But Greenspan Said So

How Markets Fail
The Logic of Economic Calamities
John Cassidy
Farrar, Straus and Giroux, $28, 390 pp.

If Alan Greenspan got the economy wrong, what chance was there for the rest of us? His aura as a financial wiz outshone dissenting economists who questioned the novel financing schemes inflating the housing market (those dissenters included colleagues at the Federal Reserve, where he was chairman from 1987 to 2006). Though there were multiple warning signs, Greenspan was surprised when the bubble finally burst and major financial institutions began to collapse—and with them the global economy.

Testifying before a House committee in October 2008 under the stern questioning of Henry Waxman (D-Calif.), Greenspan admitted that he did not “fully understand why it happened,” though he acknowledged “a mistake in presuming that the self-interests of...banks and others were such that they were best capable of protecting their own shareholders and their equity in the firms.” Take the wiz at his word: he could not foresee the Great Recession because his assumptions about markets and their innate capacity for self-correction rendered him incapable of imagining the cumulative consequences of low interest rates, deregulation, novel investment devices, securitization—all in a globalized economy. We could call this invincible ignorance, but, as John Cassidy’s new book shows, in Greenspan’s case it was more like intellectual arrogance.

An elaborate framework bolstered by mathematical formulas showing that an invisible hand regulated financial markets underpinned Greenspan’s...

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About the Author

Margaret O'Brien Steinfels, a former editor of Commonweal, writes frequently in these pages and blogs at dotCommonweal.