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By Root 3591 0

—years during which, by his account, he put out economic crises, kept inflation under control, and deftly manipulated interest rates to ensure that the economy hummed and the markets rose. Before the financial crisis tarnished his reputation, Greenspan’s self-image—Fed chairman as economic Superman—was widely shared. Congressmen fell all over themselves to praise him when he made his semiannual appearances on Capitol Hill. His interest rate decisions were invariably lauded. Many economists viewed him as the greatest Fed chairman ever, even greater than Paul Volcker, who had tamed the raging inflation of the 1970s. The small handful of favored journalists who had off-the-record access to Greenspan regurgitated his pronouncements as if they had been handed down by the Oracle of Delphi. To many people, Greenspan was the Oracle of Delphi.

Although the country was understandably fixated on Greenspan’s handling of monetary policy, the Fed had always had other roles, too. It had supervisory authority over the big bank holding companies. It was supposed to be the guardian of the “safety and soundness” of the banking system. It even had a Division of Consumer and Community Affairs, to look after the interests of bank customers. The Fed, in other words, was a regulator. Greenspan, however, was not.

As a young economist, Greenspan had come under the spell of Ayn Rand, the author of The Fountainhead and Atlas Shrugged, two of the most influential odes to capitalism ever written. The capitalism Rand believed in was “full, pure, unregulated, laissez-faire capitalism,” as she once put it, the kind that didn’t put regulatory roadblocks in the way of red-blooded entrepreneurs. Greenspan met Rand in the early 1950s, became part of her inner circle, and remained close to her until she died in 1982.

A conservative economist like Greenspan is always going to tilt against regulation. But Rand gave his leaning a philosophical underpinning and helped turn him into a true free-market absolutist. He came to believe that regulation always had unforeseen negative consequences, and that the market itself was far better at embracing the good and driving out the bad than any well-meaning government mandate. That’s what he meant by market discipline.

Greenspan’s antiregulatory philosophy did not prevent him from working for the government, however. As an adviser to Richard Nixon’s presidential campaign in 1968, he reasoned that it was better “to advance free-market capitalism from the inside, rather than as a critical pamphleteer,” he says in The Age of Turbulence. In 1974, President Ford asked Greenspan to become the chairman of the president’s Council of Economic Advisers. “I knew I would have to pledge to uphold not only the Constitution but also the laws of the land, many of which I thought were wrong,” he writes. (He concludes, “Compromise on public issues is the price of civilization, not an abrogation of principle.”)

When he was nominated to be Fed chairman, Greenspan took the job knowing that he was “an outlier in [his] libertarian opposition to most regulation.” Therefore, he says, his plan was to focus on monetary policy and let other Fed governors take the lead on regulatory matters. That’s not really how it played out, however. Greenspan was too dominating a presence, and his views were too well known. Fed economists who believed in the superiority of market discipline tended to do well in Greenspan’s Fed; those who didn’t languished.

There is no question, looking back, that Greenspan’s Federal Reserve could have taken steps to cure the growing problems with subprime lending before they got worse. It had the authority. There was a law on the books called the Home Ownership and Equity Protection Act, or HOEPA, that gave the Federal Reserve the power to flatly prohibit mortgage lending practices that it concluded were unfair or deceptive—or designed to evade HOEPA. “The Federal Reserve [has] ample authority to encompass all types of mortgage loans within the scope of any regulation it promulgates,” wrote Raymond Natter, a lawyer who had