Restoring the Market-State Balance
IN MUCH-TALKED-ABOUT testimony before the U.S. Congress in October 2008, former Federal Reserve Chairman Alan Greenspan revealed his “shocked disbelief” that market participants’ self-interest had failed so spectacularly in “protecting” society from the financial system’s gross excesses, culminating in the worst crisis since the Great Depression.1 Greenspan went on to acknowledge that he had “found a flaw” in the ideology that unfettered financial markets would limit their own excesses.
Although the crisis that started in 2007 has vividly exposed the dangers inherent in relying on financial markets to selfregulate, policy reforms adopted around the world have largely excluded measures requiring the state to attempt to wield direct influence over asset markets’ price-setting process. Despite the recognition that excessive swings in housing, equity, and other markets triggered the crisis, there is a widespread belief that the state cannot effectively influence asset-price movements, and that, even if it could, its actions would ultimately result in even more severe misallocations of capital and other undesirable economic and political consequences.
1As reported in Faisenthal (2008).