Important questions for Alan Greenspan

Caroline Baum of Bloomberg has apparently reached her limit regarding how much one financial commentator can take of former Fed Chairman Alan Greenspan in one week. Unfortunately for her, she doesn't have to look very far at the Bloomberg site to see his mug along with another demonstration of the clarity, only recently found, in his views.

As seen above and as noted by many writers over the last week, the subjects about which the former Fed chief now seems to speak most clearly are the troubled state of the economy, fiscal policy, and the failings of the Bush Administration - not monetary policy.

Naturally, this brings us directly to item numero uno from Caroline's Questions for Greenspan That Need Better Answers:

1. In the book, as in your speeches and testimonies as Fed chairman, you hyper-focus on the federal budget deficit. In some ways you seem more concerned about fiscal policy than in minding your own store, even admitting you would have "loved a chance to serve as Treasury secretary."

Did you ever think of tendering your resignation and telling the president (you were Fed chair under four) you'd like to saddle up with the administration? Maybe director of the Office of Management and Budget would have been more your cup of tea.

And don't forget the much broader and equally difficult "improve education" admonishing for the entire country - the solution, apparently, to regaining our competitiveness on the world economic stage despite all the impediments of overconsumption and entitlement which he helped foster.

Geez!

Most people will remember "Easy Al" as a kind of rich "Uncle Al" who showed up from time to time to lavish money and gifts on his adoring nieces and nephews while telling his brothers and sisters how to run their finances and educate their children. Comments on fiscal policy, education, and a host of other topics over the years make this clear.

To complete the analogy, mythical "Uncle Al" inherited a wildly profitable toy factory that is slowly, but surely, being driven toward bankruptcy as a result of its owner giving too much stuff away.

All the other questions from Caroline have their own merit, number two's "Did someone tell you opacity was part of the job description?" continues the theme of the "suddenly found ability to speak clearly".

But, by far, the most important question of all deals with inflation.

3. No doubt some of your fellow central bankers will be surprised to learn how little weight you give their role in reducing inflation in the last five to 10 years. Instead, you say certain forces -- globalization, innovation, the fall of the Berlin Wall -- came together "serendipitously" to depress inflation worldwide.

If exogenous events dealt you such a fortuitous hand, why didn't you allow the price level to fall -- you know, the "good" kind of deflation, driven by technological innovation - -which is what would have happened under your preferred monetary anchor, the gold standard?

This will, forever be Alan Greenspan's failing.

The double-whammy of having house prices removed from the inflation statistics and a generation of cheap energy (yes, hedonic adjustments too) were not quite enough for someone who aspired to leave his mark on history in such a big way.

When imports from Asia began to flood U.S. markets, first from Japan and then much more importantly from China, this began to skew the Consumer Price Index in ways that should have received much more consideration from the monetary policy maker in chief.

Instead, mild inflation was interpreted as a sign that the printing presses could be run at full speed at any sign of trouble. The two charts below from the post They should have seen those things coming demonstrates the point.

When quality adjustments are taken into consideration, there have been outright declines in prices for many imported goods, notably the price of televisions over the last ten years.

Compare the above price trend to buying movie tickets or other domestic services that do not benefit from falling import prices and a completely different picture emerges.
Combine the prices of television sets and movie tickets and you get benign inflation - the norm for most of the last two decades.

This was key to Alan Greenspan's tenure at the Federal Reserve where easy money policies were carried out amid an environment of "purportedly" low inflation.

Someday, people will figure this out - of course "Uncle Al" will be long gone by then and largely remembered for delivering many gifts rather than running the toy company into the ground.