Ayn Rand became a stabilizing force in my life. It hadn’t taken long for us to have a meeting of the minds—mostly my mind meeting hers—and in the fifties and early sixties I became a regular at the weekly gatherings at her apartment. She was a wholly originally thinker, sharply analytical, strong-willed, highly principled, and very insistent on rationality as the highest value. In that regard, our values were congruent—we agreed on the importance of mathematics and intellectual rigor…
I was intellectually limited until I met [Rand]. All of my work had been empirical and numbers-based, never values-orientated. I was a talented technician, but that was all. My logical positivism had discounted history and literature—if you’d asked me whether Chaucer was worth reading, I’d have said, “Don’t bother.” Rand persuaded me to look at human beings, their values, how they work, what they do and why they do it, and how they think and why they think. This broadened by horizons far beyond the models of economics I’d learned… [Rand] introduced me to a vast realm from which I’d shut myself off.
Greenspan admits to being merely a “talented technician” until he met Rand. Rand, by introducing him to values, persuaded him to look at the motives and values of human beings. The question is: did Greenspan really learn anything about human beings from Rand? Or did he merely learn the wrong things?
We’ve already quoted Greenspan’s acknowledgement of mystification over what’s happened in the financial markets in recent weeks. Greenspan admits to being in “a state of shocked disbelief” that the “self-interest of lending instutitions” failed to protect shareholder’s equity. Some of us are shocked that Greenspan should be shocked. Those who understand human nature through and through know that the very notion of “rational self-interest,” so important to Rand and her Objectivist philosohy, is highly problematic: for how can self-interest be “rational” when even the intelligent human being in history, as Santayana once put it, holds “a lunatic in leash.” Nor should we underestimate the pernicious effects of crowd psychology on the so-called “rational animal.” As Schiller once put it: “Anyone taken as an individual, is tolerably sensible and reasonable—as a member of a crowd, he at once becomes a blockhead.”
In other words, if Greenspan wanted to figure out how and why human beings think, or what they do and why they do it, Rand was nearly the last person he should have consulted. Rand’s influence, therefore, did him little good. Despite all the broadening of horizons that he achieved as a consequence of Rand’s influence, he remained, at his core, merely a talented technician. When confronted with the credit bubble mania of the last twenty years, he failed to see the irrational elements that went into its creation. In particular, he never fully appreciated the irrationality of using derivatives as insurance instruments and, until very recently, has stubbornly maintained that regulating derivatives is impossible because such financial instruments are too damn complex:
Collecting data on hedge fund balance sheets, for example, would be futile, since the data would probably be obsolete before the ink dried. Should we set up a global reporting system of the positions hedge and private equity funds to see if there are any dangerous implosions?...I would not be able to judge from such reports whether concentrations of positions reflected markets in the process of doing what they are supposed to do...or whether some dangerous trading was emerging. I would truly be surprised if anyone could.
Here Greenspan is talking like a talented technician, rather than a wise man who has the benefit of good judgment. Reports of hedge fund transactions are not need in order to determine whether systematic irrationality is taking place in the derivatives market. Some of us have known for years the dangers of derivatives. Doug Noland from prudentbear.com warned of such irrationality as long ago as 1999, and I warned about it back in 2003. Even Warren Buffet a few years ago described derivatives as "toxic" and "financial weapons of mass destruction." So it turns out that knowledge of the systematic irrationality of derivatives is possible after all! Nor are reports on hedge funds required to attain such knowledge! Merely knowledge of the the frailties of human nature and the mephitic influence of crowd psychology—knowledge, in other words, that Greenspan could never have attained from Rand.