Friday, October 24, 2008

Greenspan's Mistaken Faith in Self-Interest

Given today's post of the chapter on self-interest as a challenge to Into the World's hypothesis, I couldn't resist noting Alan Greenspan's widely reported testimony before the US Congress the other day.

"I made a mistake in presuming that the self-interest of organizations...were such that they were best capable of protecting their own shareholders..."

Later he noted that "As much as I would prefer it otherwise...I see no choice but to require that all securitisers retain a meaningful part in the securities they issue."

In retrospect it is easy to see that the current financial crisis is the result of the entire system acting on a giant Ponzi scheme. I'll leave the analysis to the experts, but it seems that the assumption that the housing market would continue to rise at a rate far outstripping wage increases was the critical piece in the delusion so many of us bought into. However, the view that self-interest can be the guiding moral light in economics and elsewhere seems to be to blame too.

Check out Mike Wallace's 1959 interview of Ayn Rand for some telling commentary:


John L said...

While nobody, including Greenspan, had 100% foreknowledge, it's hard to believe he wasn't keenly aware of the growing dangers.

Tracy Witham said...

I read Lost in the Wilderness recently and learned about something called "dominant-hand bias." It refers to a small ongoing bias most people have to angle slightly in the direction of their right or left hand, which when repeated over and over tends to make a person walk in a circle when they are trying to walk straight toward a goal. I think the idea that everyone can follow self-interest and everything will work out for the best in economics might be like that--lots of small biases introduced over the course of many decisions by many persons. More than enough blame to go around, so to speak.