Libertarianism and deregulation successfully trashed the US economy. Americans lost their savings, their homes, and their jobs in record numbers unprecedented since the Great Depression. Former Federal Reserve Chairman Alan Greenspan’s libertarian philosophy that markets know best is responsible for the U.S. financial crisis that erupted at the end of George W. Bush’s presidency. Greenspan’s acolytes – Treasury Secretaries Robert Rubin, Larry Summers, and Timothy Geithner – also bear responsibility for the existing international economic debacle. And it all began with Ayn Rand.
Rand immigrated to the United States from Russia in 1926, the year Alan Greenspan was born. The celebrated fiction author of the novels The Fountainhead (1943) and Atlas Shrugged (1957), Rand championed libertarianism. She famously told Mike 
Wallace in a 1959 CBS television interview that she believed in “the separation of state and economics.” She opposed all regulations of markets. Greenspan became her pupil and she was present when he was sworn in as President Gerald Ford’s chief economic advisor. That she came from an oppressive government regime likely explains her extremist laissez-faire attitude – something that Republicans love.
By the time Rand became a Hollywood screenwriter, President Franklin Roosevelt had signed the Banking Act of 1933 (Glass–Steagall Act). This New Deal legislation established the Federal Deposit Insurance Corporation (FDIC) and introduced banking reforms to control speculation. Following an era of corruption, financial manipulation and "insider trading" that resulted in more than 5,000 bank failures after the 1929 Wall Street crash, Glass–Steagall Act also allowed the Federal Reserve to regulate interest rates in savings accounts.
Deregulation fever took hold in 1980 with the enactment of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) that gave the Federal Reserve greater control over non-member banks. Among other things DIDMCA allowed banks to merge, forced all banks to abide by the Fed's rules, and removed the powers of the Fed under the Glass–Steagall Act to set the interest rates of savings accounts. Ronald Reagan became president that year, famously saying that government was not the solution to the country’s problems, “government is the problem.”
The Alternative Mortgage Transactions Parity Act of 1982 (AMTPA) removed
regulations that barred banks from making anything but conventional fixed-rate loans. That gave birth to the kind of mortgages that put borrowers in default situations today. Adjustable-Rate mortgages (ARM), Balloon-payment mortgages, and Interest-only mortgages crushed borrowers. The option-ARM allowed borrowers to underpay by as much as they want during the first few years of the loan so that the unpaid monthly interest got tacked onto the size of the loan.
Article comments
1 - Rich Paul Freeman
Greenspan would never have led an evil organization like the Federal Reserve if he had still been a Libertarian. He was one of us in the 1960's. He sold out long ago.
2 - jamminsue
Tommy, thanks for the history lesson
3 - Igor
Excellent summary, Tommy. Thank you.
Every BC denizen should read it over a few times, and even copy it to a permanent file for future reference.
Central to Greenspans mistake is his childish belief that markets would be self-correcting. It takes only a moments thought to see that markets fail under monopoly control. But a more insidious influence that Greenspan failed to see (and may still fail to see) is that in those Big Money markets the interests of the Executive Officers who make decisions affecting everyone, even the shareholders, sharply divide from the shareholders! Indeed, the officers have little vested interest in the fortunes of the shareholders (just as they have little interest in the fortunes of the employees, as already demonstrated) and that they readily subvert the interests of shareholders in favor of their own interests. They do it by cream-skimming. They demand bonus plans and employment contracts in which they get payoffs no matter what happens. They successfully insure themselves against loss. For example, they always have a clause that produces a bonus if revenue goes up, and they also have a clause that produces a bonus if they reduce costs. Thus, if business is good and revenues increase they get a bonus for that. If business is bad and sales go down they only have to layoff a bunch of people to produce a cost saving which will give them a bonus. They can't lose.
Greenspan (and Rand) were simpleminded, and were mistaken that they could make a complex system like an economy work with such a simpleminded dictum as Free Markets. Not that the alternative is attractive: a market with many rules. But, after all, that is what the average citizen meets in his daily efforts, why should businessmen and financiers be spared?
4 - Ralph
Thanks for the article. Libertarians in fact predicted the crisis,criticized Greenspan's interventions, and many prospered using Libertarian "Browne" portfolios that weather such government-coerced crises. For info on people using voluntary Libertarian tools on similar and other issues, please see the non-partisan Libertarian International Organization
5 - Todd Thompson
This is an outstanding summary. I might want to argue, however, that pure libertarian economics would require more than the work of the Federal Reserve chairman to implement. Unless it goes "whole hog," it's just a pig in lipstick.
Great work, Tommy.