Fasciano asked whether laissez-faire capitalism inherently gives rise to tail risk, and if so, if this is an acceptable risk.
Greenspan replied that if you want to guarantee that that there will be no bubbles, you should have an economy like the Soviet Union’s. A regimented society does not have bubbles; it also doesn't have Standard Oil. We also wouldn't have bubbles if we didn't have human nature, he said. Bubbles come from euphoria, which is a deep-seated inbred characteristic that vies with fear. When we switch from fear to euphoria, bubbles can be the result. Behavioral economists refer to “herd behavior.” We’ve all observed this, when people run in in one direction in droves, like lemmings running over a cliff. And we do that. Yes, Greenspan said, it happens all the time and always will unless human nature changes, which it won’t. Don't question it.
If we wanted the monetary authorities to impose terrible inflation, we would not have stock market bubbles, “I guarantee it.” So the question is, do we live with these problems – and they are problems, but there’s no way around them – or do we live in a highly regimented society? We could impose enough regulations on the financial system, Greenspan said, that bubbles would not occur. But we can’t have it both ways. [...]
Greenspan was accorded the moniker “The Maestro,” but he has also been accused of fomenting the housing bubble by keeping interest rates low in the early 2000s, following the collapse of the dot-com bubble. He's also faced criticism for failing to recognize the existence of that bubble during his tenure as Fed chairman, arguing that "national price distortion" in housing prices was unlikely. He responded to those claims.
In looking back on the crisis in residential housing, Greenspan said that it was clear at the time that housing was in a bubble. He pointed out, however, that we had just come out of the dot-com bubble, which had virtually no economic effect, and the “so-called” recession 2001 was barely visible. This suggested, he said, that we could probably get through the housing bubble. But he and others made the mistake of recognizing only too late that the dot-com bubble didn't amount to a big problem largely because the toxic assets of the time, which were equities, collapsed in institutions that were not leveraged. Therefore, although there was a very large capital loss, there weren’t the bankruptcies and sequential losses that occur when a leveraged institution holds toxic assets.
The mortgage-debt problem of the 2008 financial crisis was different, according to Greenspan. Mortgages were held in very large leveraged institutions. If we had somehow had the dot-com boom second, it would have been interesting to see how different history might have been, he said.
~ Adam Jared Apt, synopsis of Alan Greenspan speech given to Boston Security Analysts Society, February 12, 2013