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Bubble Boy: Alan Greenspan’s Rejection of Reason and Morality

From The Objective Standard, Vol. 3, No. 4.

Not long ago, Alan Greenspan was widely regarded as a sort of gnome of Zurich, on whose unique, ineffable powers our prosperity depended. His famously cryptic mumblings could spook markets and spur investors, many of whom believed that his every word carried great weight.1 One news channel would cite the thickness of his briefcase before certain meetings as an “economic indicator.”2 The “Maestro,” as one biographer called him, even appeared on the cover of Time as part of a three-man “Committee to Save the World.”3 And, most remarkably, Greenspan’s reputation as a brilliant economist and potential savior of the world was part and parcel of his reputation as a capitalist. Indeed, he had studied under the great “radical for capitalism” Ayn Rand and had written cogent essays in defense of individual rights and free markets.

But then, on October 23, 2008, media outlets around the country dropped a bombshell: Alan Greenspan, “lifelong champion of free markets,” had declared capitalism dead.4 The financial crisis, it seems, shook Greenspan to his core and led him to conclude that free markets do not work. As the San Francisco Chronicle reported:

Asked by committee Chairman Henry Waxman [D-CA] whether his free-market convictions pushed him to make wrong decisions, especially his failure to rein in unsafe mortgage lending practices, Greenspan replied that indeed he had found a flaw in his ideology, one that left him very distressed. “In other words, you found that your view of the world, your ideology was not right?” Waxman asked.

“Absolutely, precisely,” replied Greenspan, who stepped down as Fed chief in 2006 after more than eighteen years as chairman. “That’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well.”5

But the idea that Greenspan possessed “free-market convictions” and that those convictions are why he failed to rein in unsound lending practices is ridiculous. The very purpose of the Federal Reserve—the central bank at the heart of our troubled, government-controlled economy and the money machine that Greenspan operated for almost twenty years—is to manipulate the market. Such a “bank” would not even exist in a free market, and its precise function in our mixed economy is to engage in unsound lending practices as a means of such manipulation.

As explained in The Federal Reserve System: Purposes and Functions, which is available from the Federal Reserve’s website, one of the primary functions of the Fed is “conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy.”6 The document elaborates, explaining that the Fed “influences” the rate of inflation by setting the interest rate (known as the “federal funds rate”) at which private banks can borrow from the various Federal Reserve banks. When the Fed lowers this rate, it thereby expands credit and increases the supply of fiat money—money that is unmoored to any commodity; money that is just printed paper representing no real value in the marketplace; money that is, essentially, worthless. This constitutes inflation and wreaks havoc on the economy.7

Once upon a time, Greenspan openly acknowledged the destructive nature of fiat money. “The law of supply and demand is not to be conned,” he wrote in his famous 1966 essay “Gold and Economic Freedom”:

As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.8

Again, “the earnings saved by the productive members of the society lose value . . . represent[ing] the goods purchased by the government for welfare or other purposes.” In other words, Greenspan acknowledged in 1966 that one of the primary functions of the Fed is to violate property rights—yours and mine—by printing fiat money and thereby coercively decreasing the value of our hard-earned savings.

The Federal Reserve—in all its anti-capitalistic glory—is by its very nature the primary generator of unsound banking. Greenspan knew this in 1966, when he wrote that article; he knew it in 1987, when he accepted his post as chairman of the Fed; he knew it during the eighteen years he manipulated the money supply; and he knows it today. . . .

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Acknowledgment: I would like to thank Craig Biddle for very helpful suggestions on an earlier draft.

1 Meg Richards, “Greenspan’s hints on interest rates push stocks lower,” Seattle Times, April 21, 2004. Available from, accessed on November 5, 2008.

2 Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin, 2008), pp. 197–198.

3 Time, vol. 153, no. 6, February 15, 1999, cover. Available from,16641,19990215,00.html, accessed on November 21, 2008.

4 Sam Zuckerman, “Greenspan shocked at failure of free markets,” San Francisco Chronicle, October 24, 2008. Available from, accessed on October 24, 2008.

5 Ibid.

6 The Federal Reserve System: Purposes and Functions, 9th ed., edited by Lynn S. Fox et al. (Washington, DC: Board of Governors of the Federal Reserve System, 2005), p. 1.

7 Ibid., pp. 15–16.

8 Alan Greenspan, “Gold and Economic Freedom,” in Capitalism: The Unknown Ideal, edited by Ayn Rand (New York: Signet, 1967), p. 101.