19. Cult of Risk

As money and debt became key drivers of economies, bankers gained “juice”—influence. Related industries, like housing, also lobbied relentlessly for initiatives that increased the supply of money for a home of one’s own.

In The Logic of Collective Action and The Rise and Decline of Nations, American economist Mancur Olson argued that in democratic societies and market economies small coalitions form over time. They use intensive, well-funded lobbying to influence policies that benefit members, leaving large costs to be borne by the rest of the population. Coalitions accumulate, ultimately paralyzing the economic system and causing inevitable and irretrievable economic decline.

In the article “The quiet coup”¹ and book 13 Bankers, Simon Johnson, a former IMF chief economist and James Kwak, a former McKinsey consultant, argued that banksters had captured regulators. The idea echoed President Dwight Eisenhower’s 1961 warning about the military industrial complex, an influential and powerful combination of the military establishment and arms industry with the “potential for the disastrous rise of misplaced power.”²

If it were a conspiracy, then it was one of convenience among pickpockets. If it was a coup, then it was by engraved invitation, like the sadomasochistic sexual encounter between Howard Roark and Dominique Francon in Ayn Rand’s The Fountainhead.³ While increasing debt and risk was dangerous, it had become the accepted way to generate economic growth and improve living standards.

Growth for All Seasons

As in ancient Rome, where the perpetuation of Empire and Caesar’s reign required ample supplies of bread and games for the population, all politics and economics is now informed by the necessity of maintaining strong economic growth:

We have entered a period of sustained growth that could double the world’s economy every dozen years and bring increasing prosperity for...billions of people on the planet. We are riding the early waves of a 25-year run of a greatly expanding economy that will do much to solve seemingly intractable problems like poverty and to ease tensions throughout the world. And we’ll do it without blowing the lid off the environment.⁴

The belief that governments and central banks could control the economy was widespread:

Faster economic growth is the panacea for all...economic (and for that matter political) problems and that faster growth can be easily achieved by a combination of inflationary demand-management policies and politically appealing fiscal gimmickry.⁵

Economic growth was a perennial and persistent preoccupation. In 1929, the New York Daily Mirror wrote: “The prevailing bull market is just America’s bet that she won’t stop expanding.”⁶ In 1936, Wilhelm Röpke looked back at the roaring 1920s: “with production and trade increasing month by month throughout the world, the moment actually seemed in sight when social problems would be solved by prosperity for all.”⁷ At the time, the 1920s were also regarded as a period of remarkable social progress.

Historically, increasing population, new markets, productivity increases, and industrial innovation drove growth. As the world grew older, growth slowed but “when the monster stops growing, it dies. It can’t stay one size.”⁸ After the Berlin Wall fell, the reintegration of Eastern Europe, China, and India into global trade provided low-cost labor supplying cheap goods and services and creating new markets for products. But demand for improved living standards needed even greater growth. Chinese novelist Ma Jian saw this in his native country: “As society changes, new words and terms keep popping up such as sauna, private car ownership, property developer, mortgage, and personal installment loan...no one talks about the Tiananmen protests...or...official corruption.”⁹

Financial engineering replaced real engineering as the engine for growth. Debt-fueled consumption drove growth, particularly in the developed world. Investors, such as central banks with large reserves, pension funds, and asset managers, eagerly purchased the debt. Borrowing fueled higher asset prices, allowing greater levels of borrowing against the value of the asset. Spending that normally would have taken place over a period of years was squeezed into a short period because of the availability of cheap borrowing. Business over-invested in production capacity, assuming exaggerated growth would continue indefinitely.

Over half the recorded growth in the United States over recent years was the result of debt. Spiraling levels of debt were needed to maintain growth. By 2008 $4–5 of debt was required to create $1 of growth, up from $1–2 needed 20 years earlier. In the frenzy of low interest rates and rising asset prices, collateral cover and ability to service the loans deteriorated, increasing debt levels to unsustainable levels.

A perpetual motion machine indefinitely produces more energy than it consumes. The new economy was a perpetual growth machine, producing high rates of growth using debt. Perpetual motion is a Gedanken—thought experiment—designed to test a hypothesis. The new economy ultimately proved impossible to sustain. Sigmund Freud remarked that:

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.¹⁰

The financial crisis was the reality on which the fake pleasure of the Great Moderation and the Goldilocks Economy was smashed.

Financial Groupthink

Asked about why regulators did not see the problems and excesses, Richard Breeden, a former chairman of the SEC, remarked: “It’s probably a better question for a psychologist. There’s a group dynamic...nobody likes to be the person who sends everybody home from the party when they’re having a good time.”¹¹

Groupthink, suggested by William Whyte, author of The Organisation Man, and developed by psychologist Irving Janis, describes a process where a group with similar backgrounds and largely insulated from outside opinions makes decisions without critically testing, analyzing and evaluating ideas.¹² It involves collective rationalizations, conviction about the inherent morality of its views, and illusions about unanimity and invulnerability. The group holds stereotyped views of outsiders and no toleration of dissent.

The financial system was a case of financial groupthink, the madness of crowds. Alan Greenspan, the former Fed chairman, was the chief mindguard of financial groupthink. In the early 1950s, Greenspan wrote for Ayn Rand’s newsletter and contributed essays to her book Capitalism: The Unknown Ideal. In 1974, after a successful career as an economic consultant, Greenspan joined President Gerald Ford’s Council of Economic Advisers. Rand attended the swearing-in ceremony. In 1982, Greenspan attended Rand’s funeral.

Born Alisa Rosenbaum, Rand, a Russian Jew, was a trenchant critic of popular collectivism movements of the twentieth century. Based on her experience of the Russian revolution, Rand was fervently anticommunist, devoted to the rights and liberty of the individual. She shaped the libertarian self-image—the gifted individual restricted, brought down and in permanent conflict with power-hungry bureaucrats, officials, and the untalented second-handers who populate life.

Rand argued that thriving societies are not possible without freedom, entrepreneurs, and innovation. China’s embrace of market economics was validation of Rand’s point of view. Refracted through economic and finance theory, this was the core belief of extreme money.

The academic establishment found Rand’s polemic novels and views shallow and limited. But Rand’s absolute values and intolerance were attractive to an adolescent sensibility and a Manichean worldview, a simple cosmology divided between good and evil. Encouraging mystique, she anticipated the cult of celebrity thought leadership before the term existed. Her glare “could wilt a cactus.” She wore a brooch in the shape of a dollar sign. With a talent for self-promotion, Ayn Rand was her greatest creation.

Within her inner circle—known ironically as the collective—the promoter of individual liberty did not tolerate dissent. Her stifling worldview encompassed politics, interior design, and dancing. Despite a failure to create a lasting legacy or political movement, Rand remains an influence on conservative thinking. The New York Times dubbed Rand the “novelist Laureate” of the Reagan administration, citing her influence on Greenspan.¹³ Paul Samuelson, the economist, recalled that:

The trouble is that [Greenspan] had been an Ayn Rander. You can take the boy out of the cult but you can’t take the cult out of the boy. He actually had instructions, probably pinned on the wall: “Nothing from this office should go forth which discredits the capitalist system. Greed is good.”¹⁴

Like his mentor, Greenspan was his own splendid creation.

Celebrity Central Banking

Greenspan reveled in the age of celebrity central bankers: “The only central bankers ever to achieve...rock star status.... No one has yet credited Alan Greenspan with the fall of the Soviet Union or the rise of the Boston Red Sox, although both may come in time as the legend grows.”¹⁵ In 2000, U.S. Senator John McCain suggested that if Greenspan died, it would be necessary to adopt a Weekend at Bernie’s strategy—put dark glasses on him and prop him up in his office.

Lacking the talent to be a successful musician, Greenspan became the bandleader of the new economy. Critics muttered that his Ph.D. thesis in economics from New York University was a collection of articles that he wrote in the 1950s. Like Elvis, who claimed in his line of work that knowledge of music was not strictly necessary, Greenspan did not need to know much about economics.¹⁶

In oracular pronouncements, Greenspan excelled at “lacquering a slate of ignorance with a thin coating of knowledge.”¹⁷ At a July 1996 meeting, discussing the target rate of inflation, Governor Janet Yellen argued for 2 percent. Greenspan waffled about price stability. Asked to define the term, Greenspan said that it was “the state in which expected changes in price level do not effectively alter business or household decisions.” Pressed further, Greenspan expressed preference for zero inflation, correctly measured. The consensus was for 2 percent incorrectly measured. Greenspan cautioned the other governors not to reveal the target.¹⁸

In 1998, Greenspan told the U.S. Securities Industry Association that: “The financial instruments of a bygone era, common stocks and debt obligations, have been augmented by a vast array of complex hybrid financial products...which, in many cases, seemingly challenge human understanding.”¹⁹

In The Power of Yes, Adair Turner, head of the English FSA, is asked whether the fact that nobody understood what was going on was an issue. Turner responds that no, it wasn’t a problem as, for people like Alan Greenspan, it was just a matter of faith.²⁰

There was no evidence that Greenspan was accurate at forecasting economic events. At the Fed, Greenspan had at his disposal: “an entire department of economists who can provide a brilliant ex post facto explanation of what happened.”²¹ He grasped that sound economics and ideas were irrelevant as long as the stock market kept rising and people felt that they were getting wealthier. Obscure, pseudo-scientific language masked the paucity of substance. Han de Jong, chief economist of ABN Amro Bank, confessed to the Financial Times on February 21, 2008: “The role of serious economists in financial institutions is very limited today. We are little more than clowns, whose purpose is to entertain.” It was parlor economics by parlor intellectuals.

But Greenspan did have an acute understanding of power and political savvy. During the Reagan years, White House staff members marveled at his omnipresence, and the way he worked government officials. His limbo-dancer-like flexibility on policy issues was legendary. Greenspan supported President Bush’s 2001 tax cuts but was highly critical of his 2003 tax cut plans, urging a return to fiscal rectitude. Shortly after, he switched tack, praising Bush’s plan to eliminate taxes on dividends, and arguing that the cuts would have limited effects on the budget. Democratic Senator Harry Reid called Greenspan “one of the biggest political hacks we have here in Washington.”²²

Greenspan’s true constituency was the markets. He exemplified deregulation and the extraordinary gains they provided to bankers. The Greenspan put guaranteed that the central bank would save them from their folly.

Greenspan’s policies were grounded in “asymmetric ignorance.”²³ As Fed chairman, he repeatedly stated that central bankers could not anticipate price bubbles or do anything about them because it was impossible to know when asset prices were too high. Nevertheless, he always knew when falling asset prices would create a crisis and the central bank should pump money into the system to support prices. Underlying the policies was his deep-seated, fundamental belief that irrational bubbles were simply impossible in an efficient, modern market. After retirement, Greenspan gained powers of clairvoyance, warning about developing bubbles and urging action to prevent them.

Traditional central bankers shunned publicity, being reluctant to disclose anything. Asked about the level of its gold reserves by a Royal Commission, one governor of the Bank of England would only say that they were “very, very considerable.” In 1929, in an inquiry before a select parliamentary committee, the deputy governor responded that “it was [the Bank of England’s] practice to leave our actions to explain our policy.” The Bank thought it “dangerous to start to give reasons” and unwise to defend itself against criticism, finding it “akin to a lady starting to defend her virtue.”²⁴

In contrast, Greenspan courted the press—literally. He dated journalists Barbara Walters and Susan Mills before marrying Andrea Mitchell, a television personality. He manipulated the press cleverly, pumping up his profile. When he became Fed chairman, fewer than 10 percent of Americans could identify the holder of the office. By the time he retired in 2006, more than 90 percent knew him.

Like Rand, Greenspan cultivated a contrived popular image. Journalists granted interviews would inevitably find him poring over reams of data or obscure economic statistics, building the aura of deep technical knowledge. His mannered speech gave the impression of superior elevated wisdom. Greenspan himself provided guidance to interpreting his pronouncements: “I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant.”²⁵ He once further clarified his position: “If I have made myself clear then you have misunderstood me.”²⁶

In Turkmenistan, President Berdymukhamedov, a former dentist, settled for the title of hero. Based on a hagiographic, uncritical biography, Greenspan was the maestro. Like Greenspan, President Berdymukhamedov was often shown on state TV performing heroic tasks. The day after one such operation, the security services confiscated newspapers carrying a photo that showed the President holding an X-ray upside down. Greenspan’s Delphic obscurity and airbrushed history belied the fact that he wasn’t actually saying or doing much and had a term in office littered with mistakes.

Greenspan’s genius was to grasp the need for an oracle to satisfy deep-seated longings for certainty and infallibility. As Friederich Nietzsche observed:

To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown—the first instinct is to eliminate these distressing states. First principle: any explanation is better than none.... The cause-creating drive is thus conditioned and excited by the feeling of fear.²⁷

Dealing with Dissent

Like Rand, Greenspan purged dissenters with Stalinist efficiency: “You challenge Greenspan and he tolerates it—at first. If you keep going...it’s like a cartoon: a sixteen-ton weight drops on you from the ceiling, and it’s clear the conversation is over.”²⁸ Time and again, Greenspan ensured that proposals for regulation of the financial system were stillborn.

Brooksley Born, the head of the Commodity Futures Trading Commission (CFTC), tried to engender debate on the regulation of the growing volume of privately negotiated derivative contracts and the risk to the financial system. She testified repeatedly before Congress to that effect. In 1998, the CFTC issued a draft release proposing regulation, greater disclosure, and more reserves against losses.

A furious Greenspan, together with Treasury secretary Robert Rubin, deputy Treasury secretary Larry Summers, and SEC chairman Arthur Levitt, launched an extraordinary attack against regulation of derivatives and personally on Born. Michael Greenberger, a director at the CFTC, noted: “Brooksley was this woman...not playing tennis with these guys...not having lunch with these guys...this woman was not of Wall Street.”²⁹

Greenspan told Born that she did not understand what she was doing: “regulation of derivatives transactions that are privately negotiated by professionals is unnecessary.”³⁰ Regulation would reduce market efficiency, create uncertainty, and reduce standards of living. The market place was automatically self-regulating. Market regulation was superior to even minimal intervention. Acknowledging that derivatives create linkages that transmit risks, Greenspan dismissed the possibility of problems in the financial system as extremely remote. Regulation would cause a flight of capital from America, reducing its financial influence.

Arguing that the CFTC had no authority over derivatives, Rubin offered Born an education in the applicable laws on the powers of the regulator. Larry Summers, later an advocate of reregulation of the financial system, chastised Born: “There are thirteen bankers in my office. They say if this is published we’ll have the worst financial crisis since World War II.”³¹

When Born stubbornly continued, Greenspan, Rubin, and Levitt used their influence in Congress to stall the proposals. Born’s case gained support when later that year LTCM collapsed, necessitating a hasty Fed-orchestrated rescue. Greenspan’s views on derivatives remained unaffected. After Born departed in 1999, Greenspan, Summers (now Treasury secretary), and Levitt pushed through the Commodity Futures Modernization Act, stripping the agency of much of its powers over derivatives. Later Rubin and Summers argued that they had actually favored regulating derivatives but the system and public opinion militated against it.

After leaving the CFTC, Born received the John F. Kennedy Profiles in Courage Award in recognition of the “political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis.”

In 2005, in his paper Has Financial Development Made the World Riskier? at the Fed’s annual conference held at Jackson Hole, Raghuram Rajan, a former IMF chief economist and professor at the University of Chicago, presciently highlighted the increased risks and the interdependence of markets that made them vulnerable. Donald Kohn, Greenspan’s Fed flunky, and Summers rushed to defend their master, launching a virulent attack. Rajan had not followed John Kenneth Galbraith’s advice: “The conventional having been made more or less identical with sound scholarship, its position is virtually impregnable. The skeptic is disqualified by his very tendency to go brashly from the old to the new. Were he a sound scholar...he would remain with the conventional wisdom.”³²

Greenspan’s personal authority was influential in convincing both legislators and regulators. None of them had the knowledge to understand the issues or challenge the maestro, who modestly claimed credit for the rising stock market and growing economy. Within banks, managers concerned with risk were weeded out. During a meeting in 2007 between academics and banks, a risk manager told Rajan (who was surprised at the lack of concern): “You must understand, anyone who was worried was fired long ago.”³³

The world slavishly followed the American example. As William White, chief economist of the BIS, remarked: “In the field of economics, American academics have such a high reputation that they sweep all before them. If you add to that the personal reputation of the ‘Maestro,’ it was very difficult for anybody else to come in and say the problems building.”³⁴

Free markets and deregulation were conventional wisdom—everyone was paid to agree with the broad consensus. As Hyman Minsky wrote: “As a previous crisis recedes in time, it’s quite natural...to believe that a new era has arrived. Cassandra-like warnings that nothing has changed, that there is a financial breaking point that will lead to a deep depression, are naturally ignored in these circumstances.”³⁵

Noneofuscouldanode

On October 22, 2008, as the global economy and financial system dissolved into crisis, Alan Greenspan appeared before the U.S. House Oversight Committee.

Well-meaning and ineffectual hearings, irrespective of topic, typically conclude that any failure was systemic, not attributable to any individual. The inadvertent, unconscious clan and class sympathies of men and women dressed in similar attire on both sides of the bar are a factor in the outcome. In January 2011, the Financial Crisis Inquiry Commission (FCIC) would issue a weighty report, which was dubbed the financial equivalent of Murder on the Orient Express—everybody did it but no one would be held responsible.

Since leaving the Fed, Greenspan had carved out a lucrative career as a speaker and adviser to a bank (Deutsche Bank), fund manager (Pimco) and hedge fund (Paulson & Co.). He had a best-selling book The Age of Turbulence, promoted relentlessly through interviews and public appearances on popular TV shows. Aware of the importance of the event, Greenspan hired a PR consultant to help him prepare.

This time, the interrogation, led by Congressman Henry Waxman, the chairman, was less adulatory: “Were you wrong?” Looking frail and uncomfortable, Greenspan responded: “I made a mistake in presuming that the self-interest of organizations [was] such that they were best capable of protecting their own shareholders and their equity in the firms.... I’ve found a flaw...in the model that I perceived as the critical functioning structure that defines how the world works, so to speak.”³⁶ He was even, he allowed, “partially” wrong for opposing tougher regulation of derivatives: “30 percent wrong.”³⁷

Greenspan’s confession of shocked disbelief echoed the admission of Robert Stadler, the physicist in Atlas Shrugged, who betrays his faith in exchange for political favors. Greenspan seemed nothing more than an icon of an economy that was disintegrating.

In October 2008, speaking before business leaders in Edinburgh, Hector Sants, CEO of the UK FSA, apologized that bank “business models [were] ill-equipped to survive the stress...a fact we regret.... We are sorry that our supervision did not achieve all it should have done.”³⁸ As journalist Simon Jenkins commented: “It was like a pilot protesting that his plane was flying fine except for the engines.”³⁹

As markets recovered, disbelief turned to defiance. In October 2009, at the Yalta European Conference, Greenspan clashed with George Soros and Dominique Strauss-Kahn, head of the IMF, on the need for regulation: “I think you have to allow the market to make those judgments...[markets would ensure] that many practices would naturally find themselves “off the table.”⁴⁰

Keynes argued that models were weak expressions of conventional wisdom: “Like other orthodoxies it stands for what is jejeune and intellectually sterile; and since it has prejudice on its side, it can use claptrap with impunity.”⁴¹ The EMH—efficient market-hypothesis—was really a case of the extreme money hypocrisy, which in times of stress transformed into the emotional market hypothesis.⁴²

Je Ne Regrette Rien!

In 2010, the now Dr. Greenspan defended his record before the USFCIC⁴³ and at the Brooking Institute. Greenspan was careful to look prescient, drawing on past praise of achievements, especially from the late Milton Friedman. Contrition was in short supply, Greenspan telling an interviewer: “I have no regrets on any of the Federal Reserve’s policies that we initiated back then.”⁴⁴

An unrepentant Greenspan refused to acknowledge any failure to take action to rein in excessive lending, aggressive risk-taking by banks. and subprime mortgages. The banking system had had inadequate capital for at least 40 to 50 years. Asked to defend his deregulatory policies, Greenspan told the FCIC that it was not his fault: “The notion that somehow my views on regulation were predominant and effective at influencing the Congress is something you may have perceived. But it didn’t look that way from my point of view.”⁴⁵ He had warned about subprime lending and low-down-payment mortgages in 1999 and 2001. He was powerless, as legislators would have prevented him from taking action. It was an odd admission of helplessness from the second most important man on the planet.

Greenspan’s analysis of the crisis was conventional; central banks were innocent voyeurs to events. He recited Ben Bernanke’s global saving glut thesis—an excess of global saving created the problems. He steadfastly denied that loose money or deregulation of the financial system were key elements of the crisis.

Keynes argued that “the difficulty lies not so much in developing new ideas as in escaping from old ones.”⁴⁶ But as John Kenneth Galbraith realized, “faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof.”⁴⁷

Patrick Artus, economic adviser to the French government and author of Les incendiaires: Les banques centrales dépassées par la globalisation (The Arsonists: Central Banks Overtaken by Globalisation), called Greenspan a “very bad Fed chairman” who created four major crises—savings and loans, LTCM, new-technology shares and subprime mortgages. When asked about Greenspan’s contribution in rescuing markets with his actions, Artus replied: “Yes, but after the fact. He’s congratulated for his role as fireman, but he’s the one who started the fire.”⁴⁸

In 2009. the economics profession voted Alan Greenspan the economist most responsible for causing the global financial crisis—the Dynamite Prize in Economics. Milton Friedman and Larry Summers finished in second and third place. Greenspan could take solace in John Kenneth Galbraith’s advice: “If all else fails, immortality can always be assured by spectacular error.”

Last Supper

In November 2008, hedge fund manager John Paulson celebrated unparalleled gains from betting on the collapse of the U.S. subprime mortgage market. Investors in Paulson’s funds gathered for an exclusive dinner at New York’s Metropolitan Club facing Central Park. The human misery that this celebration was built on did not trouble the invited.

The evening started with a cocktail reception where Krug Grande Cuvée champagne and 2006 Chassagne-Montrachet from Domaine Marc Morey were served. The dinner menu featured jumbo crabmeat and avocado, Colorado rack of lamb with tarragon jus and Parmesan, polenta cake, and a warm chocolate cake. Oenophiles enjoyed the evening’s libations—1999 Château Haut-Brion, 1999 Château Margaux, and 1999 Château Lafite-Rothschild (at more than $500 a bottle).

The man instrumental for the investor’s good fortune provided the evening’s entertainment. Greenspan, an adviser to Paulson, was the after-dinner speaker. Greenspan believed that: “There is a lot of amnesia that’s emerging, apparently.”⁴⁹ The 83-year-old Dr. Greenspan was not immune from this affliction, especially where preserving his legacy. He took the advice of author Gabriel Garcia Márquez: “What matters in life is not what happens to you but what you remember and how you remember it.”⁵⁰

Greenspan’s FCIC testimony was followed by executives from CitiGroup, propped up by more than $45 billion of US taxpayer funds. They acknowledged deterioration of lending standards and investment in mortgage backed securities. A former CitiGroup lending officer told the Commission how lending decisions were altered from “turned down” to “approved” and of futile attempts to draw violations of credit risk policies to the attention of senior management, including Robert Rubin.

When it was their turn, senior CitiGroup personnel parroted that the super senior CDO tranches held were “super safe.” Thomas Maheras, the executive in charge of Citi’s mortgage activities, told the FCIC that no one could have conceived that house prices would fall by 30–40 percent. David Bushell, CitiGroup’s head of risk, pointed out that everybody, including the regulators, assumed the same things.

Citi’s behavior was merely a rational of poor business judgment. As John Kenneth Galbraith pointed out: “The conventional view serves to protect us from the painful job of thinking.... In any great organization it is far, far safer to be wrong with the majority than to be right alone.” The large profits, as Upton Sinclair observed, made it “difficult...for a man to understand something if he’s paid a small fortune to not understand it.”⁵¹

In October 2008 Dean Jay Light told Harvard Business Schools students and alumni:

We failed to understand how much the system had changed...and how fragile it might be because of increased leverage, decreased transparency and decreased liquidity...we have witnessed...a stunning and sobering failure of financial safeguards, of financial markets, of financial institutions and mostly of leadership at many levels. We will leave the talk of fixing the blame to others, that is not very interesting. But we must be involved...in fixing the problems.⁵²

Having failed to see looming problems, the same people, Light argued, should be in charge of solving the problem. As Benjamin Franklin remarked: “The definition of insanity is doing the same thing over and over and expecting different results.”

Boom and bust cycles had not been consigned to the dustbin of history. High levels of debt and leverage were not the elixir of endless growth. Housing prices did go down as well as up. Wealth did not flow endlessly from buying and selling claims on future properties off the plan in exotic investment hot spots. The finest financial minds proved incapable of understanding the risk of modern financial markets, though they had greater success in convincing central bankers and bankers of their models. As the Renaissance scholar Michel de Montaigne asked: “How many things we regarded yesterday as articles of faith that seem to us only fables today?”

The financial economy proved unable, ultimately, to overcome deficiencies in the real economy. Modern markets proved dangerously circular and self-referential. The crisis highlighted what John Stuart Mill knew in 1867: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”

At a meeting of the collective, Greenspan once expressed concern that he might not exist, causing Rand to remark caustically: “By the way, who is making that statement?”⁵³ During Greenspan’s FCIC testimony, the lights went out mysteriously in the hearing room as Phil Angelides, the commission’s chairman, asked Greenspan: “Do you feel there was a failure of regulation?” The financial system that Greenspan fostered had grown large and risky, eventually creating the conditions for the crisis that brought the global economy to the brink of a new depression. But it had not been forced on the world. As Alsatian humanist and satirist Sebastian Brant observed in 1494: “The world wants to be deceived.”

The ability of governments and policy mandarins to control the economic engines had been overrated. The crisis exposed politicians, bureaucrats, and central bankers as the Wizards of Oz, behind the curtain, running from one lever to another in a desperate attempt to maintain illusions. The incompleteness of knowledge would not have surprised Keynes. In an essay titled The Great Slump of 1930 published in December of that year, he wrote: “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the workings of which we do not understand.”⁵⁴