The Man Who Broke the Global Economy

0:00David McWilliams: On today's podcast, we're going to talk about the United States. It's part of our series, which has been, at least if we're genuflecting to the World Cup. But more importantly, it's on the legacy of Alan Greenspan on the economy of the United States. The man who was the longest ever serving head of the Federal Reserve. He died last week at the age of 100. we want to assess his legacy, the consequences of him and his ideology, which we can call Greenspanism. That's all coming up in a couple of minutes.

0:51but the politics and the problems of this year's tournament. Can England end 60 years of hurt? Join me, Max Rushton, our expert panel, and Barry every day of the tournament. World Cup Daily, listen wherever you get your podcasts or watch the full episodes on YouTube.

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1:19David McWilliams: How are you doing there? It is time for the podcast and we are sticking with our, it seems that you're liking it, our World Cup themed podcasts. Today and Thursday, we are going to look at the host nation, the world's most important economy, the United States of America. Their team is doing much better than people thought they were under Pochettino, that great Argentinian manager who may well be back in the premiership, John. at some stage. Oh, what have you heard? Well, you know, my sources, which are basically watching RTE or ITV, they're very, very exclusive and they're very well. Shoot magazine.

2:00David McWilliams: Shoot magazine. Yeah, yeah, exactly. Roy the Rovers. But we're going to talk about the United States. We're also going to talk about the United States against the background of and the legacy of Alan Greenspan, the chairman of the Fed who died at 100 years, vintage age, 100 years old. He died last week. We're going to talk about Greenspanism and whether or not Alan Greenspan is the most important public figure of the last 30 years. More important than any politician, more important than any movement, because he spawned an idea, notion, an ideology called Greenspanism. And Greenspanism has proved to be much more resilient than either his reputation, number one, or the various different financial crises it seemed to spawn, number two.

2:57David McWilliams: And number three, it is alive and well all over the world. In its most extreme manifestation, which is our friend Millay down in Argentina, who is the libertarians, libertarians, but more importantly, in the United States economy, in the inequality, in the casino nature of the United States economy and financialization, all of which we're going to discuss on Thursday, John. So it's Greenspanism. So I take it you weren't a fan. Well, I was always very intrigued, John. So Greenspan, I can tell you, I've had a couple of Greenspan stories this week. So let me just tell you, right? Last week at the book festival, which went really, really well.

3:36David McWilliams: I think you recorded the session I did with Katja Hoyer on Weimar Germany. And the session was, are there any lessons we can take from Weimar Germany based on her book, Weimar? Now, Weimar, little small town in the center of Germany, historical center of Germany, source and location of a huge amount of German culture. And of course, John, the town that gave its name to the ill-fated Weimar Republic, the republic that ruled Germany between the First World War and the ascent of Adolf Hitler. So from 1918 to 1933. Yeah. One of the idiosyncratic details about Weimar was that Buchenwald concentration camp was built within a kilometer of Weimar, the town.

4:29David McWilliams: Yes. And this implied that all these citizens of Weimar knew what was going on. And Katja Hoyer documents and details, evidence that the prisoners who were sent to Buchenwald concentration camp were deposited in the train station of Weimar and then put into trucks, number one, so the people of Weimar could see these innocent people going to this concentration camp. And number two, the bodies, and this is the creepy bit, the bodies that came from the Buchenwald concentration camp, because the crematorium of Buchenwald was never built, they were using the crematorium of Weimar, the civilian crematorium.

5:13David McWilliams: So the emaciated bodies were coming back from the concentration camp to be burned. Now, the fascinating thing about Greenspan, John, The Greenspan issue is that the first batch of prisoners to be taken to Buchenwald concentration camp were taken before the Second World War. They were taken in 1938. And there were thousands of Jewish prisoners who were arrested after Kristallnacht, which was in November 1938 when the Nazis turned on the Jews for the first time absolutely publicly. and they destroyed, it was called Kristallnacht because, of course, it was all about the smashing of glass, the crystal.

5:59David McWilliams: The smashing of glass was the smashing of Jewish shops, synagogues, etc. But the question is, John, why did the Nazis pick that date, the 9th of November, 1938? They picked that date because they were looking for an excuse to turn on the Jews. And the excuse they got was a week previously, the German ambassador to France, was there was an attempted assassination on him. They missed the ambassador, but they shot a young Nazi official in the embassy in Paris. The guy who shot him, this is the interesting thing, what was his name? Herschel Greenspan. The same name as Alan Greenspan. Was he related?

6:42David McWilliams: Well, if you look at the detail, Herschel Greenspan's parents emigrated from Poland to Germany in the early part of the 20th century, as many, many, what they were called, Ost-Juden, East Jews did, right? Yeah, yeah, yeah. And they ended up in Hanover, and he murdered the Nazi in protest at the treatment of his people in Germany, because it was becoming increasingly possible to live in Germany, right? As the Nazis tightened the noose on the Jews. Yes, yeah, yeah, yeah. But Alan Greenspan's parents also emigrated from a shuttle in Poland around the same time except they went to New York, not to Germany.

7:22David McWilliams: So could they be related? That's answers on a postcard, please. Anybody out there who knows anything about these two individuals, Alan Greenspan and Herschel Greenspan. So the Herschel Greenspan's name is spelt Greenspan and that would have been the name that Alan Greenspan's parents would have arrived in America with, but there's too many Ys and too many Zs in it. So they turned it and anglicized it into Greenspan. So there you go. That was the first thing. I was intrigued by this serendipitous connection in our subject and last week's discussion with Katja about Buchenwald concentration camp, Kristallnacht, and the role of Weimar Germany in the ascent of the Nazis.

8:05That's absolutely amazing. And actually, just a little aside, by the way, is that while we lost Alan Greenspan, a giant in economics and the Fed and all the rest, We also lost another giant in the music industry, which was Clive Davis. No relation, unfortunately. But Clive, I don't know if you know anything about Clive Davis. He was the booker's booker, was he? Oh, man, he was amazing. He was like Mr. Music Business that everybody, literally everybody looked up to. But he signed like everyone from Aretha Franklin to Springsteen to Earth, Wind & Fire to Pink Floyd to Barry Manilow. Oh, well, okay, fair enough.

8:47But...

8:48David McWilliams: John, I think Barry Manilow and you. Yeah, there's something there. It's the nose. Okay, it's the nose. It's the Shrone. Exactly. But he was an amazing character because he really understood people and art and fashion and ego and the whole lot, which made him a brilliant mentor. And, you know, he's responsible for nurturing the careers of, Aretha Franklin and Whitney Eusen and even Miles Davis as well. It's all Davises this week. It's all Davises. It's all Davises. Now, I don't think you're a million miles from me in this, John. Because there's a good chance that your mate, Clive Davis, knew Greenspan.

9:32David McWilliams: Why? Because Greenspan, they're about the same vintage. They both died very old. I think Davis died in his 90s. Yes. Greenspan was 100. Both New Yorkers. Yeah. Both absolutely obsessed with music. So Greenspan, again, another weird... Greenspan was into music. A weird, weird, weird, weird coincidence, John. This week after the festival, I gave a speech in the Guinness Storehouse to a bunch of scientists about economics and innovation and all this malarkey. A meeting of minds there. Exactly. I was sitting down, exactly. I was sitting down, John, beside a French woman and she was chatting away to me And she was really, really very, very humble.

10:13David McWilliams: And she didn't say anything. We were talking about music and la, la, la, la, la. And life and living in Ireland and living in France. And she was living in Berlin. And I asked her about Berlin and all that sort of stuff. And it turns out she was a Nobel Prize winner for biochemistry. Wow, nice. Her name was Emmanuel Charpentier. And she won the Nobel Prize about five or six years ago for her research in editing genomes, right? Really deep, deep researcher. Apparently one of the most important breakthroughs in biology since the massive breakthroughs of the last century. So I was chatting away, but the interesting thing is, and back to music, here's somebody with an incredible mathematical brain, incredibly, incredibly astute scientific brain.

11:05David McWilliams: And we talked about music and going to gigs and her fascination with gigs and her fascination with electronic music. And her fascination with all the... Yeah, yeah, yeah. We're chatting away. We're having a really, really good chat. Now, the reason I tell you all this is, John, is that Greenspan, and this brings in your friend Clive Davis, Greenspan started his career as a clarinet player. He studied clarinet at the Juilliard School of Music, one of the most famous schools of music in New York. I know it well, yeah. He played as a young bandsman with Stan Getz. So think about how good he was, right?

11:40So Greenspan was an extraordinary musician

11:44David McWilliams: before he was an economist. And he always made the point, and many musicians will make the point, that music and maths are close together because music and maths are all about various different rhythms, various different sounds, various different beats, various different frequencies and repetitive patterns. And so Greenspan is testament to this connection between music and mathematics and which people who study music will always say that music is sequencing. And you know this as well because that's your business. So Greenspan was making the economy dance. Is that what you're saying? Greenspan was making the economy dance.

12:28David McWilliams: Exactly, Johnny Boy. Exactly, Johnny Boy. No, but my point is that the interesting thing about Greenspan, he was always, always immersed in data and music, right? So when he was a kid, he had this aptitude for mathematics. He had invented codes himself, which he could use to predict baseball scores. So his real thing was that he was a quant before quants were ever invented. And his thing was music and maths. These were the two things that went together. And so good was he at the clarinet that he had played with Stan Getz. So he must have been extremely good as a young man. And we know the Juilliard School of Music is one of the best in the world.

13:12David McWilliams: Well, it's certainly one of the best in New York City, isn't it? Yeah. Oh, absolutely. No, it is one of the best in the world, along with the likes of the Berklee College of Music and that kind of stuff. But it's interesting, though, that, you know, when you talk about maths and music, I know we're going down a particular line, But that is why I think AI, which is algorithm and Matzi computery based stuff, lends itself so well to creating music. And that's why we've got a proliferation of AI music. But it has taken the human out of music. And therefore, AI music basically has no soul. Well, that's true.

13:51And that's the bit that we connect with. But anyway, I digress.

13:54David McWilliams: No, but it's interesting. You think of octaves and quavers and crutches. These are all ratios. These are all fractions, right? So this is all mathematics. The whole thing is based on fractions and ratios. And I hope you're right about AI, but we will come back to AI in the second part of this discussion. Fair enough. Because again, this discussion is about Greenspanism. Okay, well, let's start right there then. Tell me, what is this Greenspanism? Okay, so Alan Greenspan, as well as being the longest serving chairman of the Fed, was in a previous life a disciple of Ayn Rand. And Ayn Rand, so in the early 50s, Greenspan, introduced by his first wife to Ayn Rand, got into this cult in New York called libertarianism.

14:49And libertarianism, if you want to read about it,

14:52David McWilliams: was the basis of the book The Fountainhead and Atlas Shrugged. Both of these books were rejected by publishers and eventually when they were published, they sold tens of millions of copies. Now, I read The Fountainhead when I was in university. I remember being quite impressed by it initially and then began to break it down and say, well, hold on a second. So the libertarianism is, in effect, no government intervention, no taxation, no state intervention in anything, no welfare state. Everybody starts at a blank slate and everybody is, in effect, live and let live, living in the jungle. Okay, so hang on there one sec.

15:39Everybody starts with a blank slate. I mean, I can see that as the number one fundamental flaw and all that because nobody starts with a blank slate.

15:48David McWilliams: Exactly. So everyone starts with what our children now call your privilege. Yes, yes, yeah, yeah, yeah. And so my privilege is bigger than your privilege. Anyway, but his idea was that free markets, are by far and away the best and only determinism of what companies should do, what people should do. You should act in your own self-interest and drawing on Adam Smith, but particularly on Milton Friedman, if you act in your self-interest collectively, the world will be a better place. Yeah, as I know it as Thatcherism. Yeah, Thatcherism, but this is, yeah, and it's interesting you talk about Thatcherism.

16:34So Keith Joseph, who was,

16:35David McWilliams: Keith Joseph was the intellectual mentor of Margaret Thatcher, was also a big fan of Ayn Rand, also a big fan of libertarianism, and a student of Milton Friedman. And Milton Friedman and Alan Greenspan were mates, and they were both part of this intellectual movement. And it's kind of funny, you know, that we know sometimes you think, well, he's an arty guy, he hung out with jazz players, etc. He should have had a more attuned sensitivity to the artist, to the fact that lots of arts are written about and lots of plays are written about the people who fall between the cracks, the misfortunate, those who don't get the breaks, etc.

17:17David McWilliams: But his idea was no, no, no, no, no, that capitalism wasn't merely efficient, but it was moral. Moral. Wow. It was moral. And this is the essential spiritual value of libertarianism, that it is immoral to have a welfare state. In 1966, Greenspan, there's a quote said, he's writing about the welfare state, he says, nothing more than a mechanism by which governments confiscate the wealth of the productive members of society and give it back to the unproductive members of society. And this is real Randian radical language rather than somebody who's going to become the head of the Fed. But the basic idea of libertarianism is that if you generate income and ideas off your own bat, they are yours and should be nobody else and you should be rewarded for them.

18:11David McWilliams: And what they would argue is that if the welfare state is taking tax money from those who are creating it, what it's doing in effect is It's punishing creative people, artistic people, but also energetic, dynamic, hardworking people. And it is rewarding those who don't work. And then who don't create, who are not dynamic. And their idea is that over time, even if the impulse is proper, even if your impulse is coming from the right place, your heart, that over time, these system of incentives, which would be taxing hyper-creative people and hyper-dynamic people and giving money to others will compound and will create a society which is going to be characterized by resentment, which is what Mrs.

19:02David McWilliams: Thatcher called the politics of envy, right? Mrs. Thatcher called taxation, the policies of envy. But see, in principle, I understand that kind of idea of incentivizing people and rewarding people who get off their arses and do stuff and create stuff. But we're not all the same and we don't all have the same opportunities. So the Greenspanism, it feels like it's all or nothing. There's winners and there's losers. Yeah, it's a kind of winner-takes-all economy. And the idea that it's immoral to have a welfare state is bonkers. And also very anti-Christian or the principles of any religion. Oh, John's crows in Christianity.

19:47David McWilliams: We've got us, the podcast is tilted. Atlas has shrugged. According to A.N. Rand, Atlas has shrugged. John is counting the scriptures and the Bible. We know we are into some dark, dark areas here. So you would say from your Catholic Christian point of view that it is amoral to penalize the poor. So you're basically going down the Jesus Christ road of the meek. Yeah, man. Yeah. Okay, right. Okay. Right on. Right on. Okay, so you should say amen to that, John, not right on. Amen, brother. Amen, brother. Right? What Greenspan is doing is something quite different. He's saying it's amoral to take from the creators, to give to the poor and the non-creators.

20:33David McWilliams: Look, anything that is binary, John, is silly, right? Anything that is black and white, yes or right, you know, true, false. The world is complex. Our world is gray. our lives are long, our emotional stability is based not on what I have, I think, but what the rest of us collectively have too. If everybody's in society pulling in one direction, we're probably going to be okay as opposed to a society that is morally arguing for inequalities, right? But Be that as it may, Greenspanism, with all its attendant contradictions and critiques, etc., has become unbelievably dominant. My problem with Greenspan is not from the scriptures, John, or Catholic thinking.

21:26David McWilliams: my problem with Greenspan was that while he was very very very happy to argue for free markets for efficient market hypothesis I'll talk to you about it in a second for lack of welfare etc when he became the Federal Reserve chairman was the most interventionist chairman of all so my view is like if you want to be libertarian away you go but don't then turn around and be the most interventionist chairman. How did that manifest itself, Mike? Like what kind of interventions was he doing? So the first intervention that Alan Greenspan made was in 1987 after the 1987 crash, right? So he was just in and there was a crash in markets.

22:10David McWilliams: And what he did was he said, look, there's a crash in markets. Financial market is systemic. The banking system is unbelievably important, let us bail out Wall Street. So let us reduce interest rates as rapidly as possible. And what we will do then is we will refloat the balance sheet of Wall Street and everything will be hunky-dory. Now, that's okay as far as it goes, and that's a policy choice. But what is difficult to understand about Greenspan and the paradox of Greenspan is that he was a true believer in free markets, but he espoused socialism for the wealthy. So those people in Wall Street could get bailed out but he was always advocating capitalism, red and tooth and claw for the poor.

22:58David McWilliams: So if you fall through the cracks, well then it's your fault. And so the paradox of Greenspan was that he was prepared to adopt almost socialism for the rich and hyper-capitalism for the poor. And again, these were these glaring contradictions at the heart of Greenspanism. So essentially, he prioritized companies, corporations, shareholders, and Wall Street over the individual. Over Main Street. Yeah, okay. And maybe more egregious, he was a booster of policies that were much more likely to make Wall Street much more fragile and make Wall Street incur risk much more than anybody else. There's a thing called the Greenspan putt, which came to be understood that as long as Alan Greenspan was in the Federal Reserve, he would put a putt option under the floor of how low American shares could go.

24:07Just explain that a little bit more.

24:08David McWilliams: So in the options market, you've calls and puts, right? A call is the right to sell. So if you think things are going up, right? Yeah. And you're an options trader, what you do, you say you buy a call option, which is a right to buy a certain stock or an index at a certain price in three months' time. So if you're expecting, for example, prices to rise, you buy a call option today, which if you can buy in three months' time at today's price, given that you think in three months' time prices will be much higher, you will have made a very, very good bet. Right. So it's like buying a Ryanair flight.

24:51David McWilliams: It's like buying a Ryanair flight today in advance of things going tomorrow. Exactly. So you buy your holidays in January. So as you know, right, same idea. A put option is if you think, for example, that prices are going to fall, you buy the right to sell at a lower price in the future. Now, what that does is that prices are falling and you have the right to sell rather than to buy. It means somebody else has the right to buy and that other person takes the hit. So that's the language of financial markets. A little bit all over the place, right? But just say, if you think prices are going to fall, you buy a put option.

25:34David McWilliams: If you think prices are going to rise, you buy a call option. And ultimately, this is the options market, the essential nature. So it's protectionism. It's protectionism. It's an insurance policy, actually. It all stems from the Chicago exchange, which is an agricultural exchange, because agricultural prices can never be guaranteed. You don't know what the price of barley or the price of soya beans or the price of hogs is going to be, John. Pork bellies, the price of hogs in the future, right? So there came to be understood, because Greenspan always used the Fed's firepower to bail out Wall Street when there was a problem in financial markets, this came to be understood as the Greenspan put.

26:20David McWilliams: And the Greenspan put was like a floor that if prices fell too much, Greenspan would come in and he would actually buy up stuff, putting a floor underneath the fall in prices. Now, if you understood that somebody, i.e. the Fed, was going to come in and do that with public money, then what it did is it allowed you to take more risk because you understood that Greenspan is going to bail you out. Right. And the people pay for it. That's bonkers. It's not so much the people pay for it because, again, if you read that really interesting book called Money, A Story of Humanity, you realize that it's not...

27:05David McWilliams: When the Fed prints money, it's not taxpayers' money, right? Yes. It's actually government-created liquidity. So it's not like you're taking from Joe Bloggs. But it is backed by the tax system. It's backed by the tax system. And ultimately, if you do this too much, you will undermine the value of the currency. But to come back to the point, basically what Greenspan was doing, John, was that he was bailing out his mates in Wall Street. Yeah, yeah. under the auspices of systemic risk. That's number one. But number two, and more egregiously, by giving the impression that he would bail things out if shit hit the fan, he encouraged Wall Street to take on more and more risk.

27:48David McWilliams: Yeah. Because the return, or their losses, were going to be actually limited. Yeah. So in the process, what he did was he created the very conditions for the financial crisis. So when the derivatives markets were going out of control, when the stock market was going through the roof, when mortgages were being lent hand over fist, and he, as the head of the central bank, should have been saying, whoa, whoa, whoa, hold on a second. This is building up risk all the time. He said, don't worry. I believe in something called the efficiency market hypothesis, which is that markets are always accurate, and demand is always a reflection of fundamentals, and there can be no overvaluing or undervaluing of any assets.

28:33David McWilliams: That's what he believed based on Milton Friedman's ideas. And of course, what this did was it basically militated against anybody taking responsibility before the crash for what was about to happen. Now, we know that the role of central banking should be always to try and take away, as they say, take away the punch bowl before the party gets started. So take the booze away before everyone gets two hammers, right? Yeah, yeah, the killjoys. Greenspan, on the other hand, was actually serving tequilas at the party. And topping it up. Serving the financial equivalent of tequila and topping it up all the time, making sure that the party went bonkers.

29:15David McWilliams: At the time, it felt great because you were having a laugh, but the hangover that come down is much, much worse. So this is what I found very odd about Greenspan, was this paradox at the top. And I remember having to ingest this efficient markets hypothesis when I was in university. So Greenspanism wasn't just articulated by Greenspan, but a whole movement in the 1970s and 1980s in academic economics, which was kind of, it seemed to me, intellectually so rigid. And this faith and this sort of thinking seemed to, the idea was that if left with their own devices, markets are always right and will always write themselves.

29:57David McWilliams: Even as a youngster, I thought, that doesn't feel right. That doesn't feel like a reflection of what reality is. So, you know, you've got this fusion of libertarian philosophy and economic numerology fusing together. And university departments became infected with this sort of thinking. And I remember even studying in the 80s thinking, this is kind of daily gruel of academia and it doesn't seemed to me to be right. But luckily, there was another countervailing philosophy to Greenspanism, which I thought was much more interesting. Okay, so Greenspan was kind of dehumanizing economics and the financial markets.

30:38But let's get into this countervailing view of the economy after a little hydration break.

30:45David McWilliams: Oh, yes, indeed.

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31:24Okay, Mac, on one side we have Greenspanism, which is all about the market is always right and let the market decide and all the rest. But you're saying there is a countervailing view of the economy. Explain that to me.

31:40David McWilliams: Well, I mean, I was lucky enough when I was studying that some lecturers continued to operate and talk about various different types of interpretations of markets and finance, whatever. And the two observations were from two economists, Hyman Minsky and Charles Kindleberger. Oh, yeah. This was a very, very different worldview because where Greenspan argued that markets are fundamentally stable and right, Minsky and Kindleberger actually argued that markets are inherently unstable. The more stable markets appear, the more unstable they will become because the more stable markets appear, the more risk will be taken.

32:22David McWilliams: And it's the risk and it's the layering upon debt of more debt and more debt that makes markets inherently unstable. They warned that human nature plays a pivotal role, right? This was their whole idea, that we kind of get excited together, we egg each other on, and then these create the conditions for bubbles where prices go way above what's justified on fundamentals. And then once the crash comes and the associated debt and bankruptcies will mean the economy can become trapped in long, long recessions. So Kindleberger and Minstey's view was like, hold on a second, we need to avoid these bubbles.

32:58Yeah, and it's something we've seen play out on numerous occasions.

33:03David McWilliams: And anyone who's Irish listening to this will know exactly what happened in 2008. So even as a student, I used to think that's a much more, it seems to me like a more plausible picture. But Greenspan was mathematical. And in economics, there's a weakness for mathematics and elegant mathematics. Whereas Minsky and Kindleberger were more discursive. They were more likely to write books that explained what was happening in human terms rather than in mathematical terms. and as I've always said that economics kind of gets hijacked by the fashion of the times so I've told you before in the 19th century economics was obsessed by biology because biology was the science of the time 20th century was obsessed by physics and now you know what is economics obsessed by now?

33:53David McWilliams: EDM What's EDM? Electronic dance music No! It's obsessed by psychology which is science at the moment Yeah Think about it economists never talk what psychology 20 years ago. Now we're all over it like a rash. So economics attaches itself to whatever is vogue and leans into it and elbows its way into it. Does that kind of take away the credibility of economics then? Well, this is why... It's a bit fad driven. This is why it's like having flares, John. Right? Flares disappeared in the 70s and came back with an absolute bang in Manchester in the yoke-taking happy Mondays, stone roses, guys. And now they're gone again, but they might be back.

34:39David McWilliams: So economics... Oh, they'll be back. Don't you worry. I have them in my drawer. I know you do. I know, I know. You've got your bottle green bags. Anybody with a memory of the mid 1970s will know what bottle green bags are. They were up there with Wrangler parallels and a Wrangler jacket as the look du jour of the mid 1970s. But let me come back to economics. One of the reasons I love doing this podcast, John, is I like observing where economics, which fork in the road it takes, right? Yeah. And now when I see the obsession with behavioral economics, what I'm just seeing is a science, a soft science economics looking for relevance, right?

35:21David McWilliams: And hijacking and levering itself into another area. But that's fine. That's cool with me. I'm not a purist, right? But to come back to Greenspan, I think Kindleberger, Minsky's views, much more plausible. Greenspan, because he was the head of the Fed, had such credibility. And because he'd managed to preside over an American economy that despite crashes and the dot-com crash and the 1987 crash, et cetera, had done very well, there was a sense that he could do no wrong, right? And therefore, Greenspanism became the mainstreams go to as, well, look, this works. So stop you're talking about inequality and poor and all those sort of things.

36:02David McWilliams: This thing works, right? And this, of course, materially affected the Irish psyche in the Celtic Tiger. Because policymakers here, academics here, public institutions all believed in the Greenspan thing called the soft landing. And the only way they could have believed in that is if they also believed that markets were more or less efficient. And when there is a landing, it's going to be soft, right? Now, of course, Ireland, therefore, was captured by Greenspanism in a ridiculously profound way. And that explains why all the policymakers in Ireland, all the academics, all the economists look the other way.

36:45Yeah, go on, explain that a little bit more.

36:47David McWilliams: So basically what they said, look, if it works in America, it works here. There can be no housing bubble. It's only a reflection of fundamentals. The banks won't go bust. The banking system's fine as long as the capitalist system's working and it's working in a splendid fashion. Can't you see the growth rates? Can't you see the wealth? Can't you see the incomes? This is all permanent. Why? Because the efficient market hypothesis holds and we're now just moving on to a different type of economy. And people like me were saying, hold on a second. Yeah. Wait a second. if you go back to your basic Kindleberger and Minsky, this is a bubble.

37:24David McWilliams: This is a crazy bubble. Yeah, because there's so many variables in the economy that it's not black and white. And that's the thing that makes it so hard to define. It depends how you look at it. It's a bit like how we look at the Irish economy now and we are one of the richest, if not the richest countries in the world. Yet we don't feel it. And we know we're not. We know we're not. Yeah, yeah, yeah, yeah. It's kind of, John, you know what it is? It's common sense, right? Yeah, yeah. So Ireland got mugged by Greenspanism. And the mugging was severe. And we know that we suffered after that. Because I believe that Greenspan took the human out of economic analysis and he replaced real life behavior with assumptions about how humans should behave rather than how we actually behave.

38:15David McWilliams: As a result of that, I think Greenspan and his disciples walls themselves up a financial cul-de-sac in 2008. And the difficulty for me is, despite the catastrophe of 2008, and this I think will end and we'll go on to the long-term implications of Greenspanism for the American economy after this, because we are watching the World Cup at the same time, is that Greenspan in 2008, 2009 was asked to testify in Congress, say, look, what the hell happened, right? You were the guru. It's all crashed. The banks are bust. The economy's in a recession. The debt GDP race is going up. People are throwing their keys back.

38:56David McWilliams: There's defaults everywhere. The housing market's collapsed, etc., etc. And he was asked by a congressman, look, were you mistaken? It's a fair question. Yeah, just look at the end. Did you just use the wrong models? Were you intellectually mistaken? And this, I think, is where Greenspan's reputation and legacy was besmirched by himself because he could not say, you know what? I think I was wrong. And that's the problem. So he said in his quote, he said, so the guy said, were you mistaken? And his response was partially. I made the mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms.

39:41David McWilliams: I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well. My experience has been in the business I was in, I was right 70 % of the time, but I was wrong 30 % of the time. And there were an awful lot of mistakes in those 21 years. Jesus. Wow. Wow. And that's what pissed people off. Yeah, absolutely. I can imagine. Because the American economy was on its knees. Yeah. And the architect of the economy said, I didn't get anything wrong. Yeah.

40:25David McWilliams: I was right most of the time. The arrogance of that, yeah. And the point is that, you know, the one thing we know is that we're wrong all the time. And it's only actually in terms of scientific breakthrough. So the whole history of scientific innovation and breakthroughs is littered with the corpses of geniuses who admitted they were wrong. That's what's called progress. And I think that... Well, you've got to name the problem before you solve it. And also you've just got to say, yeah, we screwed it up. I can't believe it. So I think with his passing and the kind of the unrepentant attitude in the face of this financial calamity, I think it really damaged the economics profession.

41:07David McWilliams: because I think he set the tone for a lot of economists who said, well, I wasn't wrong. It was just those different days at the time, right? And I think he undermined the credibility of all experts because the average guy said, well, if the experts were wrong and then in the face of being wrong, they wouldn't admit they were wrong. Well, what's the point? And you remember the Brexit vote in the UK? One of the big things was don't mind the experts. Don't worry about the experts. You know, we the people have it right. So I think we're going to want - And that's what Trump is doing at the moment.

41:34David McWilliams: Yeah, but I mean, Trump you'd never have regarded as an expert. But what he's doing, he's undermining the experts. He's undermining, but that's what I mean. He's undermining the experts. Yeah, so Fauci and the pandemic, all that sort of stuff, right? Yeah, yeah. So basically, to sum up, Greenspan, a giant of economics, a dwarf when it came to his own responsibility. And yet the legacy of Greenspanism is evident everywhere. financial markets are free. Capital is free. Inequality has got worse. Financialization has become the norm. And the American economy, which is what we're going to discuss in part two of this podcast, which is out on Thursday, unless of course you're a Patreon, you will get it on Wednesday, will be the legacy of Greenspan in the casino nature of the American economy that has emerged under his tutelage and has managed to become the norm after he is gone.

42:34David McWilliams: And that, I think, is his legacy, John.

43:04We'll see you next time. OregonExpress.com slash explore-go. Terms and points cap apply.