The whole sorry business

Image of Gillian Tett

The financial crisis of 2008 produced plenty of arresting images. For my money, however, one of the most intriguing took place on October 23, when Alan Greenspan, 85, former chairman of the US Federal Reserve, testified to Congress about the banking disasters.

As the cameras whirred, a haggard Greenspan admitted that he had been wrong about how finance worked. “Yes, I’ve found a flaw [in my thinking],” said the man who was once dubbed “maestro” for his apparent omnipotence. “I don’t know how significant or permanent it is. But I’ve been very distressed by that fact ... What went wrong with global economic policies that had worked so effectively for nearly four decades?’’

The answer will undoubtedly generate reams of economics papers for years to come. These days, some pundits think that what Greenspan was really saying on that fateful October day was that his whole concept of free financial markets was wrong (and, by default, blame this vision for the entire financial mess; as in, for example, David Sington’s documentary film The Flaw, released in the UK earlier this month).

Three years on, Greenspan denies that. Last week, I chatted with him in the smart, wood-panelled office where he now works in Washington. As he recalled 2008, he insisted that there had been “gross misrepresentation” about the “flaw”: far from suggesting that all of his free-market theories were wrong, he was actually saying that he had failed to spot how changes in banking culture had made the bankers less able – or willing – to curb the risk in their banks. He also admits that government institutions held far more subprime mortgages than he realised when he ran the Fed (since they misclassified these), and underestimated how far the housing market could fall. “I thought that house prices might go down 8 per cent,” he explains. “But I was wrong.”

Such semantics will certainly not appease his (many) critics. But it does beg another fascinating question: is there ever an effective way for a politician, corporate leader, or central banker to admit that they have made a mistake in their thinking?

Over the course of history, some societies have developed traditions which enable leaders to express regret. In Jewish culture, for example, there is a well-developed concept of sacrifice and atonement. But in the modern western policy sphere there is a paradox. On the one hand, there are extensive modern television rituals that enable leaders to express apology for personal “sins”, such as adultery. Sometimes these “work”, in the sense of producing “atonement”; sometimes they do not. Either way, there is a culturally accepted formula: teary-eyed press conferences, grim-faced spouses and a speech about “seeking forgiveness”, “hurting others” and “seeking help”. The recent tragic spectacle around Anthony Weiner, the former US congressman for New York’s 9th district, is a case in point.

But when it comes to the issues that really matter to mankind – such as public policy or ideology – there is no obvious formula for confessing to a “flaw”. If a leader admits while still in office that he or she has been mistaken with an idea, they are usually expected to resign. However – and unsurprisingly – most officials and politicians do not publicly admit to mistakes, least of all in America. The economist John Maynard Keynes might have once observed that, “When the facts change, I change my mind.” Few modern leaders have that luxury; or not in public.

Frankly this is a pity, not least because it makes so much political debate feel immature. Most voters know perfectly well that intellectual mistakes occur. In any American bookstore today you will find reams of “personal growth” books which point out that acknowledging – and then learning – from mistakes is a key part of life. But not, it seems, in public policy. Last week, for example, Newt Gingrich, the Republican presidential candidate, apologised for having criticised the healthcare plan produced by Paul Ryan, another Republican. “When I make a mistake ... I’m going to share with the American people … because that way we can have an honest conversation.” However, that did not appease the media; indeed, it may have damaged him more.

So when I listen to Greenspan talk these days, I have mixed feelings. Personally, I am highly critical of some of his laisser faire regulatory policies and loose monetary stance; in my view, his track record had far more “flaws” than he admits. I also wish that he had recognised those flaws while still in office. Nevertheless, I respect his formidable intellect and spirit of inquiry – and the fact that he has admitted to a few flaws. It is more than most have done. As such it is a challenge to us all. And a reason to watch out for the book he is currently writing. Fittingly, perhaps, it is on why computer models – and economists – sometimes get their predictions wrong.

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