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Dean Baker is one of my favorite US economists. He agrees with Jerome that Greenspan is guilty of recklessly blowing bubbles:

The Federal Reserve Board is having its annual retreat at Jackson Hole, Wyoming and the agenda this year is devoted to a retrospective of Greenspan's 18-year tenure as Fed chairman. The world has not seen a greater display of obsequiousness since the death of Leonid Brezhnev. An economist whom I used to respect even called him the greatest central banker in history . . .

Let's get a few facts on record:

1) Mr. Greenspan ignored the stock bubble. . . . decided that it wasn't his job to do anything about the creation of $10 trillion in bubble wealth and the resulting economic distortions. . . . The tens of millions of people who saw much of their retirement savings disappear in the crash are just out of luck, as are the pension funds that are now insolvent . . .

. . .

2) Mr. Greenspan promoted the housing bubble. . . . like the alcoholic who gets over one hangover by starting on the next, Greenspan's tool for getting out of the recession created by the collapse of the stock bubble was to promote a bubble in the housing market. . . .

When the housing bubble bursts, we will see the loss of $5 trillion in housing bubble wealth. . . . Tens of millions of people will be in for a rude shock . . . this will destroy their plans for a comfortable retirement.

The economic fallout will also be enormous. . . . You will see a huge falloff in consumption . . . The resulting recession may well be worse than the 1981-82 slump.

For extra fun, watch for the collapse of the secondary mortgage market . . . think S&L bailout, think $400-$600 billion in federal spending.

But Baker also agrees with FT that:

In 1995 and 1996 he lowered interest rates and kept them low. This allowed the unemployment rate to fall below the 6.0 percent level that the vast majority of economists considered a floor. . . .

The decision . . .  gave millions of people jobs. . . . disproportionately benefits those who are most disadvantaged, especially African American and Hispanic workers. . . . allowed for the first sustained growth in real wages for most of the country's workers since the early seventies. . . .

There is a bit of a contradiction here, I think, since, as Jerome argues, the low interest rates helped to make the stock bubble possible in the first place, and the bubble itself contributed to faster growth and low unemployment, making the 1990s boom unsustainable in the long run.

Baker argues, though, that Greenspan had an option other than raising interest rates:

The proper remedy for the bubble was actually very simple - talk. If Greenspan used his Congressional testimony and other public speaking opportunities to lay out the case for the bubble, there is little doubt that it would have deflated long before it reached such outlandish proportions.

Is this true? Is it possible to jawbone our way out of financial bubbles?

If not, is there any hope of creating a sustainable full employment economy without blowing bubbles? How do we square this circle?

by TGeraghty on Sun Aug 28th, 2005 at 07:18:18 AM EST
Well, maybe to clarify, I don't want to let it be believed that I think that everything Greenspan did was bad. One can argue that he did indeed a pretty good job until 1998-99. The response in 1987 was probably the right thing to do (although it also brought in a few heady years followed by a nasty recession), and his calls in 1994-96 were indeed pretty good (and in 1994 he did buck the markets by increasing the Fed rates somewhat unexpectedly).

Where he erred, and is all the more inexcusable after his "irrational exuberance" speech in 1996, is when he decided to encourage the dotcom bubble (all the talk about a "new economy" and increased productivity) - and then when he compounded that by creating a bigger bubble, which he has so far managed to keep alive until beyond his retirement.

He has not solved problems in the past 7 years, he has just pushed them under the rug, while making them a lot bigger. He has also been a hack in encouraging Bush's insane tax cuts and in encouraging his Social Security plans - when he was the guy that raised the payroll tax in 1983 to fill up the SS reserve fund (the "lockbox") to make SS fully solvent. In effect, he made the middle classes overpay for 20 years, and then he helps give out the surpluses to the very rich. Hack, hack, hack.

He could have spoken out against the bubble in 1996/7/8/9. He had the credibility to stop the worst excesses. He chose not to, and he is fully responsible for that, and all the consequences of that, and the snowballing he also chose to go for.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Aug 28th, 2005 at 05:33:32 PM EST
[ Parent ]
While the US job creation might have been a good thing for USAmericans, the rest of the world didn't fare as good.

Dean Baker mentions tens of millions of people who saw much of their retirement savings disappear in the crash, he doesn't mention investors from all around the world who also saw their capital, thrown into the supposedly most profitable national economy by the trillions, go up in smoke. A capital flow 'helped' by FED (and other US economic governance) policies in wide-ranging fields, and distorting and hurting the economies this money left.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Aug 29th, 2005 at 03:36:30 PM EST
[ Parent ]
I've always wondered if one of the reasons the German (and other European) economy(ies) fared poorly after 2000 is that a lot of individual investors from Europe joined the dotcom fun pretty late in the game, and they were the ones that were left holding the bag. American investors, except for the few most extreme cases, if they invested earlier in the 90S would stille come out in positive territory. Europeans (starting with the Deutsche Telekoms, Alcatels and the like) that bought assets at inflated prices in 1999-2000 had to support real losses. I remember seeing that German foreign investments reached records in these years (to the tune of 150 billion euros, I think), and a good chunk of it was probably lost altogether. Quite a nasty shock for the economy.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Aug 29th, 2005 at 05:51:51 PM EST
[ Parent ]
I think you're definitely onto something there. The question is, will internationals get burnt by this new bubble? Will the Chinese investment method (mostly US Treasury Bonds) insulate them from a similar scenario?

Also, an interesting question is how much did Japanese companies lose in the dot com bubble and what effect did it have?

by Metatone (metatone [a|t] gmail (dot) com) on Mon Aug 29th, 2005 at 06:30:26 PM EST
[ Parent ]

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