Or should this be the ’shocked doctrine’ of disbelief? Here is an excellent overview by UMass economics professor David M. Kotz on the background of Greenspan and the ideology which enabled this mess we are now experiencing. Amazing that even *I* (with no professional economics education at all) could see this coming a mile away, yet this man, this scion of institutional legitimacy, this atlas (of the shrugging type?) of political influence and supposed wellspring of economic wisdom is now scratching his head totally befuddled as to how our economy is in freefall.

Greenspan should be indicted, if not for direct criminal activity, for criminal negligence and inexcusably grotesque ignorance. But that is what ideology will do to you, particularly if it is of the virulent Ayn Rand-ite strain that he worshipped his entire life.

Former Chairman of the Federal Reserve Alan Greenspan found himself “in a state of shocked disbelief” at the failure of individual self-interest to protect our banking system. What really ought to provoke shocked disbelief is that a person who held such views was placed in charge of regulating the American financial system, a position he held from 1987 to 2006.

Greenspan’s long stewardship of the financial system reflected the revived intellectual dominance, since around 1980, of a free-market economic theory once thought to have been permanently laid to rest by the Great Depression of the 1930s. This theory holds that if individual actors, whether ordinary people or officials of large corporations, are free to pursue their own self-interest through market exchanges with other free individuals, the result will be optimal for society as a whole. Government has little role to play in the economy, beyond enforcing the law of contracts and protecting the rights of property owners. In such a world, everyone is supposed to succeed based on her or his own effort, skill, intelligence and other worthy attributes, or fail due to a lack of them. It is an appealing vision in which individual liberty meshes perfectly with the social good. No one has to depend on the good will of anyone else, but instead need only rely on oneself.

This theory, pushed to the fringes of respectable thought for several decades following the Great Depression, re-emerged and was vigorously, if not entirely consistently, applied to the US and global economies starting nearly three decades ago. This is a world in which the process of production and exchange takes the form of a global system of interconnected corporate institutions. Since 1980, this system has become increasingly interdependent, as virtually every corner of the globe was drawn into the new complex of economic networks.

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As the American financial system was gradually deregulated during 1980-99, promoted by the resurgent free market ideology, one more experiment based on this theory was put into play. Alan Greenspan did his part by encouraging the experiment to proceed unhindered for his entire tenure at the Fed. Those who ran our banks, investment banks and other financial institutions participated with enthusiasm. They quickly found a much better way to make money than the old humdrum activity of taking deposits, making loans and holding those loans to maturity.

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Everyone in this chain felt their super-high rates of return were safe, given the supposedly endless rise of home prices and the AAA ratings given to these securities by rating agencies hired by the security issuers. Free market theories of finance insisted that the markets price every security properly, so no one need worry about the spread of these derivative securities throughout the world financial system. Chairman Greenspan’s vision played out on a world stage.

No one who knew any history should have been shocked when this vast experiment collapsed.

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Hopefully, the lesson will finally be learned. What former British Prime Minister Margaret Thatcher claimed at the start of the free market period - that there is no society, there are just individuals - is belied by what we are now witnessing. We are not disconnected individuals whose fate rests solely in our own hands. We are all dependent on one another. We must rebuild our economy on the principle that we are all in this together. If we are to solve the many real economic problems we face, we have to do so by cooperative effort, not by the pursuit of narrow self-interest.

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