I was asked the following question about Alan Greenspan, the Chairman of the Federal Reserve:
There is a video on YouTube of Alan Greenspan of the US Federal Reserve-see ”I still do not fully understand what happened – What can be concluded from same regarding his ‘risk intelligence’?
And I replied:
I am currently taking a course on model building , and I have learned some insights that may help us on Greenspan, though they are mine not the course leader’s. He suggests that we reflect on Isaiah Berlin’s: ‘The fox knows many things, but the hedgehog knows one big thing’, and also on research that suggests that in political prediction, foxes with many mental models do better than hedgehogs with one mental model.
Greenspan is to me a classic hedgehog with the Efficient Markets Hypothesis as his one model. He learned nothing from emerging behavioral economics, Keynes, Minsky or any other available model, or even the Austrians or Milton Friedman or even his predecessors at the Fed. He lethally coupled this uni-model view with an inability to learn from the past whether it be the 1930s, the 1980s Savings and Loan Debacle, or 200 years of financial manias and panics. He compounded this by creating the ‘Greenspan Put‘: even though he didn’t think markets could be wrong, he made it clear he would bail them out if they went downside ‘irrationally’. ‘Irrational Exuberance’ was fine. So why bother with risk intelligence in creating opaque financial products, Alan would bail you out of any cognitive errors.
Gregory Bateson, the anthropologist, suggested in his ‘Steps to an Ecology of Mind’ we may be part of any ecology, any social system we study. We are not God-like separate beings. So we need to be reflexive on the interaction between our take and the thing we are studying. ‘The map is not the territory‘ as Bateson said. Greenspan also failed in this regard and thought himself God-like in his prescience (hmm pun on pre-science suggests itself) and the markets came to share his narcissistic self-assessment.
Now this commentary links three models: Efficient Markets, Hedgehog/Fox and Bateson’s Ecology of the Mind. I would love to hear some different models applied, or added to the mix. The more the merrier I say, as a fox trying to learn even more things.
Greenspan, the weapon of mass financial destruction in Warren Buffet’s immortal phrase: