Greenspan's Folly: The demise of the cult of self-interest

I was wrong, Alan Greenspan said in so many words. Seated before his congressional inquisitors in October 2008, with the worst financial crisis since the Great Depression cascading down Wall Street, Mr. Greenspan confessed that the philosophical principle upon which he had based his highly influential professional judgment is—flawed.

For some two decades as chairman of the Federal Reserve, Greenspan had counseled presidents and Congresses that government deregulation of financial markets and reliance upon self-regulation by self-interest was the way of both freedom and prosperity. The collapse of one insolvent bank after another has called such counsel into question.

Here are Greenspan’s own words: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.... The whole intellectual edifice [of risk-management in derivative markets]...collapsed last summer.” Asked whether his ideological bias led him to faulty judgments, he answered: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

One pillar in the “intellectual edifice” of Mr. Greenspan’s economic philosophy is the objectivist philosophy of the late Ayn Rand, whose inner circle Greenspan joined in the 1950s. As explained in her book The Virtue of Selfishness (1964), Rand believed that the individual exists solely for her own happiness and thus that rational self-interest is the only objective basis for moral action. There are no moral constraints on the selfish pursuit of personal happiness, except force and fraud. And there is no moral duty to sacrifice individual advantage for

any greater good, because there simply is no greater good than personal happiness (“egoism”).

In the view of the objectivist philosophy, the only moral economic system is laissez-faire capitalism, which gives free rein to the selfish pursuit of individual profit. Accordingly, government should be minimal, limited to national defense, property protection and criminal prosecution. In his memoir, The Age of Turbulence, Greenspan acknowledged Rand as a “stabilizing force” in his life and reconfirmed as “compelling” the “philosophy of unfettered market competition.”

Ayn Rand and the Egoist Ethic

As his comments to Congress indicate, Greenspan seemed sincerely surprised (and distressed) that financial institutions managed by self-interested individuals seeking to maximize private gain in unregulated markets would not have more prudently protected shareholder interest from excessive risk. He had assumed, implicitly, that corporate executives would seek what was best for the institution and its investors—and hence, that self-regulated self-interest would align private profit with institutional good. Given a Randian ethic of rational selfishness, however, one should be wary of such assumptions.

The egoist ideal is that, short of force or fraud, I pursue my own advantage regardless of others, because individual happiness is the ultimate good. Consider executive compensation. If I am an executive, then on egoist terms, I have limited rational interest to sacrifice personal gain for shareholder equity on account of risk assessment, as long as my compensation package guarantees me multimillions regardless of stock performance. Even if the company crashes, I escape with my “golden parachute.”

The egoist ethic amplifies this divergence between private interest and common good throughout the financial market. Consider the mortgage market. If I am a mortgage lender, then issuing risky loans that are unlikely to be repaid is a good investment for me, as long as the secondary mortgage market allows me to pass the risk of default to others—say, by selling the loans on the secondary market for bundling into mortgage-backed “securities.” Even if the borrower later goes into default, I have gained in the market as long as I am able to remove the loan from my books and reap my commission.

And if I am an investment banker, then purchasing bonds backed by risky loans is also a good investment, as long as a derivatives market allows me to “swap” the risk with a leveraged investor or an insurance company. Even if the underlying loans go into default, I have still maintained my market position, as long as my credit-default swaps pay out and I cover my losses.

In short, as long as there is an unregulated market for betting on loan defaults and as long as there are investors willing to take the bets, financial risks that promise individual profit with potential cost to the common good make rational sense. Of course, this game of risk is sustainable only as long as the bets continue paying off—which meant in this case, only as long as housing prices continued rising. With the burst of the bubble in the housing market, resuluting in a flood of mortgage defaults, bond sellers and default insurers alike were left unable to make good on their promises, leaving bond holders to absorb the losses they had gambled others would pay. Although the risk-takers have reaped their reward in a whirlwind, it is ultimately stockholders and taxpayers who have borne the real cost through losses to retirement funds and education budgets.

Greenspan’s “intellectual edifice” of self-regulation by self-interest has thus collapsed upon its own presuppositions. Having recognized the “flaw” in his thinking, Greenspan now suggests that financial institutions selling complex products (e.g., securities backed by high-risk mortgages) be required to hold a substantial portion of the bonds they issue in their own portfolio. That is, institutions should be required to expose themselves to the risk they market to others in order to constrain the excesses of self-interest.

Reasonable regulation of capital markets and executive compensation to rein in self-interest, though necessary, does not get to the heart of the matter, however. The deeper philosophical issue is that the egoist ethic underlying Greenspan’s theory is an insufficient foundation for how we envision our economic life. According to the Randian philosophy, rational selfishness is the chief virtue, its constraint the chief vice. What the financial crisis teaches us is that excessive self-interest is economically destructive. Unrestrained selfishness is thus itself a vice, undermining not only the general welfare but also self-interest.

While self-interest is the operative principle of the marketplace, and while Greenspan is correct to argue that markets have made expanding prosperity possible for many, the unrestrained self-interest that egoism values has proved corrupting of the very free market in which it was supposed to flourish. Rational selfishness without moral constraint has corroded the trust between financial institutions that is necessary to sustain the flow of credit upon which a market-capitalist economy depends. Not even the lowering by the Federal Reserve of its lending rate to practically zero has been sufficient to stimulate financial markets in the current climate of mistrust.

Buying into the market, inasmuch as it involves risk, depends on trust; but trust in the market cannot be bought. For trust depends essentially upon the trustworthiness of prospective buyers and sellers, borrowers and lenders. Without mutual trustworthiness, freedom of exchange is undercut, even if the cost of buying into the market (the interest rate, for example) is cut to zero. Virtue thus is prior to freedom; and without virtue, freedom destroys itself. The free market cannot operate by self-interest alone, therefore, but relies on ethical presuppositions.

An Alternate Vision

What is further lacking in the Randian philosophy is a robust concept of the common good. The common good is more than the competing interests of selfish individuals (the view on the right). It is also more than the composite interests of special groups (the view on the left). The common good is “the good we have in common”—the comprehensive communal conditions necessary for the virtuous pursuit of human fulfillment by all in society.

Talk of virtue ethics and the common good is the language of Christian moral philosophy. The financial crisis, then, issues a special call to the faithful. American society needs an alternative vision of economic life to the one that has reigned over the past quarter-century and has now brought so many institutions and investors to ruin.

The first task of this alternate vision—in the face of ingrained individualism and endemic egoism—is to reclaim the very fact of our common life as the basis of our obligations to one another. Times of crisis remind us of our inter-dependence and summon us to our mutual responsibilities. Without sustained focus and reflection, however, such lessons learned can be quickly lost in the public consciousness. (Recall how soon the official message after 9/11 shifted from “let’s pull together” to “everyone go shopping.”)

As a Mennonite philosopher, I have found Catholic social teaching to provide a plentiful resource of reflection on these questions, especially Leo XIII’s encyclical Rerum Novarum (1891), where we can find precisely the principle that we need to re-learn: “Civil society exists for the common good, and, therefore, is concerned with the interests of all in general, and with the individual interests in their due place and proportion” (No. 37).

From the perspective of Catholic social teaching, individual interest is inseparable from the common good. The individual’s claim on the community is bound up with the community’s claim on the individual. Such mutuality implies moral principles for the economic system: individual profit is accountable to the common good; gain for the wealthy is immoral apart from justice for the poor; economic freedom entails social responsibility (see the U.S. Catholic bishops’ pastoral letter, Economic Justice for All, 1986).

Another rich resource for reflection is John Paul II’s centenary reflection on Pope Leo’s encyclical, Centesimus Annus (1991), which includes a comment (No. 17) with a remarkable relevance for the current crisis:

We see how [Rerum Novarum] points essentially to the socioeconomic consequences of an error which has even greater implications.... This error consists in an understanding of human freedom which detaches it from obedience to the truth, and consequently from the duty to respect the rights of others. The essence of freedom then becomes self-love carried to the point of contempt for God and neighbor, a self-love which leads to an unbridled affirmation of self-interest and which refuses to be limited by any demand of justice.

The “unbridled affirmation of self-interest”—among buyers and sellers, borrowers and lenders—was indeed the mantra of the Greenspan era. And the “socioeconomic consequences” of that “error” are now evident to all.

Secular Wisdom

The wisdom of virtue ethics and the common good, as Catholic social teaching itself acknowledges, is not confined to the tradition of the church. It would thus behoove people of faith, when presenting an alternative vision to persons of good will in American society who are not Christian, to seek out sources of such wisdom beyond ecclesial documents.

We could reconsider such classic writers as Aristotle, Aquinas and Tocqueville. They understood civil society as the natural setting for human fulfillment, the common good as the moral horizon of individual pursuit and wise governance to be as important as individual liberty for the sustainable pursuit of living well.

We would also do well to consider contemporary writers like Robert Bellah, Stephen Carter and Amitai Etzioni. They not only remind us of the republican ideal of a common good above private interest, but also call us away from the egoist ethic of selfish individualism toward a civic ethic of shared sacrifice and social virtue.

The need now, for both people of faith and all people of good will, is a return to the ethics of virtue and the philosophy of the common good, within which human freedom and individual interest find their “due place and proportion.” The welfare of the nation depends on it.

From the archives, Americas review of Ayn Rands Atlas Shrugged.

7 years 11 months ago
Excellent article. Greed, it turns out, is not so good. That really oughtn't come as a surprise. Now if we can only get all Americans to follow our Church's social teachings. It would be a start to get all Catholic Americans to follow our Church's social teachings. Unfortunately even among Catholics who subscribe to the Church's teachings, it's hard to find any who don't selectively pick and choose which they'll sign up for.
Edison Woods
7 years 11 months ago
May our Lord Jesus, forgive us for ever having taken seriously a pholosophy of selfishness. It is shear stupidity to have supposed that adherents of greed would ever care about the fate of others. This is another proof that history is an important subject of study to often forgotten. We are now paying the price of that neglect.
Paul Louisell
7 years 11 months ago
Hard to argue with the man - Ethics in business and government are both essential. The appeal of Ayn Rand's vision of society is that it applauds individual achievement and warns against the harmful influence of an all powerful state that controls what is taught in our schools; confiscates personal property through taxation and fiat; governs by force; and justifies it by doing all of this in the name of the "middle class" or the "poor". Let's not forget that before the Wall Street types could market their tainted derivatives, Congress embarked on a policy of guaranteeing bad mortgages with the future earnings of tax-paying Americans. This was done for the "common good" without thought of the potentially disasterous consequences that took place. America's founders were right to be fearful of a too powerful central government. I am fearful of the existing one that has undertaken to legislate (control) more and more of our daily lives. And to use a financial crisis, caused in large part by government agencies, to assume even greater control through increased taxation and regulation. Ayn Rand's philosophy seeks to eliminate the "spiritual" from man's make-up and concentrate only on mind and body. This is the weakness in her hypothesis. Morality, ethics, is an essential componant of a free society. Had Congress and Wall Street stuck to the tenants found in the 10 Commandments, this crisis would not have occurred.
7 years 11 months ago
Darrin, We must try to engage in a RATIONAL exchange of goods and services. Reason is the thing. Government intervention, especially as it is rearing its ugly head in the AIG situation holds a gun to our collective head and takes from us. Ayn Rand really preaches the "common good" which is RATIONAL selfishness. If everyone deals with his neighbor in a rational manner, everyone benefits. One person exchanges his/her goods for the goods or services of another. Greed that brings one to break the law or ruin the company that pays them is not rational and, therefore, not what Ayn Rand preached. Unrestrained selfishness doesn't equate to Irrational selfishness. Sorry, Darrin. If I was hiring, I would be looking to hire John Galt.
Darrin Snyder Belousek
7 years 11 months ago
Hi Brian--Good to hear from you this way, and thanks for reading the article and for your comments. I suppose the question turns partly on a definition of 'rational'. Each player in the scenarios depicted does what is rational in terms of maximizing individual profit in the market conditions in which they found themselves. None of the scenarios involves fraud or violence, the two constraints Rand places on egoism. One might say that the players did not think enough long-term or systemically. But, then, how high is the bar of rationality: how far into the future do I have to be able to project the consequences of my actions, how many variables in the system do I need to control for, in order to be rational? Many pundits point out that hardly anyone on Wall Street saw the catastrophe coming, despite all their computer models and market forecasters. There were a few voices in 2005-2006 that sounded warnings from beyond Wall Street, but top people at Standard & Poor, which gave AAA ratings on a lot of these now-worthless bonds, continue to swear that all looked good, that their judgments were correct given the information they had. Sure, there were some investors that made foolish bets, and some lenders that made foolish loans. But most folks in the financial world that played their part in this continue to maintain that they took well-calculated (i.e., rational) risks. So, what is the standard of rationality that applies? It must apply in foresight, not hindsight, mind you, or egoism fails to be the practical ethic it claims to be. Perhaps one might see the present situation as only indicating the need to revise the operative notion of rational behavior in the free market. Still, most of the players in the financial world thought of themselves at the time as behaving quite rationally.
7 years 11 months ago
Warning signs for Freddie and Fannie came on in 2001. I maintain that the government foisted upon the financial world a faulty policy, dating back to the Clinton Administration, when it placed pressure on lending institutions to give mortgages to people who couldn't afford them. Lenders had to come up with loan products that could get these people mortgages--sub-prime loans, ARM's etc. Some of these lenders preyed upon people, others just utilized these products to try to compete. I think the recklessness with which many of these loans were made equates to fraud. Regardless, there was out-and-out fraud in some cases and, at least, the threat of retribution from the federal government(not violence, but still holding the government's gun to their heads) for companies that did not comply. President Obama's policies and his hints at what regulation would look like is both punitive and counterproductive. Regulation will be circumvented. Lawyers love this kind of thing. When we cap salaries, we give bonuses or stock options. People utilize tax shelters to avoid paying taxes. Regulation doesn't work for that reason. Pure capitalism with a rational exchange of goods for services is probably impossible to attain due to dealing with human beings, but it is far better to try to reach that goal than to limit that exchange with partisan regulation. When the government begins to tell everyone how much they can be compensated, the system has broken down.
Darrin Snyder Belousek
7 years 11 months ago
Thanks, Brian, for your follow-up response. (It's almost like being back in high school--only better!) You're right, of course, to point directly to the sub-standard mortgage market as a key source for all this. Those who took sub-prime loans without the ability to pay, perhaps hoping a rising housing market would generate enough equity to allow them to refinance, were indeed acting irrationally. In some cases, such sub-standard lending was exploitive of those who were naive. And, yes, there was surely some outright fraud, by both borrowers and lenders. Incentive structures (fees and commissions) likely encouraged such fraud by mortgage brokers. But does this account for all, or even most, of the mortgage mess? I don't think so. Why would mortgage lenders pay brokers commissions and fees for fraudulent loans? Why would lenders pressure their own underwriters to approve risky loans? Were they just being plain irrational? No, because even such loans were potentially very profitable. And why was that? Answer: the secondary mortgage market and the securitization of loans. Who invented this market? Not Washington, but Wall Street. Was investing in this market irrational? No, at least not based on history: mortgage-backed securities had had a solid record prior to this new regime of risky lending. What made investing in this secondary market and mortgage-backed securities worth the new risks? Answer: the derivative market. Who invented the derivative market? Not Washington, but Wall Street. Now, Washington--from Reagan to Clinton to Bush, Republican and Democratic congresses alike--does not escape responsibility here. Allowing lenders to make risky, sub-standard, sometimes exploitive, loans, allowing financial institutions to blur the line between commercial banking and investment banking, and allowing derivative markets to go unregulated--all of these were foolish policies. And why they were foolish is now clearly evident--because each of these policies is premised on the supposition that self-interest is a sufficient regulator of the market. I do not pretend to know what reasonable regulations are required to protect the economy against excessive self-interest and systemic risk. But I do find Eliot Spitzer's ideas presented in the current (March 30) issue of Newsweek to be quite reasonble. Spitzer ("Making Up for Years of Neglect") argues that we must no longer allow risk to be an externality of the market. It is the rest of us, you and me, who are now paying the price for Wall Street's risk-taking on the "free market." That cost needs to be redirected to those who take the risks and expect to reap the rewards. That, it seems to me, is only reasonable and fair--and I don't see how that is to happen apart from government regulation of risk (analogous to government regulation of pollution).
7 years 11 months ago
Our pastors should now be able to apply the lesson of the parable from Luke 16:1-8 which should rightly be titled the 'imprudent servant'. The end of the parable shows that the servant understood how to correct his error. Wouldst that our financial servants learn this lesson.
Christopher Kuczynski
7 years 11 months ago
We certainly made a golden calf of Mr. Greenspan for years. We danced with drunken exuberance, never asking ourselves whether we were building too many hourses (as thousands of homes sat vacant and boarded up in our cities), or whether it made any sense that very modest homes in places like the Washington, DC suburbs soared in price to more than $300,000. We worshiped Mr. Greenspan's every word -- even more so when we could not understand his obfuscatory langage -- and were actually willing to make investment decisions based solely on his utterance of the day. We even found a way to ustify the unbridled accumulation of wealth within the context of our Catholic world view, though Jesus Christ himself clearly teaches that the acqisition of a disproportionate amount of wealth, by its very nature, causes us to turn our attention away from God. There is no such thing as ever-expanding prosperity. The lean cows have been eating the fat cowrs for thousands of years. Still, the current economic crisis presents us with an opportunity to think about our economic model and the moral and ethical assumptions underlying it. The quetion is whether we will do so if prosperity follows this current recession, or whether we will return to business as usually, according to the Gospel of Greenspan.
7 years 11 months ago
This article is fatally flawed, and enormously behind the times. Gelousek just has not done his homework. Had he done so, he would have understood why "the common good" fails as a social principle. He would have taken a closer look at how regulations from Washington influence the economy, and so on. The blogosphere is swirling with clear arguments that Greenspan was operating in complete contradiction to what he had learned from Rand. Indeed, he contradicted his own arguments, published in the essay-collection titled "Capitalism the Unknown Ideal" (my bolding). If a lie is repeated often enough, there will always be people who will believe it to be true. Belousek is just another of them. The lie began when Greenspan pretended to be an advocate of free markets in accordance with Ayn Rand, whilst imposing interventionist policies. Anti-capitalists, and many capitalists, have fallen for and promoted his deception. This financial crisis was neither a failure of laissez-faire capitalism nor of Ayn Rand's ideas, it was a failure of intensive regulation —with Greenspan's hypocritical contributions. From The American Competitive Enterprise Institute: “While the Dow collapses, we have a bull market in government regulations. The 50-plus departments, agencies and commissions are now at work on 3,882 rules; 757 will affect small businesses. More than 51,000 final rules were issued from 1995 to 2007.” That’s nearly 54,000 NEW regulations, added to what was there before, in only 12 years! One of the most destructive of them all was Sarbanes-Oxley. Yet Belousek acts as if these regulations never existed. That is hardly Rand's laissez-faire capitalism; that’s massive socialist/fascist government interference! At root, those are the very ideologies Rand spent her lifetime hoping to save Americans and America from Now, when the effects of those destructive ideologies from Washington hit the fan, everyone is blaming laissez-faire capitalism instead. They are ridiculous, uninformed, or dishonest. Greenspan dropped any pretense of understanding Rand's arguments well before he became head of the Fed., and he then became a major part of the problem. His monetary policy and suppression of interest rates (1%!!), when Rand would have said “let the market decide”, were an appalling government intervention. Add in the HUD, CRA, CDS, Fannie Mae, Freddie Mac, Sarbanes-Oxley and the recipe for a catastrophically distorted market, including the trading of derivatives, was complete. Those who suggest the cause was deregulation, or lack of regulation enforcement, are not looking at facts. Edward Cline wrote, "Reason and rationality flee when force becomes a factor in men’s decisions, to be replaced with the pragmatism of punishment-avoidance or a risk-free shot at easy money." So imagine YOU are the CEO of a large financial organization. Your competitors are complying with the regulations and appear to be making good for their shareholders, while things are getting tight for your firm. What do you do? You want to buy a house, and the government directly or indirectly tells your lender they will protect him from default so long as he keeps the mortgage interest low. What do you do? You do the pragmatic thing, join in, and trusting in the state's easy money guarantee. As a CEO, if you are able to understand the fraud in the government’s game, you build yourself some protection for when the government's house of cards collapses. Most people believe the "government is here to help" (say by regulation), so they don't protect themselves. You would not have dared to engage in the risky lending or buying that lead to the crisis, were it not for the handful of people in the US government who believed they were smarter than the free market and installed legislation to distort it. Without those people, lending rates would have adjusted themselves years ago, paper money would not have been printed like it grew on<
7 years 11 months ago
The stockholders and Boards of Directors did NOT act in their self interest- they did not insist on compensation packages being linked to company performance. They, therefore, destroyed themselves. If I hire a baby sitter, if I come home to find the baby dead I will not only not pay her but sue her for criminal negligence and possibly murder. The government systems that exist do not properly allow shareholders to gain restitution from CEOs in cases of mismanagement or fraud. CEOs, unrestrained by a properly self-interested corporate ownership and rational civil law, are allowed to run rampant. The flaw in Greenspan's thinking is he is not understanding that the lack of self interest has played a part here: he does not understand that if the self interest of stockholders were unleashed and protected these abuses would not be possible. Why are CEOs allowed to be selfinterested and stockholders aren't? Because CEOs buy politicians, who have no business regulating business.
7 years 11 months ago
The writer's argument is one over-worked straw man. Greenspan is not an Objectivist. He is more a product of the evil ethic of altruism; an ethic this writer shares with failed government functionary Greenspan.
7 years 11 months ago
Ayn Rand has received a tremendous amount of press recently for having very accurately predicted the current crisis that we are now dealing with; normally when someone receives a lot of press they are often misquoted and, in the case of a philosopher like Rand, their ideas are misinterpreted. Whether the author misquoted Rand's ideas in error, or intentionally, (dishonestly), I would like to make the following corrections: Ayn Rand was vehemently opposed to the both the idea of self sacrifice, or of sacrificing others for one's own gain. As she stated many times "The individual must exist for his own sake, neither sacrificing himself to others nor sacrificing others to himself". If I am a Wall Stret investor and I purchase a loan that I know to be bad and resell it to someone else, that would be an example of someone "sacrificing others to himself"; a direct contradiction of her philosophy. Alan Greenspan as a young man, wrote many articulate and powerful arguments against the very policies that he adopted in the later years of his tenure as Chairman of the Federal Reserve. His actions and ideas were a complete contradiction of Ayn Rand's philosophy. With regard to Rand's philosophy he was a complete sellout, and for over 20 years has been strongly rebuked by the Ayn Rand Institute. He abandoned her ideas and his own princlples a long time ago in favor of appeasing Washington bureaucrats, (a common practice in Washington). This current economic crisis was not caused by greed but by massive government intervention in the housing market. One only needs to research the topic and read about the US Government's massive effort to force banks to lower their credit standards and make loans to "subprime borrowers" to understand both the cause and the scale of this crisis. If anyone is interested in finding out what Ayn Rand really believed with regard to the ethics of rational selfishness, not a feeble secondhand misinterpretation, and the disastrous effects of government intervention in the economy, should visit and follow the link "ARC's Response to the Financial Crisis."
7 years 11 months ago
You wrote: One pillar in the “intellectual edifice” of Mr. Greenspan’s economic philosophy is the objectivist philosophy of the late Ayn Rand,... This is utterly false. Greenspan was never an Objectivist, despite some time associating with Ayn Rand, and it has been many decades since he even paid lip service to rational ideas. The failure of Greenspan is the failure of power-lust and government control of the economy, two things that Ayn Rand's philosophy unambiguously repudiates. To put it in terms you may understand: Greenspan was to Ayn Rand as Judas was to Christ.
7 years 11 months ago
This is such utter bunk. Greenspan pays lip service to Rand. But his actions were contrary to virtually every tenent of Objectivism. In the same way that Bush claimed to be a "free market guy" but acted completely contrary to that belief. This author has been deceived by press clippings. So sad what passes for journalism.
7 years 11 months ago
The so-called "cult of self-interest" is not a cult and it remains in existence and is as strong as ever for those who understand the full meaning of "rational self interest". Contrary to the Belousek's understanding, rational selfishness consists of knowing that your mind is the primary tool of your survival and to engage in honest, productive work to support your existence in the course of your life. One of the key points that I disagree with in the article is the idea that trustworthyness is at odds with rational self-interest. A person who is engaged in trade/business with others has every reason to value honesty, both in himself and in others. Because of this, one may count on such a person to act only in his long-term interests and to make no claims to the contrary. When a person you don't know claims to be looking out for your interests, you may be certain of nothing regarding his motivations. It is in this regard that the rationally selfish person is more trustworthy. The other failing of this article is that Belousek argues against self-interest by presenting the idea of the "common good", but he does not define the term. He says that we have a duty to others without stating what duty that is. Rand, on the other hand defines everything in detail: What is good. What is evil. What facts give rise to her definitions. She supports every idea with reference to the facts of man's nature and the nature of existence. A short study of Rand shows exactly how far Greenspan is from being an advocate or an exemplar of her ideas.
7 years 11 months ago
The so-called "cult of self-interest" is not a cult and it remains in existence and is as strong as ever for those who understand the full meaning of "rational self interest". Contrary to the Belousek's understanding, rational selfishness consists of knowing that your mind is the primary tool of your survival and to engage in honest, productive work to support your existence in the course of your life. One of the key points that I disagree with in the article is the idea that trustworthyness is at odds with rational self-interest. A person who is engaged in trade/business with others has every reason to value honesty, both in himself and in others. Because of this, one may count on such a person to act only in his long-term interests and to make no claims to the contrary. When a person you don't know claims to be looking out for your interests, you may be certain of nothing regarding his motivations. It is in this regard that the rationally selfish person is more trustworthy. The other failing of this article is that Belousek argues against self-interest by presenting the idea of the "common good", but he does not define the term. He says that we have a duty to others without stating what duty that is. Rand, on the other hand defines everything in detail: What is good. What is evil. What facts give rise to her definitions. She supports every idea with reference to the facts of man's nature and the nature of existence. A short study of Rand shows exactly how far Greenspan is from being an advocate or an exemplar of her ideas.
7 years 11 months ago
Thank you for your article. A few comments: 1. While Greenspan was associated with Ayn Rand in the 50s, 60s, and 70s it is clear he drifted far from her ideas after then. The man who once morally condemned the Federal Reserve Board became its chairman. The Greenspan story is a sad one of a man who sold his soul for power. 2. The author alleges that all an investment banker has to do is swap the risk to the derivative markets and voila risk is gone. The derivatives market is not an arbitrary consciousness. Individuals trade in that market. They knowingly take on the risk of their investment. If not knowingly, then they should become more self-interested and gain knowledge before investing. If fraud exists, Rand addressed and opposed “fraud” very clearly. 3. As to unregulated markets, our current financial situation is caused by unbridled *regulation*. Politicians (including Barney Frank, Chris Dodd, and yes Barack Obama) and bureaucrats pushed banks to provide loans to those who could not afford them on an unprecedented basis. Where was the “trustworthiness”? The consequence of that policy is obvious. 4. The author fails to define “common good” in a clear manner and leaves its association with individualism very fuzzy. Rand wrote of the common good: “America’s abundance was not created by public sacrifices to “the common good,” but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America’s industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance—and thus the whole country was moving forward and profiting, not suffering, every step of the way.” Thanks again.
7 years 11 months ago
I thought this was a most thought provoking article and from my perspective, an excellent analysis of what took place over my 33 years (retired in 2001) in the corporate world. Personalities aside, i.e., Greenspan, Rand, their defenders and detractors, I saw an economy based on solid financial policies erode over that time to greed and self interest. When I started work there was a sense of mutual corporate responsibility that existed between employer and employee and social responsibility between the corporation and the community - obviously it was not a perfect world but it got worse as any sense of loyalty and commitment to the common good diminished in the 80's and 90's epitomized by the junk bond/S&L disaster of the 80's right into the corporate downsizing and short term thinking of the 90's up to today's very serious problems. I remember many examples of the shift in financial accountability such as bank business loan officers going from credit analysts to sales people no longer interested in "if" a customer could pay but what the immediate return was since the debt shifted to another entity. Perhaps the most telling and prescient experience was a personal one when I was transfered from New York to San Francisco in 1980. When applying for a home mortgage, the loan officer wanted to know my income but never asked about my debts. When I asked why the reply was that houses were going up $1000 a month and "if you default we own the home!" There was a "housing crash" in California shortly after that but apparently the lesson was not learned, as is so often the case. I believe Catholic social teaching to be a powerful tool to bring about justice in this world and an economy rooted in justice is a better economy. The author's proposals are on target. Thanks for them.
7 years 11 months ago
Alan Greenspan repudiated any and all agreement with Ayn Rand and Objectivism the moment he became The Chairman of the Federal Reserve. His alleged "belief in the free market" - which made him hold interest rates artifically low and encouraged irresponsible lending and borrowing - is nothing even closely resembling the actions of a free market. When the government says interest rates should be at a level that the market, if they had a choice in the matter, would reject that is not the behavior of a free market. Any intellectually honest person can see that.
7 years 11 months ago
One cannot fault Mr. Greenspan, the Bush 43 White House, or Congress over the desire to move as many Americans as possible into their own home. For many families, the most important day in their lives is the day they close on their first house. Many families save for years on a down payment, buy a fixer upper, or something smaller than they deserve. Yet until recently, this was the American dream. Rapid house flipping, ostentatious kitchens and home theaters, tear-downs, and other schemes turned the american dream into a nightmare. Easy credit, Ninja loans (No Income, No Job, No assets), turned American and European housing stock into a classic bubble economy. As easy credit rose, so did housing prices, house flippers inflated true value. Debt collateralization reduced the risk for many mortgage companies, they were eager to write loans, and could quickly spin them off without worry as to the true risk behind the mortgages. Like a Miami condo, CDOs were flipped time and time again.
James Lindsay
7 years 11 months ago
Thank you for this article. Ayn Rand's atheism is both as troubling and as corrosive as the atheism of Marx and Engels. I cannot think of a better venue for examining this issue than this publication. Well done.
Darrin Snyder Belousek
7 years 11 months ago
My essay on Alan Greenspan and the financial crisis has, not surprisingly, come under attack by the devotees of Ayn Rand. Here is a response to some of their comments. (1) I am accused of basing my argument on a “strawman,” a gross misrepresentation of the Randian view. Here is how I characterized Rand’s philosophy in my essay: “As explained in her book The Virtue of Selfishness (1964), Rand believed that the individual exists solely for her own happiness and thus that rational self-interest is the only objective basis for moral action. There are no moral constraints on the selfish pursuit of personal happiness, except force and fraud. And there is no moral duty to sacrifice individual advantage for any greater good, because there simply is no greater good than personal happiness (“egoism”). In the view of the objectivist philosophy, the only moral economic system is laissez-faire capitalism, which gives free rein to the selfish pursuit of individual profit. Accordingly, government should be minimal, limited to national defense, property protection and criminal prosecution.” Precisely in order to be able to defend my argument against such a charge, I took this characterization of Rand’s philosophy primarily from Rand’s own summary of her philosophy which she published in The Objectivist Newsletter (1962) and is reproduced on the website of the Ayn Rand Institute: “Man—every man—is an end in himself, not the means to the ends of others. He must exist for his own sake, neither sacrificing himself to others nor sacrificing others to himself. The pursuit of his own rational self-interest and of his own happiness is the highest moral purpose of his life. The ideal political economic system is laissez-faire capitalism. It is a system in which men deal with one another, not as victims and executioners, nor as masters and slaves, but as traders, by free, voluntary exchange to mutual benefit. It is a system where no man may obtain any values from others by resorting to physical force, and no man may initiate the use of physical force against others. The government acts only as a policeman that protects man’s rights…In a system of full capitalism, there should be…a complete separation of state and economics…” ( The charge that I am guilty of a strawman fallacy thus fails. (2) What of Greenspan himself? Was he a true Randian or a traitor to the cause? It is well-known that, even though Greenspan continued to think of himself as a follower of Rand, Randian purists long ago denounced him because he took a career in government regulation of the banking system, which made him in their eyes an “anti-Rand” (or a “Judas” as one commenter put it). One might offer a more favorable gloss: Greenspan did compromise his Randian ideals by taking on regulatory responsibility but used his authority and influence to realize Rand’s vision of unfettered capitalism as far as possible in an imperfect world. Whether Greenspan is a betrayer of the master or a misunderstood disciple is a dispute that Randians can hash out among themselves. In effect, it is not relevant to the issue. For, either way, what remains true is that Greenspan took the principle of self-regulation by self-interest from Rand (from Adam Smith, too, of course) and that he based his theory of the market and the limited regulatory role of government on that principle. And it is that very principle which, I have argued, has failed in practice. (3) Some respondents have claimed that I have misunderstood rational self-interest and its relationship to the financial crisis and that, in fact, the financial crisis has been caused by rampant non-Randian behavior—that is, not by rational self-interest run to excess, but by irrational self-interest. What constitutes irrationality on Rand’s terms? Besides the obvious irrationality of failing to act for my own advantage, irrational action takes two forms, fraud and<
Darrin Snyder Belousek
7 years 10 months ago
I need to amend the above rejoinder to the Randians, specifically concerning (6). The argument there overlooks the fact that economic models of derivative markets were supposed to manage risk and thus allow the rational actor to accurately price risky securities. They obviously failed to do this. Nonetheless, given this, I would make the argument in a more nuanced way: The financial system has collapsed under the excess weight of systemic risk due to excessive investiment in risky securities. What explains this excess and collapse? How did systemic risk grow to unsustainable proportions? Greenspan himself attributes the financial crisis, not the failure of his favored theory of self-regulation by self-interest, but rather to the data fed into the theory. Other economists, along with casual observers such as myself, who lack Greenspan’s ideological commitment to the theory of rational self-interest, point to the theory itself: rational self-interest has proved an insufficient mechanism for regulating systemic risk (cf. Eliot Spitzer, “Making Up for Years of Neglect,” Newsweek, 30 March 2009). I think the lesson of the financial crisis can be seen by way of a limited but useful analogy between financial risk and industrial pollution. A century ago manufacturing industries operated on the assumption that pollution could be externalized into the environment by dumping it into waterways or emitting it into the air stream—“dilution is the solution to pollution” was the saying. The present crisis thus teaches us that, just as the physical environment has limited capacity to absorb pollution before the ecological balance of the system is destroyed, habitat is damaged, and life-cycles are disrupted, so the financial market has limited capacity to absorb risk before the economic balance of the system is destroyed, institutions are damaged, and credit flows are disrupted. As long as an unregulated market allowed risk to be externalized from individual transactions into the financial system—i.e., “diluted” into the “investment stream” by means of securitization of mortgages and derivatives on securities—it was rational in terms of self-interest for individual actors to invest in sub-prime mortgages for the prospect of profit despite the higher risk. Self-interested investors (analogy: manufacturers), each of whom acts rationally to maximize individual profit, have limited interest in minimizing risk (analogy: pollution) as long as the risk of such transactions can be externalized into the market (analogy: environment). The mounting problem of externalized risk in a complex, highly integrated financial system thus cannot be dealt with at the level of individual, self-interested investors—just as the mounting problem of externalized pollution in a complex, highly integrated ecological system cannot be dealt with at the level of individual, self-interested polluters. Because rational self-interest has proved an insufficient basis for protecting all investors from systemic risk (analogy: environmental pollution), therefore, government regulation of financial risk (analogy: pollution-generating industry) is necessary and justified.
7 years 10 months ago
This feature of comment and response that includes the author is remarkable. Glad to see someone standing up for his ideas! So, Ayn Rand waxes philosophical, under the guise of fiction, her ideal economic system; low and behold, we humans Fall short. Sounds like the Catholic Church to me. Jesus' Church of Love viscerated by a greedy, selfish, clergy. Splinter after splinter spinning away for 100s of years and with no end in sight. Sin after sin. Should Christianity and in particular Roman Catholicism be disbanded as unworkable? Of course not! We humans have been mucking up perfectly laid plans since Eden, but that's no reason to stop planning! John Galt is the Rand epitome of rational self interest. Notice that greed is not in his rational make-up. He wears a sensible watch, charges a fair price for his work. He doesn't go BEYOND what he needs. Yet, he does the best that he can do. I think the subleties of Rand's ideas as played out through her characters are missed. Strive to be the best possible you. Imagine if we all actually did that---Jesus and Ayn have.
7 years 10 months ago
I think Greenspan was foolish to think that people as notourisly greedy as Wall Street executives, would choose to help their companies and employees, instead of guaranting larger bonuses for themselves. However, if it weren't for Greenspan's unearned faith in these corporate executives, the U.S. wouldn't have experienced the economic boom throughout the ninties up until a couple of years ago, that it did. Unfortunately, the boom was too good to be true. Ultimately,no matter what Greenspan's policies were or are, he cannot be held responsible for the actions of corporate executives who must swallow their pride, admit their mistakes, and do what they can to improve their companies' standing within the world economy.
7 years 10 months ago
The Objectivist philosophy does not support "force or fraud" as the article states, thus any deception that occurred is contrary to Ms. Rand's philosophy. Risk is part of the free market, which the Church recognizes as an essential right (Catechism of the Catholic Church 2429). If two parties wish to enter into a financial agreement that is risky (i.e. sub-prime loan, credit default swap, mortgage-backed security, etc.), that is their prerogative, so long as no unwilling party's rights are violated. Irresponsibility and fraud are not unchecked, the free market naturally regulates this, after all what person or business would seek to do business with frauds, lairs, and other such unsavories? Unless fraud is present, what right does anyone have to tell someone how to use their property. The market goes through natural cycles, on the down segments the economy is purged of bad practices and companies, however this has not been allowed to happen. Also, a true laissez-faire/Objectivist marketplace would lack regulation short of enforcement against "force or fraud". Thus Objectivist/laissez-faire economic policies have not been followed, and therefore cannot have failed or shown any philosophic or practical fault. Laissez-faire doctrine believes that through the promotion of self and the freedom of action, all will be benefited. It is truly a shame that Mr. Greenspan did not stay true to his principles, he is a brilliant economist and a patriot.
7 years 10 months ago
I strongly agree with the point being made that self-regulation by self-interest may be a slightly flawed philosophy in modern times. This is because there are various financial instruments available in today's market that allow an individual to pursue personal gains at the expense of the common good. If the common good is hurt by the selfish decisions of one, the market place suffers. The financial crisis that we are currently in has been contributed to the selfish decisions of a few that has affected so many. There must be some regulation on certain financial instruments to prevent this from happening again. I still consider myself a strong supporter of capitalism, even though my opinion on regulation semi-contradicts the system of laissez-faire which capitalism relies upon. As the modern world advances, however, adjustments must be made to a capitalist economy.
7 years 10 months ago
Darrin, For someone who is not an economist, I appreciate your summary and analysis of one of the main problems that precipitated the present recession. Also, I find that your recourse to Catholic social teaching is commendable and quite useful in my Catholic Social Ethics course with seminarians and lay students. The follow-up postings are particularly helpful in clarifying points from your interlocutors.
Darrin Snyder Belousek
7 years 6 months ago
Dear Samuel Martin,
Unfortunately, you have misread my article.  I did not make the claim, contrary to what you have said, that the objectivist philosophy supports force or fraud-quite the opposite.  I wrote: "The egoist ideal is that, short of force or fraud, I pursue my own advantage regardless of others..." (emphasis added). The logical implication of this statement is that force and fraud go beyond the bounds of what is permitted by the objectivist philosophy.  So, I think what I've written is accurate. 
The point I'm making in the article is that the various actors in the sub-prime mortgage investment stream-from mortgage brokers to securities bundlers to securities buyers to credit-default swappers-whose excessively risky activity brought down the financial market (a) served their self-interest but (b) did NOT commit force or fraud in doing so and therefore (c) acted in a consistently Randian manner.  The attempt to distance the self-interested actions of investors in the financial markets from the egoist ethic of Ayn Rand for the sake of salvaging the respectability of the latter in the face of the financial crisis, it seems to me, is a clear case of special pleading.
7 years 5 months ago

[size= 11.0pt; font-family: Verdana; color: black]Greenspan's reference to "self-interest" is completely
different from Ayn Rand's.  The latter means by self-interest
"whatever will enhance the objective well being of an agent." It calls to mind the exchange between Crito and Socrates in one of Plato's dialogues, the Phaedo.  Crito asks, "When you are gone, Socrates, how can we best act to please you?" [/size] Socrates
replies: "Just follow my old recipe, my friend: do yourselves concern yourselves with your own true self-interest; then you will oblige me, and mine and yourself too." This is pretty much what Objectivism, Ayn Rand’s ethical position, states: Do what in fact advances your best interest as the individual human being you are!

[size= 11.0pt; font-family: Verdana; color: black]In contrast, Greenspan was talking about the common neo-classical economic idea of homo economicus according to which every free agent always acts in his or her best interest which is simply whatever anyone does (if one is free).[/size]  The former requires of people to adhere to strict standards of conduct while the latter requires no standards for them
to follow only to choose to do whatever they want to do.

[size= 15px; font-style: normal]Whatever Greenspan learned from Rand many years ago he completely abandoned when he turned to technical contemporary economics.[/size]

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