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More tarnish on the Greenspan legacy

Friday, October 17, 2008

Though former Fed chairman Alan Greenspan has been remarkably silent lately, perhaps no longer feeling the need to issue weekly "recession probability alerts" since it has become clear that we are now in the midst of one, his detractors have become more vocal.

In fact, criticism of monetary policy over the last two decades seems to be gaining something of a critical mass in recent weeks, a development that is quite understandable given the earth-shattering events that have unfolded in financial markets.

Even Ben Bernanke seems to be pointing a finger at his predecessor, though the current Fed chairman is certainly not without blame for the current mess as he has long been a proponent of the central bank's "hands off" approach toward asset bubbles, hedge funds, and all sorts of other late-20th century bright ideas that have caused so much trouble over the last year.

This report in today's Wall Street Journal captures the new thinking at the Fed:

The Federal Reserve and academics who give it advice are rethinking the proposition that the Fed cannot and should not try to prick financial bubbles.

"[O]bviously, the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the economy, and there is no doubt that as we emerge from the financial crisis, we will all be looking at that issue and what can be done about it," Fed Chairman Ben Bernanke said this week.

The bursting of this decade's housing bubble, which was accompanied by a bubble of cheap credit, has wrought inestimable economic damage. The U.S. economy was faltering before the crisis in credit markets recently intensified, rattling financial markets and sending home prices down further. Even if the government's decision to take stakes in major banks works, it could take weeks for money to flow freely again.
Obviously. Well, better late than never.

Hopefully, this won't be a case of being too late.

In today's American Banker can be found this story with a "Greenspan Mess" sighting right there in the title.

[Note to financial writers: This kind of takes the thrill out of it for those of us who realized what was coming years ago and now spend a good deal of time on the lookout for others who are just catching on. Remember the rule: the two words must be within two paragraphs or one hundred words of each other.]
Greenspan's Fingerprints All Over Enduring Mess

In the fable "The Emperor's New Clothes," two make-believe weavers purport to spin a fine suit of clothes for the emperor, which is made of beautiful material that possesses the wonderful quality of being invisible to any man who is unfit for his office or unpardonably stupid. The potentate and his subjects acknowledge that the garments are very fine indeed. That is, until one little child sees the emperor marching in a procession, and says at last: "But he has nothing on at all" — and the grand swindle is exposed for all to see.

The U.S. economy as well as economies around the world have been going through wrenching experiences lately, and much more is likely. Former Federal Reserve Chairman Alan Greenspan is the architect of the enormous economic "bubble" that has burst globally. No longer is he revered as a "potentate." His reputation is in tatters. Giulio Tremonti, Italy's Minister of Economy and Finance, has said: "Greenspan was considered a master. Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most." That speaks volumes.

Greenspan let things get out of control, and the prices of U.S. homes rose to stratospheric levels. Americans and their counterparts abroad borrowed like drunken sailors because of their newfound wealth and net worths, and no one believed that the party would end. While borrowers were told to read the fine print about the risks of adjustable-rate mortgages and the like, few people worried about the future
And to think that I actually attempted to change the name of this blog about 15 months ago, thinking that laying a good portion of the blame at The Maestro's feet had already become conventional wisdom.

Bill Bonner at the Daily Reckoning steps in during the former Fed chairman's silence and offers up A Letter from ‘Alan Greenspan’ About the Deterioration of the U.S. Economy in which he seeks ing to explain what might be going through the man's mind now that the financial world is collapsing along with his legacy.

Some excerpts:
This is not by any means the first thing I have written. I have written much over the years. But it was all written for a purpose, which only a few were able to discern. Most readers foolishly saw the cluttered mind of a dithering economist or the clumsy, stuttering pen of a professional bureaucrat. Many listening to my wandering speeches and twisting sentences thought that English was not my first language. They thought they detected a faint accent, like that of Henry Kissinger or Michael Caine. They mocked me as "incomprehensible" or "indecipherable." They watched what they thought was an obsequious bureaucrat squirm. They had no idea what I was really up to and what I can only now reveal.
I had weaseled (why not be honest about it?) my way to the top post by knowing the right people and by making myself generally agreeable, and helpful, and by not saying anything anyone could disagree with. That was the original reason for what the press called "Greenspan speak." My private thoughts remained mine alone. All the public and the politicians got was gobbledygook, but for good reason.

They would not have wanted to hear what I really thought. So, I did not tell them. For I knew well and good what generally happened when politicians and central bankers got their hands on soft money and a compliant central banker. I was not born yesterday. They use their control of the money to cheat people. It is as simple as that. (I explained this early on in my career; fortunately, no one bothered to read what I wrote. Otherwise, I never would have gotten the job.) If central banking were an honest m├ętier, there would be no reason to have it at all. Private banks could do the job better.

But people are ready to believe anything. Somehow, they think that a collection of rich financiers and power-mad politicians got together to create and run a central bank for the benefit of the people! Well, I've got news: it doesn't work that way.
Go read the whole thing - Bill was in classic form when he wrote this but, in my view, he gives the former Fed chairman far too much credit.

I've long thought it was more of a "childlike idealism", a severe character flaw common amongst economists, rather than a "knowing deception", as some believe, that caused the man to do what he did.

Oh well, what's done is done.

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