In October 2008, Alan Greenspan had the following exchange during testimony before a Congressional committee:
Representative HENRY WAXMAN (Committee Chairman, Democrat, 30th District of California): You found a flaw in the reality…
Mr. GREENSPAN: Flaw in the model that I perceived is a critical functioning structure that defines how the world works, so to speak.
Rep. WAXMAN: In other words, you found that your view of the world, your ideology was not right. It was not working.
Mr. GREENSPAN: How it – precisely. That’s precisely the reason I was shocked, because I’ve been going for 40 years or more with very considerable evidence that it was working exceptionally well.
One of the things in that model was an assumption that the self interest of the bankers was a more important factor in containing their risks than regulations.
But the evidence that self interest is insufficient to control excessive risk taking is all around us and has been for many, many years. It takes a massive amount of selective blindness to ignore it.
All it takes it to take your car out of the driveway and drive on the roads. Driving involves risk management decision making. For one thing, almost everyone drives a car that is capable of traveling much faster than the speed limit. And the speed limits are only very occasionally enforced. So it is an individual risk management decision of how fast to drive a car.
Now, I happen to live in an area of the New York City suburbs where many of the folks who work on Wall Street firms live. And the evidence is all around. Many drivers do not put long term safety self interest above short term time advantage of speeding. In many cases, they are deliberately trying to take advantage of the folks who are trying to be safe and driving extra recklessly under the assumption that they will not run into someone who is driving as recklessly as they are.
Now it is quite possible that none of the reckless drivers are Wall Street executives. But the reckless drivers are all people. And the readily available evidence with 50 years or more of accident statistics to back up shows that self interest is NOT sufficient motivation for safety.
Perhaps economists and especially central bankers do not own cars.
To the rest of us who do, the theory seems to be from another planet. The people that are risk takers and the people who drive safely are two different sets of people.