The fed was not effected by dogma, but by strategy, the strategy was faulty (get people into homes as a recipe for fixing the tech crash) and it’s risk mitigation was faulty (the new ‘financial instruments’ would make failure impossible.) People who are in power rarely make religious decisions. The simply must make SOME decision. In the absence of knowledge, and in the presence of time, they make decisions.
1) Greenspan’s primary failing was his belief in the new financial devices. In effect, he fell in with the quant’s. It wasn’t his libertarianism that failed him it was his Keynesianism. This fact is very visible in the record of his spoken and written word. He repeatedly refers to the fact that he was sure that the new financial instruments provided insurance against this state of affairs. That is not the statement of a Hayekian.
2) The hatred of the fed, and the fallacy of the gold standard, are a trap for libertarian philosophy, which simply would slow development worldwide, and decrease compteititive advantage for it’s participants against less libertarian societies. The inverse of the philosophy is true: we need credit but NOT general liquidity. (A statement that is too complicated to elaborate on in this post.) It’s just that we need to solve for productivity increases, not disequilibrium. In fact, the purpose of credit should be to create disequilibrium: innovation. It should not create a world of free trade and competitive neutrality, but one of national competitiveness and prosperity.
3) The general thinking since Regan was that they could transfer enough wealth to enough property holders via debt, to enfranchise enough people to ‘correct’ the postwar pathos, and in parallel create enough entrepreneurship to ‘correct the ship of state’. THere is some evidence that this worked, at least in part. However, general liquidity, rather than targeted liquidity, (again, a fed problem) led to increased consumption, not increased production. I do not have data on this in front of me, but we did not get the increases in productivity that we intended to buy with the debt.
4) And yes, libertarianism is a reaction to socialism. And yes, we need to throw out everything in economics, politics and the social sciences post Roosevelt. I’m not sure much of value has been created in the social sciences since the second world war. In their envy of the physical sciences, the softer fields spent too much of their times trying to discover fundamental laws, using equilibria, neither of which exist, instead of discovering the process of invention (expansion not equilibrium) itself. There is no end of history. There may be an end to the properties of the physical universe, but there is no end of human history. There are no final laws. Subjectivism and heurisitcs alone, with a drive for status in pursuit of the mating ritual, insure that problem will be eternal.