by Jerome a Paris
Fri Aug 26th, 2005 at 06:57:16 AM EST
Is it a case of damning with faint praise? Or do they actually believe it? In any case, the Financial Times published not just one, but two (including a full-page ode) highly favorable articles on Alan Greenspan and his times as Chairman of the Fed, due to come to an end at the end of this year.
As you know if you've read my texts on "Bubbles" Greenspan, I certainly don't share that enthusiasm. So let me give you the unedited positive spin first, with a few comment from me afterwards.
First of all, the full-page article, which presumably presents the "official view" of the FT on Greenspan. I suppose it's hard for htem to go against the hero of so many of their readers, but I am somewhat disappointed, I must say...
Mervyn King, governor of the Bank of England, points in an interview to his counterpart’s deep thinking, flexibility, communication skills and judgment. He refers to a piece of writing by John Maynard Keynes, the founder of macroeconomics, on another British economist, Alfred Marshall: “Keynes, in his obituary of Marshall, said that a great economist must possess a rare combination of gifts: mathematician, historian, statesman, philosopher. Alan Greenspan embodies that.”
Alan Blinder, vice-chairman of the Fed from 1994 to 1996, says: “Volcker’s task required iron will and determination. Greenspan faced more subtle and differentiated challenges: what to do about accelerating productivity growth, 4 per cent unemployment, financial crises and a stock market bubble. His calls, for the most part, were terrific."
Mr Greenspan has studied the US business cycle since the late 1940s. At the Fed he has shown a mastery of data, drawing not only on government statistics and data series developed by the Fed but also on company reports and anecdotal evidence. Allan Meltzer, professor at Carnegie Mellon University and historian of the Fed, says: “He takes in information from a wide variety of sources and distils it rather accurately. I don’t know of any other Fed chairman who has paid so much attention to the daily, weekly, monthly events, in thinking about what they mean and mostly getting it right.”
Many economists believe Mr Greenspan’s crowning achievement was his response to signs of the productivity boom of the 1990s. He understood the change early and acted upon it, allowing unemployment to fall lower than many economists thought was possible without stoking inflation. Common estimates at the time put the non-accelerating rate of unemployment at about 6 per cent. Mr Greenspan allowed unemployment to fall below 4 per cent in 2000, and inflation did not take off. Aside from the gains in output from letting the economy grow faster, wages increased for those with lower incomes and companies needing skilled workers invested more in training.
He has distinguished himself in crisis management. After the crash of 1987 he ignored advice that he should wait and gauge the impact on the economy. He also increased liquidity in 1998 after the Asian financial crisis and Russia’s default, and in 2001 after the September 11 terrorist attacks.
Mr Greenspan has been criticised for dabbling in politics. He is not a particularly partisan Republican – he supported the Clinton administration’s tax increases of the early 1990s as well as the Bush tax cuts of this decade – but has an overriding belief in the power of market forces and the benefits of unfettered capitalism. Left to themselves, he believes, financial markets will help to reduce imbalances in the economy.
The most prominent example was his approach to the stock market bubble of the late 1990s. Mr Greenspan’s determination that it was better to deal with the consequences of the bubble, rather than trying to burst it, has largely been borne out by events.
“What do you look for in a chairman? A great forecaster and person with extraordinary judgment,” says Mr Meyer. “There is no taking away from Greenspan the fact that he’s a hall-of-famer and he’s exceptional.”
I have only taken out some technical or historical description of his work out. There is not a single word of criticism or restraint in the article that would convey any doubts about the above compliments. In fact, the only vaguely critical part is in full below:
“It is far from obvious that bubbles, even if identified early, can be pre-empted at lower cost than a substantial economic contraction and possible financial destabilisation – the very outcomes we are seeking to avoid,” Mr Greenspan told the American Economic Association last year. The short recession the US suffered in 2001 appears to provide vindication.
Mr Greenspan has suggested that the Fed’s success in securing low inflation and less volatile economic growth may itself lead to more speculation in asset markets, as investors conclude that these good times are likely to continue. Part of the next Fed chairman’s inheritance will be a housing market that Mr Greenspan has said is showing signs of “froth” in a number of cities, amid buy-to-let speculation that has resulted in “speculative fervour” in some areas. At their June meeting, the Fed’s policymaking Federal Open Market Committee discussed house prices and came to the same conclusion as it had with the stock market: the Fed should deal with the consequences in the event of a market disturbance.
Henry Kaufman, the Wall Street economist, believes the FOMC is too sanguine: that the housing market poses grave risks for the economy and that the Fed’s assurances that it will raise rates at a “measured” pace have contributed to a household debt-financed consumption binge and to speculative activity by investors. “The new exuberance is in the housing area, and that problem will have to be resolved by the next chairman,” Mr Kaufman says.
So, a vague reference to "speculative fervour" in the housing market, which the Fed should be able to deal with as it dealt with the dotcom bubble. All is dandy and Alan Greenspan is the greatest central banker in the world.
Then the next day, the FT provides another layer, this time in the form of an Op-Ed pice provided by Kenneth Rogoff, another big hitter in the global economists league (he was chief economist of the IMF).
Greenspan will leave a less activist Fed
As Alan Greenspan’s fifth and final term as Federal Reserve chairman comes to a close in January next year, more and more people are asking the question: “What were the secrets of his extraordinary success and can he pass them on to his successor?” This is not a small question given the Fed chairman’s legendary reputation for obfuscation. (According to Andrea Mitchell, his wife, Mr Greenspan had to propose three times before she understood him.)
We even have the cute anectode (certainly false, but in line with other supposed anectodes about his "obfuscation" powers) about him proposing. Yeeeew. Greenspan, cute?!?
Let us get one thing straight. Alan Greenspan is the Michael Jordan/Lance Armstrong/Garry Kasparov of modern-day central bankers. It may be a long time before we see another individual as adept in all phases of the job. He has certainly been a crisis manager extraordinaire. (...)
Mr Greenspan’s deft handling of the October 1987 stock market crash – only months after he took office – was bold and brilliant. He poured liquidity with abandon into a financial system that might otherwise have seized and collapsed. The Fed probably lost a big chunk of change, but hundreds of billions of dollars were saved. The Greenspan team executed a similar strategy in the wake of the September 11 2001 terrorist attacks. With seconds on the clock, and the game on the line, there is no doubt who you want handling the ball in a global financial crisis.
He has been no less successful in the day to day routine of monetary policy. When Mr Greenspan came to the Fed, he took charge of a great team of economists and made them better. They are a key source of ideas and credibility, helping to make Mr Greenspan the Oracle of Delphi for financial markets.
The salient effects of the Fed’s stabilising strategy, and similar ones followed by most other leading central banks around the world, have been stunning. The risk premium on long-term interest rates is down sharply, helping fuel sustained growth and expansion. (Let us set aside the thorny problem of the concomitant global housing bubble for another day.)
Paradoxically, then, the Greenspan Fed has succeeded by reducing the role of monetary policy, rather than by enhancing it. Factoring in the superb staff and generally strong team in place on the federal open market committee, there is no reason to fear the post-Greenspan world. Certainly, there remains much room for debate on the fine points of how to respond to asset bubbles, not to mention productivity or terms of trade shocks. Whether the next Fed chairman will succeed in continuing to refine Mr Greenspan’s eclectic approach to include more formal inflation targeting remains to be seen. Who knows, maybe Mr Greenspan himself has already proposed such a mechanism, and we just did not understand it.
Oh please, how much more fawning can you get???
Let me sum up Greenspan' career very fast:
- there is no financial crisis that cannot be solved by throwing large amounts of money at it;
- not being obvious about it somehow makes it more palatable to the more scrupulous types in the banking world.
Let's be real. Greenspan has presided over the biggest bull market ever by fuelling it on every occasion he could. Of course Wall Street is happy about him - they have made money beyond they wildest dreams thanks to him. Bull markets were rewarded with "new economy" pronouncements, whereas crisis or dropping markets were blessed with lower interest rates and money injections which took out all the pain and offered new opportunities. The 1987 crash? Forgotten in a few months of cheap money. The 1998 Asian crisis? Forgotten in a few months of cheap money? The 2001 dotcom bubble? Forgotten in a few months of cheap money? 9/11? a second opportunity in the same year to open up the money taps.
Greenspan is the maestro of a runaway train, the caon artists who has been able, thanks to the almost unlimited credit of the US treasury, to double up his bets as he lost each of them. Thre Asian crisis was not a crisis until the LTCM systemic alert, which was drowned in an orgy of public money. The dotcom bubble was not a bubble until it was, but that was forgotten when 9/11 gave a great excuse to wash it all out in a new orgy of debt.
Well, Greenspan is a maestro, in the sense that he is smart enough to leave the train before it crashes. Have you notices all these small provisos in the above articles? ("The new exuberance is in the housing area, and that problem will have to be resolved by the next chairman", "Let us set aside the thorny problem of the concomitant global housing bubble for another day") As Americans say, "Duh"! The housing bubble is the biggest bubble in the history of the world. It is the sum, compounded, of all the bubbles created by Greenspan in his job. It is the bubble that has been able to absorb all earlier bubbles, by being bigger than them.
It will burst.
When it does, I certainly hope that Greenspan will be blamed for it, as he deserves to be. He is the perfect Bush shill: deal with today's problems by apparently solving them by pushing them (if needed, making them worse in the process) into the future. Never forget that Greenspan was part of the team that brokered the 1983 deal on Social Security, whereby contributions by the middle class were increased so that there would be surpluses to take care of the future - and he was part of the team that let these surpluses be used for tax breaks for the richest under Bush, suggesting to increase contributions (or reduced benefits) to solve the imaginary "Social Security crisis" (in fact, a federal budget crisis) for those that have been paying more than they should for the past 20 years.
The man is a hack, but he has given the financial markets what they love, so that they don't complain. But this is really a pyramid financing that he has built, like you can find in Russia or Albania - but hey, who cares, it's only the middle classes that will bear the brunt of it.
Greenspan has not been a good central banker, like Volcker was. Volcker was respected, but hated, because he brought inflation down by imposing pain on everybody. Greenspan has not imposed pain on anyone. He is the king of instant gratification, which makes him a good representative of our times, I suppose.
Let me finish with a kinder word for the Financial Times, which did publish on the 23rd, i.e. on the same day as the Rogoff article, a more critical letter to the editor, by the economist of a big European bank (Paul Mortimer-Lee, of BNP Paribas):
Greenspan may be skilled with a wedge but he could leave his successor in a very large sand trap
Andrew Balls ("Greenspan's record", Comment & Analysis, August 22) paints a picture of the Fed chairman's record that is way too favourable.
First, Alan Greenspan's judgment is far from infallible (...)
Second, not only did he supinely back off his "excessive exuberance" line on stock prices once the politicians grumbled, but he later became one of the chief cheerleaders for the "new economy", thereby helping to inflate the bubble and the associated disastrous deterioration in corporate finances. His recent rhetoric on the housing market is not so flawed, (though he indulges the current central bank fashion for recognising a bubble only after it has burst). However, presiding over one bubble could be seen as bad luck; presiding over two begins to look like carelessness.
Third, Mr Greenspan has elevated moral hazard to a new pinnacle. Given his past record - never hesitate to flood the market with liquidity, but be very careful not to take it away - is it any surprise that US household debt levels are at record highs? Is there any real doubt about what the Fed will do if the US housing market hits the rocks? That by itself increases the probability and likely eventual severity of a bust.
Overall, Mr Greenspan has been far-sighted and effective when it has come to dealing with financial crises. But his myopia on the effect that Fed behaviour (and expected Fed behaviour) has on asset prices and debt is a serious flaw. He is great with the sand wedge, but he should have avoided the traps in the first place. Given the huge imbalances in the US economy, arguably he will leave his successor in the biggest bunker yet.
It's good to see that not everybody in the market has fallen for him, and that some do see the obstacles ahead. To be fair, pretty much everybody sees them (the housing bubble is mentioned in each article), but a lot are still hoping, without cause, that somehow, this time, like the previous times, the Fed will be able to do its magic and save the markets (not the economy, mind you, just the markets). With Social Security now dead, it's really hard to see what could take the place of the housing bubble.
So please, do NOT join the parade of those congratulating Greenspan for his record. History will not be kind to him.