Wednesday, April 09, 2008
Caroline Baum really did a neat job of skewering former Fed chief Alan Greenspan in her column at Bloomberg today. After the developments earlier in the week, if there had been any referees around, flags probably would have been thrown for "piling on".
This, however, is clearly one of those cases where "piling on" was appropriate.
Volcker Stands Tall, Greenspan Keeps ShrinkingCommon sense questions, apparently, don't come easily to Fed economists - a few years ago they were more interested in coming up with twisted explanations about why a negative saving rate wasn't really a problem, how "equity cushions" would ease any housing downturn, and how "financial innovation" was making the world a better place.
Former Federal Reserve Chairmen Paul Volcker and Alan Greenspan present an interesting study in contrasts.
Volcker is tall; Greenspan isn't. Volcker is a man of few words; Greenspan won't shut up. Volcker retired as Fed chair and avoided the limelight; Greenspan is doing everything possible to make sure the light shines on him.
The problem for Greenspan is that the spotlight on him is also illuminating detritus on the economy's shoreline now that the tide of easy money has gone out. (Wait, easy money is back!) Greenspan's curriculum vitae includes two asset bubbles (one in Internet and technology stocks in the late 1990s, another in residential real estate), a pair of banking crises, a boatload of fraudulent lending he chose to ignore, and a household savings rate of zero.
What really separates the two men, however, is the legacy issue. Volcker is content to let his record speak for itself: He inherited inflation of almost 15 percent and bequeathed a rate of 4 percent to posterity. It took two recessions to get there, but he did the heavy lifting on inflation.
Greenspan is desperate to deflect the blame for a credit crisis he called "the most wrenching" in 50 years. He can write his autobiography, which he did last year, but he can't write his epitaph. We, the public, will do that.
He wrote an op-ed for the Financial Times on March 18 ("We will never have a perfect model of risk") that generated such an outpouring of criticism he had to write a follow-up.
Alice Rivlin, who served as a Fed governor under Greenspan, was one of those who responded to Greenspan's misplaced assertion that econometric and risk models were to blame.
"We will never have a perfect model of risk in a complex economy," she wrote. "But the culprit was not imperfect models. It was a failure to ask common sense questions,'' such as "will housing prices keep going up forever?''