Comment from Econtalk: Ritholz on Bailouts

I just wrote this comment over at the Econtalk website about the podcast with Ritholz on Bailouts, the Fed and Crisis. Check it out, it’s a really good one.

Great Podcast. I have to agree with Doc Merlin and Brian, the “ungovernable” meme is a smoke screen. The only reason people use it, is because we, the people, don’t agree with their ideas. Since we don’t want to do what they think is best, they call us ungovernable. It’s sheer Elitism in all it’s glory.

I’ve been thinking about the Greenspan comment made by Ritholtz and Russ. Why did Greenspan, a devotee of Rand, do what he did and get away with it for so long?

I think the answer can be found in, you guessed it, Hayek in Intellectuals and Socialism.

The point which is important for us, however, is that the scholar who becomes a university president, the scientist who takes charge of an institute or foundation (in this case the Head of the Fed)…all rapidly cease to be scholars or experts and become intellectuals, solely in the light of certain fashonable general ideas.

I would argue that once Greenspan and now helicopter Ben stopped being scholars and became Intellectuals, in the Hayekian sense, they fell victim to all the temptations that a position of power has; namely hubris.

I think they started to buy into what all the thousands of “Yes-men” were saying about them. They are the Maestro. I don’t think that term specifically points to Greenspan but to any Fed Chairman that makes certain players a lot of money.

The Government and the Fed, by very nature, pick the winners and losers of the Market Game. The smart players know, that it’s a good idea to kiss up to the boss, so when the hammer does come down, they come out on top. The ones that don’t kiss up will be the ones that go down. I can’t remember which Podcast Russ made the comment about Bear and their non participation in the rescue of Long Term Capital Management, but it was something to that effect. Bear didn’t kiss up to the Fed, so when it came time to bail out Bear Sterns, the Fed gave them the finger (Oops, we aren’t going to give you that loan, we are giving it to JP Morgan to buy you!). The Fed did step into help out GS and Merrill (Didn’t BofA CEO Lewis say something about being fired by Paulson if he didn’t buy Merrill), who did participate in the bailout of LTCM.

I think our current POTUS embodies this as well, how people in power will tend to believe the hype about them, especially when it is ultra-flattering. It was Greenspan’s fatal flaw, and unfortunately because he welded so much power over the entire economy, his flaw became everyone’s problem to deal with.

The thing is, when you have an organization like the Fed with so much power, any mistake can lead to disaster. It’s just begging for another Black Swan event. Of course, hubris plays an enormous role in it as well. It’s the Fatal Conceit of all planners, that they know best.