Oh man, this is great…it’s like watching everybody’s grandfather talk about bank regulation, AND Greenspan is basically saying that behavioral economists had it right all along:
(Sidenote: the closed captions are really helpful if you are somewhere where audio is frowned upon.) Oh good, we’ve gotten to a point in the world where the guy who brought his mother and Ayn Rand to his Fed inauguration is lecturing us about human behavior…
“Markets do weird things…it reacts to the way people behave, and, sometimes, people are a little screwey.” Really, you don’t say. =P In fairness, however, most of the believers in rational markets didn’t really believe that people were always rational at all times, just the irrationalities were basically noise in markets and therefore not impactful enough to study in detail. Or, as Greenspan puts it, “We all thought that the srewiness would wash out…that was wrong.” In other words, people are not only irrational in some scenarios, but they are, ahem, predictably irrational.
When having a conversation about bank regulation, however, it’s important to keep in mind that there is more than just human irrationality at play, there’s also the misalignment of incentives between bankers and society, or what Jon Stewart more colloquially refers to as greed. I’m glad that Greenspan addresses this as well when he talks about the differences between partnerships and corporations, and It’s worth noting that Greenspan is not the first to point out the impact that corporate structure has had on risk taking and incentives- for example, Michael Lewis addresses this fairly cogently in the epilogue to The Big Short. (Technically, I could be mistaken on this, since said discussion may have come from an interview at the end of the audiobook, but the general point remains.) The basic idea is that managers are more careful when it’s their company and they’ve put up all the capital, made it their baby, etc. than if they are essentially hired mercenaries who can just move on to the next company when the current one goes under and merely screw over a bunch of faceless shareholders.
Overall, Greenspan seems to have moved a bit from channeling Ayn Rand to channeling John Maynard Keynes:
“When the facts change, I change my mind. What do you do, sir?”
― John Maynard Keynes
That said, Greenspan clearly still has a reasonable level of free-market enthusiast in him, since all he is really advocating for is higher capital requirements for banks and his overall policy position seems to be “just make them have enough capital so that their stupid decisions are their own problems and they can’t bring anyone other than themselves and their investors down with them.” I’ve got to admit that that mindset is pretty hard to argue with.
What surprised me a bit, on the other hand, is that Greenspan was pretty much on board regarding taxing labor income and investment at the same rate. Don’t get me wrong- I’m all for fairness, and I don’t actually think that capital income is more valuable or should get special treatment or whatever, but I do think it’s important to recognize that taxing capital and labor income at the same rate at the household level doesn’t actually tax the two items at the same rate overall. From the perspective of the firm, labor income is paid on a pre-tax basis (that’s, in part, how we ended up with employer-provided health insurance), but dividends are paid out on a post-tax basis. In addition, capital gains generally track the path of post-tax earnings (and, in fact, theoretically represent the present value of future dividends), so the profits that are driving the household income from capital have already been taxed once at a decently high rate. Therefore, it’s harder than it initially looks to make the effective tax rates on capital and labor income the same. (I’m not sure where this leaves us on the whole carried interest thing, however.)
Like always, I will start by saying how much I enjoy your show, and I appreciate all that you do to make it clear that learning stuff and being aware of the world around you can be interesting and cool rather than dull and dry. That said, I must kindly request that you immediately cease toying with my often delicate emotions- for example, how am I supposed to not get my hopes up when you joke that you invited an entire audience of economics masters students* to your show? I mean, Colbert freaking married people on his show, so I know full well that almost nothing is out of the question in this regard. Furthermore, if you’re going to claim that you brought in Hyman Minsky, the least you could do is put Jason Jones in an economist ghost costume and have him float around a little- otherwise, let’s be honest, you just seem like you are phoning it in a little. In order to at least partially make up for this most unfortunate oversight, I can offer up a couple hundred economics graduate students for you if you decide that you want to make good on your previous claims, and I am happy to even arrange charter buses for the occasion.
* Jon, if you were to consult me on these matters you would know that masters’ programs in economics are fairly hard to come by and therefore most economics graduate students are in fact PH.D. students.