested. (lol)

    Not to defend the Fed, but the anti-Fed wackjobs keep careening into conspiracy-land.

    1. OK, how about a couple of cites on those assertions?

      1. This describes Clinton’s actions in 1999, and predicts that he will cause a taxpayer bailout similar to the 1980s. I cite the Times, to also show their hypocrisy on the issue.…..nding.html

        Next, actual C-Span videos of Congressional hearings on the matter. The video was assembled to document how Democrats kept killing all attempts to regulate Fannie and Freddie — but it includes Greenspan testifying to the threat (2:20)and calling for regulation of Fannie and Freddie — thus exposing this Reason column as just more Fed-conspiracy wackiness.

        Some context. Fannie and Freddie were packaging and reselling mortgages with a TAXPAYER GUARANTEE but no regulation. Crazy as it sounds, this apparently caused no problems for 80 years as long as Fannie Mae(originally) set their own standards. The risk was created when Clinton pressured lower standards under the Carter-era Community Reinvestment Act.

        The Fed had nothing to do with it. Again, not to defend the Fed, but to separate the conspiracy nuts.

  13. Sammy DeSoSo is not going to liek that at all man.

  14. You had a randroid as the Fed chairman? And everything went to shit? Pshaw! Any time Libertarianism fails to work it’s because a government somewhere did something. Give anarchy a chance.

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