tag:blogger.com,1999:blog-11719208.post112788787085035244..comments2023-11-05T04:36:14.223-08:00Comments on The Mess That Greenspan Made: Rationalizing Bubbles, Shaping a LegacyTimhttp://www.blogger.com/profile/16530974968126497397noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-11719208.post-1128109832536281422005-09-30T12:50:00.000-07:002005-09-30T12:50:00.000-07:00Tim, I am not an economist, so maybe there is hope...Tim, I am not an economist, so maybe there is hope that we will understand each other. <BR/><BR/>Your Sept. 29 responses to my comments of 11:04 Sept. 28 are along the lines of most of the critiques out there, but fundamentally these critiques are no different or better than the problem they are trying to solve. They criticize the way Greenspan has intervened in the economy through artificially lowering real interest rates, but all they propose to do is replace one form of short-term, results-oriented interventionism with another, one based on the targeting of asset prices, a form of intervention which, as I think Janet Yellin has tried to argue, is unworkable and undesireable.<BR/><BR/>I think if we go back and re-read the history of the great central bankers, say, for example, Paul Volcker, we will find that their policies were not based on intervening in the market to achieve a particular short term set of results, but were based on following principles, in the case of Volcker, the principles of monetarism, including the principle that monetary growth should be kept stable.<BR/><BR/>I am not sure where I am going either, but I will have more to say about this later.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1128032363566097652005-09-29T15:19:00.000-07:002005-09-29T15:19:00.000-07:0011:04I'm not sure where to go with this, but I fee...11:04<BR/><BR/>I'm not sure where to go with this, but I feel compelled to respond in some way. If you're an economist, I fear we will never be able to really understand each other ... <BR/><BR/>My point about the S&P500 example is really very simple and has nothing to do with "intervening to pop a bubble" - someone should have done something BEFORE it became a bubble - in 1996 or 1997. <BR/><BR/>The market capitalization of the 500 biggest public companies is a fairly big deal - it's not like it's the price of bananas. When this rises 30+% in 1995, then 20+% in 1996, maybe someone at the Fed should have done something to prevent things from getting out of hand - to prevent an exhuberant market from becoming a bubble.<BR/><BR/>The same case could be made for real estate - it's not like it's the price of bananas, and two years ago, many people realized that home prices were rising rather rapidly, but there were no substantive monetary policy changes or regulation. The time to do something to prevent a real estate train wreck in 2006 was in 2003.Timhttps://www.blogger.com/profile/16530974968126497397noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127973874764589972005-09-28T23:04:00.000-07:002005-09-28T23:04:00.000-07:00Tim, in your 6:15 pm comment, you set some rather ...Tim, in your 6:15 pm comment, you set some rather arbitrary percentage benchmarks on when the fed should intervene to pop a bubble. But the idea of targeting asset prices is inconsistent with the notion of a free market economy, because buyers and sellers in the open market are supposed to set asset prices. Who is the fed as the God of markets to say when an asset is too expensive: that determination is supposed to be made by the buyer who weighs the opportunity cost against the use he or she intends to make of the asset. Also, which assets are you going to target? Today, you are saying it should be financial and investment assets such as houses and stock. Tomorrow, someone else may decide to regulate the price of, say, ball bearings, or corn, or iron ore. What principled distinction ca you come up with to distinguish these latter categories of goods from the assets you do want to target?<BR/><BR/>I think the notion of saying that the fed should target asset prices is different from saying that real interest rates in the economy as a whole are too low, or the fed has adopted an unprincipled, results-oriented, ad hoc approach to monetary policy which has caused a credit inflation. The policies implied by these latter criticisms are consistent with free markets in a way targeting the specific prices of specific assets is not.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127961888530637562005-09-28T19:44:00.000-07:002005-09-28T19:44:00.000-07:00He has shifted from you can't tell it is a bubble...He has shifted from <BR/> you can't tell it is a bubble until after it pops<BR/> to <BR/>we knew it was a bubble in the late 90's and our best option was to wait for it to pop on its own (forces of the boom exhaust themselves)<BR/><BR/>I'd guess this shift was forced by the eventual release of the minutes that made it very clear they were aware of the stock market bubble. Note that he never explains why it was appropriate to lie. This is why he needs to repeat the stock bubble story over and over, so he can gradually shift his story. <BR/>His my success at creating stability is what caused the problems is his set up for how he justifies his record after the stuff hits the fan. I think the point you made about their (Allen & colleagues) total avoidance of the subject of how the bubbles started is telling. Why can't they bring themselves to discuss this. Anyone interested enough in economics to get a degree in it would HAVE to be curious about this, why the deliberate self censorship? Thanks for the blog TimAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127956526250795802005-09-28T18:15:00.000-07:002005-09-28T18:15:00.000-07:00You know, the thing that really bugs me about this...You know, the thing that really bugs me about this whole Fed asset bubble popping nonsense, as evidenced in the Yellen speech above, is that the asset bubble shouldn't have been allowed to form in the first place. You rarely hear anyone at the Fed talk about bubble formation, and when they do, they claim they really could't be sure it was going to turn into a full-fledged bubble.<BR/><BR/>Most of the Fed policy discussion starts with the existence of a bubble, as if it just appeared one day - by that time it's already too late. <BR/><BR/>A simple example would be, when the S&P500 goes up 20% of more in one year, then you should take notice. If it looks like it's headed for another 20% increase the next year, then it's time to do something. That's exactly what happened in 1996 when the "irrational exhuberance" warning was issued. Instead of doing something, we got the "productivity miracle" explanation and another three years or so of 20% gains. Meanwhile the Nasdaq was going crazy.<BR/><BR/>You can make the same case for housing prices starting about five years ago. It was clear to many people in 2003 that this was a bubble - Fannie Mae was already getting into trouble. But it was allowed to go on until today, where it looks like things might finally be peaking.Timhttps://www.blogger.com/profile/16530974968126497397noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127951251267263312005-09-28T16:47:00.000-07:002005-09-28T16:47:00.000-07:00I've posted a Bubble poll on my site. The more par...I've posted a Bubble poll on my site. The more participants, the more interesting the results. <A HREF="http://bighousingbubble.blogspot.com/2005/09/to-pop-or-not-that-is-ques_112794840737610719.html" REL="nofollow">Cole @ The Boy in the Big Housing Bubble</A>Cole Kennyhttps://www.blogger.com/profile/07850823626440219150noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127949912991884662005-09-28T16:25:00.000-07:002005-09-28T16:25:00.000-07:00There was an interesting speech by Janet Yellin in...There was an interesting speech by Janet Yellin in London on September 27 where she discusses, among many interesting things, whether the fed should target asset, specifically, house prices.<BR/><BR/>Here is what she said:<BR/><BR/><I>"As a starting point, the issue is not whether policy should react at all; I believe there is quite general agreement that policy should be calibrated to the wealth effects of house prices on output and inflation. The debate lies in determining when, if ever, policy should be focused on deflating the asset price bubble itself.<BR/><BR/>"In my view, the weight of a decision to deflate an asset price bubble rests on positive answers to three questions. First, if the bubble were to collapse on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble?<BR/><BR/>"My answers to these questions in the shortest possible form are, "no," "no," and "no." . . . Since the short answer is not satisfactory and the thorough one overwhelms our time limits, I will compromise and give just a brief explanation for my trio of 'nos.'<BR/><BR/>"In answer to the first question on the size of the effect, it could be large enough to feel like a good-sized bump in the road, but the economy would likely to be able to absorb the shock. <B>For example, a reversion to the long-run price-rent ratio would appear to represent a shock that is only about half the size of U.S. stock market collapse in 2000 and 2001.</B><BR/><BR/>"In answer to the second question on timing, the spending slowdown that would ensue is likely to kick in gradually, because it mainly affects household wealth. That would give the Fed time to cushion the impact with an easier policy.<BR/><BR/>"In answer to the third question on whether monetary policy is the best tool to deflate a house-price bubble, there are several points to consider. For one thing, no one can predict exactly how much tightening would be needed, or by exactly how much the bubble should be reduced. Beyond that, a tighter policy to deflate a housing bubble could impose substantial costs on other sectors of the economy that would lead to equally unwelcome imbalances. Finally, it's possible that other strategies, such as tighter supervision or changes in financial regulation, would not only be more tailored to the problem, but also less costly to the economy."</I><BR/><BR/>This humble commentator would also argue that the use of monetary policy to target asset prices is fundamentally at odds with the notion of a free market economy where the free interplay of supply and demand are supposed to determine asset prices.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127940036392620222005-09-28T13:40:00.000-07:002005-09-28T13:40:00.000-07:00Re. the housing bubble. The tragedy here is: where...Re. the housing bubble. The tragedy here is: where I live (extremely over-priced New England suburb), I don't see a bunch of out-of-town speculators buying expensive s$hitboxes. I see lots of ordinary, young, hardworking couples - with maybe one or two loud brats in tow - stretching to buy a modest ranch or split-entry, mostly to escape "apartment hell". These aren't financial sophisticates; talking to them about "historical valuations" would be pointless. These are the kinds of people who are going to get hurt most by Greenspan's grand "I don't do bubble pops" experiment. If the Fed chief can't understand the value of asset price stability to ordinary folks like these, well - he's simply not qualified for the job.<BR/><BR/>Re. deregulation. Another grand experiment, and the jury is still out on that one. 20 years on, it appears that in at least one industry - airlines - we have an unmitigated disaster, with virtually every key player already in bankruptcy, or close to it. The net result being serious loss of pension benefits to salaried employees, and an ultimate taxpayer-funded bailout of this underclass via the PBGC. With the inevitable downdraft in the financial markets (which haven't really popped just yet), next on the line is likely all finance-related businesses - mortgage providers, GSE's, commercial banks, service providers like mutual funds, you name it. There, the impact will be much broader, and definitely result in - that's right - regulation. These things go in cycles. And through it all, rank-and-file employees and taxpayers get the shaft.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127937427985117552005-09-28T12:57:00.000-07:002005-09-28T12:57:00.000-07:0012:49 -After four months we're all stuck wiht the ...12:49 -<BR/><BR/>After four months we're all stuck wiht the mess that greenie madeAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127937231810105512005-09-28T12:53:00.000-07:002005-09-28T12:53:00.000-07:00Just read in the LA times how the cost of living t...Just read in the LA times how the cost of living to maintain a bare-bones decent existence in California has gone up 12% a year over the last 3 years, yet these Fed fraudsters go around claiming inflation is under "control"<BR/><BR/>Sad to see the economic fate of the world hang on the whims and fancies of one man on top of a small cabal.<BR/><BR/>I hope history would judge Greenspan for what he is - one of its worst villains. His easy-credit policies are destroying the American middle-class, and redistributing the wealth to the financial elite. I hope capitalism and freedom survive Greenspan's legacy.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127936959622373432005-09-28T12:49:00.000-07:002005-09-28T12:49:00.000-07:00Does that mean you will be changing your name soon...Does that mean you will be changing your name soon?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127920992418430432005-09-28T08:23:00.000-07:002005-09-28T08:23:00.000-07:00Greenie has been a bubble-enabler who never wanted...Greenie has been a bubble-enabler who never wanted to be the wet blanket once things really got going and it was clear to many that it was going to end badly.<BR/><BR/>This is probably the gist of this comment - that, in retrospect, he too quickly dismisses policy options early on when first recognizing "irrational exhuberance" and allows bubbles to grow, when maybe he should have done somthing other than be the cheerleader. This cheerleading occurred for both the stock market bubble in the late 1990s and the housing bubble until recently.<BR/><BR/>Once the bubbles start to grow uncontrollably, he never wanted to be the one to stop them - better to viewed as the problem solver than the problem creator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-1127918586863225922005-09-28T07:43:00.000-07:002005-09-28T07:43:00.000-07:00Maybe there is some post-hoc historiography by Gre...Maybe there is some post-hoc historiography by Greenspan going on here, but the comment:<BR/><BR/> "In short, we would have needed to risk precipitating a significant recession, with unknown consequences. The alternative was to wait for the eventual exhaustion of the forces of boom. We concluded that the latter course was by far the safer." <BR/><BR/>needs to be read in light of some of his other speeches, about how it is the job of a central banker in a world of uncertainty to manage risks. It looks like he is trying to justify his '99-2000 approach to the stock in light of that overall risk-management philosophy of central banking. Since it was not at all clear at the time that his assessment of the risks (as he described it after the fact, with whatever degree of credibility) I am not sure it is entirely fair for you to say, as you do with what appears to be a certain degree of sarcasm: "See, it just wasn't realistic to pop the stock market bubble - it's as simple as that. Better to wait for the boom to exhaust itself, then play the hero. Better to swoop in and save the day, taking no responsibility for creating any of the problems in the first place."<BR/><BR/>On the other hand, it could perhaps be fairly said that perhaps he didn't identify all of the risks he should have, that risks need to be assessed over the long term as well as the short term, and he hasn't given enough weight to the long-term risk that his short term risk avoidance would lead to an ever-inflating credit bubble.Anonymousnoreply@blogger.com