I would like to start by considering a couple of the accounts of the origin of the financial crisis that have been offered to us in the public sphere. First, let us listen to Alan Greenspan testifying to Congress in October 2008:
We are in the midst of a once-in-a century credit tsunami…. Those of
us who have looked to the self-interest of lending institutions to pro-
tect shareholder’s equity (myself especially) are in a state of shocked
disbelief. Such counterparty surveillance is a central pillar of our fi-
nancial markets’ state of balance. If it fails, as occurred this year,
market stability is undermined.
There would be much to say about the scene of the testimony, but let me just focus on what Greenspan takes himself to be saying. The problem, he says, is that there was not enough self-interest. The model on which policy was based presumed that, although the intention of the banks might not have been to increase shareholder equity, that would be the effect of their actions. This presumption is, of course, a variant of Adam Smith’s idea that the rational pursuit of self-interest fortuitously promotes the interests of others via the mechanism of the markets.
Conceiving of lending institutions as market agents who would lend only in such a way as to promote their own interests, Greenspan assumes that their rationale must be such as to have, as an unintended consequence, the protection of the reasonable market conditions that allow their continued existence. Greenspan’s story, then, is that contrary to what the model predicted, banks did not act as rational investors; lending institutions did not protect their self-interest, at least not enough, and thus shareholder equity suffered.