White vs. Greenspan - No Contest

William White, the former chief economist at the Bank for International Settlements, has been something of a cult hero around here for a few years now and, yesterday in London, he apparently mixed it up a bit with former Federal Reserve Chairman Alan Greenspan.

According to this report at Bloomberg, it wasn't much of a contest.

A long-time critic of central bank policy during the Greenspan years, Mr. White wrote one of the most prophetic outlooks for the world economy and global financial system last July, laying the blame squarely on the Federal Reserve for the collapse that would occur just a few months later.

A short excerpt:

How, for example, could a huge shadow banking system emerge without provoking clear statements of official concern? Perhaps, as with processes for internal governance, it is simply that no one saw any pressing need to ask hard questions about the sources of profits when things were going so well.

He's appeared here regularly over the years - every June it seems - right around the time that the BIS issues its annual report which causes a bit of a stir and then everyone goes back to doing what they were doing:

• June 29, 2006 - Catch the Swamp Fever
• June 26, 2007 - Austrian Economics in the WSJ
• July 1, 2008 - BIS Chief Economist William White channels his innner Austrian

It's too bad he won't be around this summer to say, "I told you so". Maybe they'll bring him back as a consultant so he can lay into the Fed one last time.

On the subject of central banks and asset bubbles, he sure laid into the one they once called The Maestro yesterday:

“We started worrying about this at the same time that Alan Greenspan started worrying about irrational exuberance” in 1996, said White, a Canadian who has remained in Basel, Switzerland, since retiring from the BIS in June. “The difference was he stopped worrying about it, or at least he stopped worrying about it publicly, and we didn’t.”

Though it is unlikely to make that much difference now that the horse has long since left the barn (i.e., these problems are far more difficult to solve today than they would have been to prevent earlier in the decade), at least a few more people are paying attention to what Mr. White has to say these days.

Unfortunately, what he has to say now about our future is even more disconcerting.

White, now 65, suddenly has company. His approach is reflected in position papers for the G-20 written by Jacques de Larosiere, former head of the International Monetary Fund and the Bank of France, and former Fed Chairman Paul Volcker.

“Concerns for financial stability are relevant not just in times of financial crisis, but also in times of rapid credit expansion and increased use of leverage that may lead to crises,” a panel led by Volcker said in a January report for the coalition of former central bankers, finance ministers and academics known as the Group of Thirty.

Stability matters because today’s economic stress could quickly lead to social unrest, which is what happened in the 1930s, White said in an interview across from his old office in Basel.

In what will remain just a footnote in the history books...

White took his argument directly to Greenspan on Aug. 28, 2003, at the Kansas City Fed’s annual meeting in Jackson Hole, Wyoming. Claudio Borio, head of research for White’s department, prepared for questions as White wrote his notes out in longhand at the Jackson Lake Lodge in Grand Teton National Park.

“Claudio said to me quite rightly, ‘We cannot miss this chance, everybody is going to be there,’” White said. Borio, still at the BIS, declined to comment.

Greenspan was unmoved by the presentation and said he pointed out that the Fed had tried and failed to stem a surge in stock prices by raising its target for the Federal Funds rate by 300 basis points in 1994. A basis point is 0.01 percentage point. He still isn’t convinced White’s monetary policy plan would work, he said.

“There has never been an instance, of which I’m aware, that leaning against the wind was successfully done,” Greenspan, 83, said in a Feb. 27 telephone interview. He added that spotting a bubble is easy. What’s hard is predicting when it will pop.

The year 2003 would have been a perfect time to have taken action that could have prevented the financial crisis that we have today as Fannie and Freddie had just begun to demonstrate how potentially lethal lower credit standards and financial derivatives were.

Unfortunately, the response in Washington - from both the Federal Reserve and Congress - was to offload a good portion of the GSE's work in the mortgage business onto Wall Street and the rest, as they say, is history.