Over at Felix Salmon's place, guest-blogger Yves Smith chastises Alan Greenspan:
Remember, a central banker actually has very few policy tools, and monetary policy is a blunt instrument. Moral suasion is one of their powerful but often not effectively used instruments. Greenspan, unfortunately, was an enabler, fond of impenetrable statements that left everyone perplexed but not worried since in the end he'd open the money tap in times of trouble. It was a hollowing out of the role of the central banker who, as William McChesney Martin famously remarked, was supposed to take the punch bowl away just when the party was getting good. Greenspan didn't merely help create widespread asset inflation via overly aggressive rate cuts in 1998 and 2002, but also set a tone that makes it hard for his successor Bernanke to deliver tough messages.If there were ever any doubts about Greenspan's willingness to rock the boat, they were dispelled, irrevocably, on December 6, 1996. Greenspan, the evening before, had used the now famous phrase, "irrational exuberance," as a question rather than a statement about a recent runup in the equity markets. The Nikkei fell 3% overnight. European markets traded down 2-3%. The Dow dropped 145 points before rallying late in the day.
And Greenspan took the trouble to clarify his remarks and retreat from any implication that stocks were too high.
Now readers might think this confirms Greenspan's power, but actually it shows the reverse. The stock markets are not the Fed's job. And worse, a Fed chairman should not try to talk the markets up. This revealed how Greenspan was hostage to the markets, and that attitude may have taken root at the Fed.
I'm not sure I'd cite William McChesney Martin as an example of a fellow who took the punchbowl away when the party got going; during the last five years of his twenty-year fed term, he allowed inflation to spike from 1.6% in 1965 to 5.7% in 1970, rather higher than is thought fitting by today's central bankers.
I think it's justified to fault Mr Greenspan for concern with the stock market . . . only most of the people mad that he worried about falling prices were also mad that he didn't pop the stock bubble by raising rates. As a friend reports, he once saw Greenspan heckled by one Punchbowl Paul, who demanded to know why he hadn't done something about the speculative bubble.
Greenspan blinked, then said "If you're asking whether we know how to use the tools of the central bank to deflate a stock market bubble, the answer is yes." He then stood silently while the various financial types in the room pondered just how high he would have had to raise rates, and margin requirements, in order to pop that particular bubble, and the fairly hideous economic effects that would have resulted from such an action.
But I don't think that the world would have been a happier place if Greenspan had kept the lid on the punchbowl in 1998 and 2002. We haven't had a really bad, deep recession in 26 years, and it seems reasonable to think that the Fed's willingness to control inflation, while releasing liquidity as necessary, are very much responsible for that change. Had Greenspan not opened the taps when times got tough and markets were unhappy, we might well have had some really nasty fallout.
The problem really is that central bankers, like most government institutions, are equipped to fight the last war. Alan Greenspan (and now Ben Bernanke) had excellent tools to deal with price inflation and liquidity problems. But our central bankers don't have much on tap to deal with asset price inflation, i.e. speculative bubbles. Nor do they have any way to keep a flood of capital from flowing into our markets and lifting all boats, so to speak . . . nor from flowing back out and leaving us to deal with the mess. In the latter case, I don't think that they should have those tools. But that means they can't protect us from all bad financial events.
Here what the fed could/should have done:
1998- after bailing out the credit market in Oct with 75 bp worth of cuts, take them back early in 99.
2000-2001 - not raise rated 13+ times when things were clearly falling apart
2002-2004 - not bring rates down to 1% for as long as they did, prompting a real estate bubble. ALso not promoting the use of ARMs when rates were at the abosolute lowest point in 50 years.
Greenspan era was one of a too activist fed and clearly bought into the whole "Maestro" persona.
To me, what's remarkable about recent economic history is that various recent financial panics (the 1998 Russian debt crisis, the bursting of the dot-com bubble, etc.) have had so little impact on the real economy, compared to the financial panics of the 19th and early 20th centuries. People like Yves Smith seem to regret this, and to believe that the purpose of economic policy is to produce an economy with some sort of "real" or "essential" soundness. For myself, I believe only in the phenomenal economy, which has done very well, despite the apparently incurable human tendency to asset price bubbles and financial panics.
I think that Mr Greenspan did a fine job.. he was one of the first to warn of a bubble.. he did what he could to ease the impact of the burst..
But the "internet" bubble was an emotional one? Bill Gates was already the richest man on the planet - his and other IT stocks have been doubling for more than 15 years when some old school bankers and consultant discovered "high-tech"... Does nobody recall how The Economist used to write about Silicon Valley before the "internet".. a bunch of weirdos, geeks, etc..
The bubble exploded because suddenly - everybody wanted a piece of the revolution... The kind of people who suddenly poured into high-tech.. oh my god.. but the "insanely great IT growth" has already been going on for decades and will continue for decades to come.. with or without the free-riders? once the bubble has burst - there was room and air again for something new.. along came $ 150 billion in market cap for a search engine...?
Again: It was NOT the geeks and entrepreneurs who caused the bubble.. not Mr Greenspan's fault that.. it was asymmetrical information BEFORE the Internet that was the main reason?
I want to clone Mr Greenspan!
The criticism of Greenspan is a version of the Ted Williams Was a Bad Baseball Player (because he failed to get a hit twice as often as he succeeded) argument.
But, when compared to every other person in Williams's profession, he is one of the handful of great hitters in the history of the game.
Similarly, when judged against other Fed Chairmen, Greenspan turns out to be Williams, Babe Ruth, Hank Aaron, and Bobby Bonds all rolled into one.
Yeah, some perspective is useful. In a world where there are the likes of Arthur Burns, Alan Greenspan looks pretty good.
For once I agree with Patrick Sullivan.
I know he is going to die of shock.
One of Greenspan's greatest acts of mischief was giving the green light to Bush's regressive tax cuts, thus permitting a return to income inequality not seen in America since the Gilded Age.
Ms. McArdle's blog is part of the cultural overhang of the greed-is-good Greenspan era. As Americans look around at the slow destruction of the middle class, they have ample reason to disparage the legacy of Greenspan.
"Here what the fed could/should have done:
1998- after bailing out the credit market in Oct with 75 bp worth of cuts, take them back early in 99.
2000-2001 - not raise rated 13+ times when things were clearly falling apart
2002-2004 - not bring rates down to 1% for as long as they did, prompting a real estate bubble. ALso not promoting the use of ARMs when rates were at the abosolute lowest point in 50 years.
Greenspan era was one of a too activist fed and clearly bought into the whole "Maestro" persona.
"
I concur.
I do not concur with Patrick Sullivan.
Greenspan delayed any substantial recession until he was out of office, because he could. We didn't need a huge stimulus during the asian crisis as a small one would have done it, and then didn't need to raise rates over and over again until the economy stalled COMPLETELY in 2001. Then the recent lowering rates to historic lows was completely unprecidented and set the stage for the housing bubble and the more recent huge raise in rates. Simply look at the historical FF rate on a chart, the last few years look like an earthquake. That earthquake was Greenspan trying to save his legacy and has landed us in the housing bubble and commercial paper crisis we are currently facing.
It is going to be very, very ugly in a year, all because Uncle Al couln't bear to see himself retire during a recession.
HH: If Bush's tax cuts are the main reason why inequality has shot to such high levels, why is it then that the largest increases in the income of the top 1% (and income inequality as a whole) came BEFORE Bush II?
http://economistsview.typepad.com/economistsview/images/fig171506.gif
http://ezraklein.typepad.com/photos/uncategorized/gini.jpg
Blame Reagan, Bush I, even Clinton if you feel like it but at least look at the facts and realize that most of the growth in US income inequality had nothing to do with Bush II.
Bush and Rove signed on to the Grover Norquist agenda, which was to put American society into a time machine set to 1890. It is under Bush II that middle class incomes have stagnated while CEO and other top earner incomes have exploded.
There is now a well-developed right-wing craft guild that weaves selected economic statistics into flimsy garments to cover Bush II's plutocratic nakedness. But the evidence of a new (guilt-free) Gilded Age is all around us. Millions of middle class citizens (like Ms. McArdle) are getting pushed out of health insurance plans, while yachts and private jets are setting sales records.
Grover Norquist won't be content until America has a social structure resembling Mexico - but with higher walls for the rich and more armed guards.
Wait... So HH... You think those graphs are from a 'right-wing craft guild'?
I'm sure Ezra and Mark will be happy to know they're in cahoots with the ultraconservative conspiracy.