Wikinvest Wire

Greenspan, Geithner, and Darth Vader

Tuesday, May 12, 2009

It's good to see that we've not completely forgotten former Fed Chairman Alan Greenspan, two items appearing today as reminders of just what a mess has been made. Dan O'Connor at the Mises Institute reckons the former Fed chief is a lot like Darth Vader (hat tip BY).

The former chairman of the US Federal Reserve shares a lot in common with one of the most famous villain characters in the history of Hollywood, Darth Vader, who was first a member of the Jedi coalition when his name was Anakin Skywalker.
The policies of the Federal Reserve Bank had an enormous impact on our current crisis; and the American people have come to realize how destructive the force of the Fed can be. By expanding the supply of credit, inflating the currency, and keeping interest rates artificially low and fixed for an extensive period of time (a form of price fixing), the country — and globe — became plagued by malinvestment: people and banking institutions were encouraged by this dark and opaque monolith in Washington DC to buy and spend.
Dan goes on to suggest that the former "Maetsro" might redeem himself in some way by exposing the Federal Reserve and all of its evils before its too late.

Fat chance!

After having confessed to finding a flaw in his ideology, his reputation suffering dearly as part of that process, don't look for any more mea culpas from him.

And don't look for too many more U.S.-based economists or gubment workers to start pointing fingers even if they cite the former Fed chief's errors. Current Fed chairman Ben Bernanke has been loathe to cast any aspersions his way, sticking with his increasingly strained "savings glut" rationalization of how things went so wrong.

Over at the Treasury Department, the guy who used to be the head of the New York Federal Reserve and who now sits in the big chair at the Treasury Department talked to Charlie Rose the other day and couldn't bring himself to utter his name as he criticized his policies.

The Wall Street Journal carried this op-ed about the interview that had the feel of a Monty Python movie and a character "whose name can not be spoken" (Monty Python may not be the correct reference here, but you get the idea). When citing monetary policy that was "too loose for too long", it's hard to think of anyone else other than Alan Greenspan.
The Earth stood still, the seas parted and a member of the U.S. political class admitted last week that the Federal Reserve helped to cause the financial meltdown. OK, only the last of those happened, but it's a welcome miracle nonetheless.

The revelation came from Timothy Geithner last Wednesday with PBS's Charlie Rose, who asked the Treasury Secretary: "Looking back, what are the mistakes and what should you have done more of? Where were your instincts right, but you didn't go far enough?"

Mr. Geithner: "We need a little more time to get full perspective."

Mr. Rose: "Right."

Mr. Geithner: "But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful."

Mr. Rose: "It was too easy."

Mr. Geithner: "It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time."

Mr. Rose: "Now, that's an observation. The mistake was that monetary policy was not by the Fed, was not . . ."

Mr. Geithner: "Globally is what matters."
We disagree with Mr. Geithner on one point. He's right that monetary policy needs to be considered in global terms, but he's still too quick to pass the buck from the Fed to other central banks. The European Central Bank was much tighter than the Fed throughout this period. The Fed was by far the major monetary player because much of the world was on a dollar standard, with its monetary policy linked to the Fed's. That was true of China, most of Asia and the Middle East.
Mr. Geithner's remarks are a sign of intellectual progress, and they suggest that at least some in government are thinking about their own part in creating the mess. The role of Fed policy should also be at the heart of the hearings that Speaker Nancy Pelosi is planning on the causes of the financial meltdown. We won't begin to understand the credit mania and panic until we acknowledge their monetary roots.
According to this story in the Telegraph, the Brits have already taken a big step in this direction blaming the government and central bankers for many of today's ills.

If Congress starts an investigation, they'd have to invite Greenspan to testify. That could be his opportunity to expose the Fed and return to his 1960s gold bug ways...


fish said...

Mr. Geithner's remarks are a sign of intellectual progress, and they suggest that at least some in government are thinking about their own part in creating the mess.We are so fu....screwed. This guy is the President of the New York Fed and is now the Treasury Secretary and hey.....he's making intellectual progress as to their own part in creating the mess.

It's tough to feel any sympathy for my fellow citizens and what they are about to suffer!

Dan said...

So... if monetary policy was too loose then, and it's even looser now...

Lawrence Hunter said...

Geithner’s comments on money being “too loose for too long” are certainly remarkable but I fear they show little intellectual progress. Indeed, if one views this comment as his premise, then the conclusion he draws -- we need more regulation to avoid “going back to the situation we’ve had over the last ten years” -- is a non sequitur. I go into more detail here:
Larry Hunter

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