Friday, October 24, 2008

Greenspan's libertarian lousiness: no longer the purest purist

Greenspan recently admitted that he maybe should have imposed a couple of regulations on the financial sector during his time as Fed chairman to help prevent the financial crisis. This admission is a partial abdication of his previously purist libertarian position.

Slate's Jacob Weisberg wrecently wrote that the financial crisis takes the financial crisis to be final and crushing evidence against libertarianism, and calls out libertarians like me for blaming the market failures on excess government involvement, such as Congress pressuring Fannie Mae and Freddie Mac to invest in over a trillion dollars of subprime mortgages. He says that this is not enough to fully explain the market failures, and I accept this as a likely possibility.

And yet I still call myself a libertarian. Not a purist, for sure -- purity in nearly any ideology seems to prioritize principle over practicality. But aside from purism, there is a grain of truth in most ideologies, and I think that the grain of truth in libertarinism is still strong enough to be useful even in the market of the future.

The grain of truth is that every governmental action has economic costs as well as benefits, and that much governance does more harm than good. There is no reason why the current crisis should be taken as a referendum on this simple principle. Some politicians talk as if "deregulation" is to blame. In hindsight it is clear that a different mix of regulation was needed. A failure in our old set of regulations is no excuse for mindlessly slapping on a bunch of new regulations. Each new regulation must be carefully examined so that we can understand its potential unintended consequences. This is the kind of caution that I think libertarians have to offer.

I'm pretty sure that Greenspan understands this now.

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