Being Wrong - Kathryn Schulz [43]
This was hardly the kind of congressional welcome to which Greenspan was accustomed. Throughout his five terms as Fed chief, Greenspan had regularly been referred to as “the greatest central banker in history,” “the most powerful man in the world,” and, simply, “the maestro.” His fame extended beyond the United States (France awarded him the Legion of Honor; Great Britain made him an honorary knight), as well as beyond financial and political circles. In the words of the Economist magazine, Greenspan enjoyed “almost rock-star status” among ordinary Americans—a remarkable and somewhat baffling achievement for a famously tight-lipped financier in charge of a blindingly complex aspect of government. His autobiography, presciently titled The Age of Turbulence, reportedly sold for $8.5 million dollars, second only to Bill Clinton’s memoir and tied with Pope John Paul II’s. When the book came out, in the summer of 2007—right around the time when the financial fault lines began to tremble—it topped both the New York Times and the Amazon.com bestseller lists.
By October 23, though, all that was in the past. The economy had been in bad shape for over a year, and in the spring of 2008, with the collapse of the global investment giant Bear Stearns, it had entered a virtual freefall. What began as a subprime mortgage crisis (triggered by the now-infamous practice of offering mortgages to people with limited or troubled credit histories) had broadened into a liquidity crisis, a credit crisis, a banking crisis, a currency crisis, a trade crisis—just about every kind of economic crisis you could name. In the United States, the stock market had fallen 37 percent since the start of the year. The American economy had lost 1.5 million jobs (a figure that would rise to over 5 million by early 2009), and the unemployment rate was marching toward double digits in the worst-hit states and sectors. Globally, the situation was even grimmer. The International Labor Organization predicted that, worldwide, between 18 and 50 million jobs would vanish into the maw of the crisis. Six months after Greenspan spoke, the Blackstone Group, a financial services company, reported that between 40 and 45 percent of global wealth had evaporated in under a year and a half.
For anyone with so much as a toe in the global economy, the crisis came as a massive financial and emotional shock—disturbing if you were lucky, devastating if you weren’t. But for those who were charged with actually understanding and directing that economy, the collapse occasioned a massive ideological crisis as well. One of the primary jobs of economists is to create models of how financial systems work, and while those models are, by definition, simplifications and estimations as compared to the real thing, they are nonetheless supposed to be useful for making predictions, not to mention policy. (That’s why economists create them, after all.) As Waxman pointed out, Greenspan’s economic model was based on the premise that markets could be trusted to regulate themselves—and, as a corollary, that governments should not do so instead. Since Greenspan’s model had essentially been the global model for close to twenty years, the doctrine of market self-regulation had become all but holy writ. As Waxman put it, “trust in the wisdom of the markets was infinite.”
Then the markets imploded—and, with them, the model. As Greenspan told the committee, “the whole intellectual edifice collapsed.” He had, he continued, “found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.” If that wasn’t clear enough, Waxman offered a blunt translation: “you found that your view of the world, your ideology, was not right.” It is a measure of how completely and