Alan Greenspan's Icarus moment

As the pillars of capitalism collapsed around him, the man once called the maestro summed up 2008 by admitting, "I have found a flaw"

As 2008 is about to fade into memory, I've been pondering which is the most striking current affairs moment of the year. I'd be interested in the stories and images that most struck you, but for me there's one I keep coming back to.

No, it isn't Barack Obama's acceptance speech. It was a mighty piece of rhetoric and his election is my favourite moment of the year. I think back on the China-New Zealand free trade deal, the string of child deaths in this country, John Key's victory and Helen Clark's sudden resignation, the Mumbai bombings...

But the most momentous event of the year was the credit crunch and the resulting recession. And for me the most revealing moment in that story came in October when the former Chair of the US Federal Reserve Alan Greenspan testified before a Congressional hearing on Capitol Hill.

The man some had labelled the most powerful person in the world was asked about the free-market ideology that defined his 18 years in charge of America's central bank, and he replied, "I have found a flaw".

It was a compelling, tragic, profound moment. The curtain was pulled back to reveal a Wizard that was not the giant he was thought to be. The maestro had become Bozo; the ring master turned clown.

I hope you will excuse the rush of metaphor, but it was such a profound moment that it lends itself to endless comparison. It was a Greek play, a fable, and country song all in one; a real moment in history.

A brilliant man with a deep understanding of financial systems came face-to-face with human nature and realised he was looking at a stranger. He didn't understand simple human foibles, our built-in tendency to over-reach. He just didn't get it. He had forgotten – or never appreciated – that at the heart of the smooth, gleaming machine he thought was the free market are people with all their greed and ambition and stupidity. And so he finally, belatedly, spotted "a flaw".

Greenspan said he was "very distressed" at having found the flaw. Not half as distressed as the millions who have lost their homes, their retirement savings and their jobs as a result of his myopia.

We have seen for generations that capitalism is the greatest wealth-creating system humans have yet created. It has brought comfort and prosperity to untold millions. Through the middle of the 20th century, bridled capitalism and the redistribution of its gains brought a high standard of living to a huge number of people. "Ordinary people" in countries such as New Zealand and America became middle-class with property and aspirations.

Yet inside the dog remains a wolf. Left unregulated, unchecked, without strict controls, capitalism runs wild. Greenspan, following on from others, steadily stripped back the regulations. With such a prosperous middle class, the pressure was on to do better, to let the hungriest and most driven become even richer and have their success trickle down to the rest of us, to remove the shackles. In doing so, he released the wolf.

If only he had known the fable of Icarus – the Greek character who tried to fly out of Crete on home-made wings – he might have understood human frailty and not let us fly too close to the sun. But he didn't and we did and now we're paying the price.

We can only hope that the global market system to be rebuilt over the coming few years is made of sterner stuff than wax and feathers.