Friday, April 03, 2009
Former Fed chairman Alan Greenspan's recent Wall Street Journal op-ed will likely be looked back upon as the moment akin to when the Toto pulled back the curtain from behind a diminutive man who was still in the process of saying how great and powerful he is.
OZ'S VOICE: Do you presume to criticize the....The above excerpt is courtesy of the Wendy's Wizard of Oz script, just prior to when Dorothy says to the wizard, "You're a very bad man", much like the response to the former Fed chairman's recent opinion piece.
(Toto pulls back the curtain to reveal the Wizard at the controls of the throne apparatus)
OZ'S VOICE: ...Great Oz? You ungrateful creatures!
OZ'S VOICE: Oh - I - Pay no....
(Shooting past the Four at left to the Curtain in b.g. -- Dorothy goes over to it and starts to pull it aside --)
OZ'S VOICE: ...attention to that man behind the curtain. Go - before I lose my temper! The Great and Powerful --
(Dorothy pulls back the curtain to reveal the Wizard at the controls -- he reacts as he sees Dorothy -- Dorothy questions him -- the Wizard starts to speak into the microphone -- then turns weakly back to Dorothy -- CAMERA PULLS back slightly as the Lion, Scarecrow and Tin Man enter and stand behind Dorothy)
OZ'S VOICE: ... -- Oz -- has spoken!
The latest example of the wizard being excoriated comes in this commentary by Susan Lee at Forbes who cites John Taylor's recent book about how government actions "caused, prolonged, and worsened the financial crisis" (seriously, that's right in the title of the book).
It's been quite a spectacle for those who have followed Alan Greenspan's career for decades. Gone is the financial rock star or even the statesman testifying before Congress in a measured baritone. Instead, over the past several months, Alan Greenspan has morphed into a totally new person.The whole piece is worth a look, particularly the part about how the housing bubble in its formative stages was clear to see in 2003. That is, back when something could have been done to prevent the current crisis, as opposed to the action that was taken at the time - offloading a good portion of mortgage securitization from the GSEs to Wall Street.
The first incarnation was the shaken Greenspan who was stunned that greedy and reckless short-term behavior could overwhelm long-term, rational self-interest. That was rather amazing all by itself. But now, there's a newer Greenspan--a decidedly prickly and whiny one.
I'm talking about Greenspan's recent op-ed in The Wall Street Journal. A 1,500-word attempt to move blame for the financial crisis away from himself and onto ... China.
It was, writes Greenspan, Chinese growth that led to "an excess" of global savings. That growth kept long-term interest rates low, which fueled the housing bubble. As for himself, the lowly chairperson of the Fed, he says he was helpless. He only had control over short-term rates.
Why this recent incarnation as a self-pitying victim of historical forces? Most likely, it's because of John Taylor, a mild-mannered professor at Stanford and former colleague of Greenspan's at the Fed.
In his Getting Off Track, a nifty little book, Taylor exposes, as plain as day, the culprit behind the financial boom-bust: Greenspan. His weapon of choice is the "Taylor rule" (discovered by Taylor--but not named by him, as he modestly points out.) (The Taylor rule is a recommendation about how the Fed should set the short interest rate--suggesting the amount it should be changed given economic conditions.)
Here's Taylor's take. Short interest rates fell in 2001 in response to the dot-com bust. But--and here's the important moment--beginning in 2002, the Taylor rule indicated that Greenspan ought to have tightened. Indeed, from 2002 to 2005, rates ought to have climbed to a touch over 5% and then stayed there through 2006.
We all know how that worked out.
The wizard from the movie turns out to be a fairly nice and helpful man after he is exposed. Unfortunately, the same can't be said for the former Fed chairman.