Former Federal Reserve Bank Chairman, Alan Greenspan in his testimony before Congress this past Thursday said: “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity — myself especially — are in a state of shocked disbelief…” Age must be a truth serum, because here Greenspan exposes the very flaw of laissez-faire capitalism. The fundamental problem is that most proponents of market “self”-regulation see both the market and corporations as individual persons.

This worldview of both the market and the corporation as a person is downright pathological; and the underpinning of this crisis that we’re facing. The ultimate end of deregulation based on “self-interest” is individuals paying themselves at the expense of the corporations they work for, and by extension the public institutions that are influenced by those corporations.

Let’s look at AIG Financial Products (a holding company of AIG), headed by Mr. Joseph A. Cassano. This company made tons of money selling credit derivatives, in essence insurance policies on mortgages. These products can be very lucrative if you never have to pay out, but disastrous if you do – especially all at once. Let’s assume I work for GECO, the car insurance company as a sales agent. Selling insurance policies would be very lucrative for both me and my company if nobody ever got into an accident. However, if all of the folks that held insurance policies got into an accident simultaneously, my GECO car insurance company would likely go broke. Even if it were discovered that individual agents sold policies to individuals with suspended licenses, multiple DWI, etc – GECO would be forced to pay its policy holders, and a sales commission the very agents that got them in trouble.

If there were no system that regulated who I could sell a policy to, would I police myself? Would my interest as a selling agent necessarily align with GECO car insurance? Should GECO and I actually be considered the same individual or “self”?

Let’s return to Mr. Cassano’s London based unit of AIG. Between 2001 and 2007 employee compensation within this unit averaged 1 million dollars per person, equaling anywhere from 33% to 46% of revenue (not profit). In other words Mr. Cassano’s unit didn’t have AIG’s interest in mind let alone the public’s – they had their own individual interests in mind. In fact, AIG proper was doing rather well pursuing profits with it’s traditional insurance business, but was ultimately brought down because of its liabilty for financial products sold by its London based operation. Wouldn’t it have actually helped AIG, if regulators fined or even publicly assailed AIG for the risky behavior of its holding company?

This story, like many others, represents one fundamental point: AIG isn’t a person or a single “self”…it is comprised of many varied selves. The catch phrase that “the market will do this or that” is just stupid, [because] the market isn’t a person with a sense of will and purpose. The market is a virtual space where the conflicting forces of buying and selling work to find a balance. Reducing the volatility of finding this balance is the job of the regulator. If the assumption that the market, and even corporations are healthy minded individuals were correct then it would be reasonable to think that these “individuals” would act in ways to preserve self. After all, self-preservation is the first law of nature. However, if these individuals are not healthy – but in fact schizophrenics who have varied personas, voices and interests residing within the same body – it might not be so safe to assume that they will act in ways to preserve self most of the time. In fact, it might even be better to assume that these schizophrenic individuals will act in ways that would compromise their own well being and others if not monitored very closely.

While a lot of people want Greenspan to take 100% responsibility for the logical end of 30 years of Reaganomics, I say thanks gramps for letting the truth finally come out!