A postmortem on "Greenspan Week"

So, did last week's spring offensive by former Federal Reserve Chairman Alan Greenspan do any good?

From my (obviously biased) viewpoint, it only seemed to make things worse - his response to his critics only seemed to make the critics speak louder while attracting a whole new group of doubters as to the long-term deleterious effects of the Greenspan term at the Fed.

Anyone having to defend themselves so forcefully and unwilling to accept any responsibility for such an enormous and obvious mess must be living in some state of denial. Let's see ... who else might fit that description.

The old guy's legacy would probably fare much better if he'd just fade quietly into the background and make fewer speeches instead of constantly drawing attention to himself.

Does her really need the money? More likely, it is the attention he craves.

By the looks of things, his successor may turn an enormous mess into one of gargantuan proportions by the time he's done, so the whole "Greenspan legacy" problem may have taken care of itself if he'd just keep his mouth shut.

For those of you on vacation last week, here's a summary of what went on:

• Greenspan recession probability update alert!
• Greenspan: Don't blame me for the housing bubble
• And ... it's a hat trick
• Greenspan overfloweth
• Caroline Baum skewers Alan Greenspan
• The "retraction" of the 2004 ARM comment

And that was only through about Thursday...

Late in the week came this story in the Globe & Mail about the one Greenspan critic who really stood out - Anna Schwartz. A few of you brought to my attention via email - thanks.

Anna Schwartz, remarkable woman and revered economist, turns 93 on Monday. She graduated from Barnard College in New York in 1933, in the midst of the Great Depression, at age 18. She got a master's degree in economics from Columbia University at age 19. She went to work as an economist at age 20 (leaving her PhD until the 1960s). Five years into her career, Ms. Schwartz joined the National Bureau of Economic Research, the private, Cambridge, Mass.-based research organization that cites 16 winners of the Nobel Prize for Economics as associates – including her celebrated husband, free-market champion Milton Friedman. Ms. Schwartz still works in the bureau's New York offices where, almost seven decades later, she still puts in five full days a week and still studies the nature and causes of business cycles.

Ms. Schwartz says the Federal Reserve caused the credit crisis that has shaken financial institutions around the world.

She says this market mayhem need not have happened – and specifically blames former Fed chairman Alan Greenspan for it. Mr. Greenspan, she says, took interest rates too low – reducing the Fed discount rate to 1 per cent – and then kept them there for too long.

“It is clear that monetary policy was too accommodative,” she told The Sunday Telegraph earlier this year in a report that described her as defiantly lucid. “It was bound to encourage all kinds of risky behaviour.”

“They [the Fed] need to speak frankly to the market and acknowledge how bad the problems are, acknowledge their own failures in letting this happen. This can't be blamed on global events. There would never have been a subprime mortgage crisis if the Fed had been alert.The Fed failed to confront something that was evident. This is something Alan Greenspan must answer for.”

Yeah, it's that whole "common sense" deficiency that seems to plague economists, mostly in the U.S. Also see A 92-year old finger pointed squarely at the Fed.

Surprisingly, no one alerted me to this "Greenspan Mess" sighting in Martin Wolff's weak defense of the former Fed Chairman in the Financial Times.

Why, then, are so many Americans determined to blame Mr Greenspan for the mess? I can see three reasons. One is that it is far more painful to admit that the US was, in large measure, the victim of circumstances beyond its control. Another is that it is far easier to complain that the Fed made us do things we now bitterly regret than take responsibility for one's own mistakes. Last, the more one can blame the Fed, the more reasonable become demands for bail- outs now flooding into Washington.

Remember that there are no rules on context - it's simply the words "Greenspan" and "mess" in the same paragraph or within 100 words of each other.

And to close out the week, Stephen Roach weighed in with this retort in the comments section of the Financial Times blog.

The Greenspan defense completely misses the trees from the forest. His place in history will not be defined by a cross-country comparison of housing bubbles. What he missed repeatedly over the years – and still misses today – are the corrosive impacts this bubble had in fostering the imbalances and excesses of an asset-dependent US economy. Unprecedented consumer leverage is only part of the problem. So, too, is the failure of an aging US population to save at precisely the phase in its life-cycle when it needs to prepare for retirement. Global imbalances are also an outgrowth of this era of excess – underscored by America’s massive external deficit and, by the way, the protectionist fires it stokes.

Alas, these fault lines were made all the deeper by the Fed’s regulatory laxity in an era of unprecedented financial innovation – a laxity that, unfortunately, was accompanied by the cheap money that only a narrow CPI inflation targeter could justify. In retrospect, this was the most dangerous tactical blunder of all – a combination that created voracious investor demand for opaque and increasingly toxic financial products.

It didn’t have to be this way. Saying no to asset bubbles – equity, property, or credit – was always an option. In contrast to Alan Greenspan, I concur with Martin Wolf and believe that could have been achieved by common sense – “leaning against the wind” when faced with the obvious asset bubbles of the past eight years. That would have allowed the Fed to use a variety of anti-bubble tools – the bully pulpit of jawboning, more disciplined regulatory oversight, and, ultimately, a tighter monetary policy than a narrow core CPI inflation targeting rule might otherwise suggest.

Yes, economic growth would probably have been slower as a result during the period when the Fed was leaning against asset bubbles. But that shortfall may well pale in comparison to the cost of the post-bubble carnage that is now unfolding. Yet trapped in ideology and politics, Alan Greenspan simply couldn’t bring himself to follow the sage advice of one of his predecessors, William McChesney Martin, and “take away the punch bowl just when the party was getting good”.

Mercifully, "Greenspan Week" is over.

ooo

This week's cartoon from The Economist, a publication that has been noticeably silent on the recent Greenspan offensive.