Greenspan Stands His Ground
Ex-Chairman Says Fed Policies Didn’t Cause Current Woes
By Steven Mufson
Washington Post Staff Writer
Friday, March 21, 2008; D01
Perhaps the Maestro composed some discordant notes after all.
The record of longtime Federal Reserve chairman Alan Greenspan — worshipped by business leaders and dubbed “Maestro” in a 2000 biography by The Post’s Bob Woodward — is getting a critical look as his successor Ben S. Bernanke wrestles with problems that began on the Maestro’s watch.
Many economists blame Greenspan for lax bank supervision and for keeping interest rates too low, too long from mid-2003 to mid-2004. That, the theory goes, fueled the housing bubble and spawned subprime and adjustable-rate mortgages for low-income people, vast numbers of whom can’t make their payments now. Banks bought those mortgages in bundles that are worth far less than they originally were. That has led to big write-offs, shaking the entire financial system.
In an interview yesterday, Greenspan said the Fed wasn’t to blame. He said that global forces beyond the control of the Federal Reserve had kept long-term interest rates low, fueling the housing bubble earlier this decade. “Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time,” he said. “I don’t know of a single example of when interest rate policy has been successful in suppressing gains in asset prices.”
Regarding the current turmoil, Greenspan said that a market crisis was inevitable. “If it weren’t the subprime crisis it would have been something else,” he said. That is because an era was ending that had seen “disinflationary forces” from developing countries such as China and a “protracted period” in which there was an “underpricing of risk.”
First of all, Alan, one has to wonder what the risk actually is, when interest rates are at 1% and doubling that is, in your view, likely to shut down the economy. What it actually did out there in the wide, wide world of commerce, was to destroy the dollar.
The buck, Mr. Greenspan, didn’t stop on your desk. It didn’t even pause on the way to the floor, but you had an unfunded war to contend with and an unfunded tax break to the wealthy as well. Hence, the CYA memoir you left us with as you quietly got out while the getting was good (or at least possible).
Simply said, Al, you didn’t contend. Disinflationary China is now buying and bailing out America. Being disinflationary was supposed to be your job.
Bob Woodward, who dubbed Greenspan “The Maestro” in 2000, was less flattering in 2007 (but then Woody was a little late on his Bush judgments as well);
Alan Greenspan, who served as Federal Reserve chairman for 18 years and was the leading Republican economist for the past three decades, levels unusually harsh criticism at President Bush and the Republican Party in his new book, arguing that Bush abandoned the central conservative principle of fiscal restraint.
Fiscal restraint was the unknown soldier during those three decades. Excepting, of course, a brief time out during Bill Clinton’s presidency, when budgets actually got met and the national debt actually got paid down (a bit).
As late as October of last year, Alan thought it (the economy) would be OK. The man who didn’t see the dotcom bubble or sub-prime bubble “didn’t expect a rapid decline in the dollar,” even though it had already experienced a 50% hit.
Greenspan was the hit man.
“Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time,” he said. Yeah, Alan. Why exactly is it that you didn’t try it? “
“I don’t know of a single example of when interest rate policy has been successful in suppressing gains in asset prices.” Think back, Al–way back–back to the late 70’s when we were all younger, your glasses were thinner and mortgage interest rates were 22%. The gains in asset prices were monumentally suppressed.
The Fed’s job (by the Greenspan definition) is to regulate the money supply, defend the value of the currency and control inflation. As Al handed the keys to a very beat-up car to Ben Bernanke,
1) the dollar had fallen by half,
2) $2 trillion had been additionally ‘regulated’ into the money supply for war and tax cuts and
3) the house I bought in 1972 for $160,000 was recently sold (not by me) for a million and a half.
That’s not the vaunted increase in wealth through home-ownership that your government would have you believe, that’s a 1,000% inflation over 30 years. The proof of that is the fact that I was able to buy that house with a one-third down-payment in a single income household. Now, after three and a half decades of conservative government, two incomes and no down-payment can’t afford that house.
The Fed advised Congress that the new-fangled invention called ‘hedge-funds’ needed no oversight, no rules, no definition and that it was perfectly alright to allow hundreds of trillions internationally to deal in their ‘derivative‘ investment vehicles. No one, including Alan, knew what the hell they were or how to define them, but fueled by near zero interest rates, they were making a ton of money for a very few investment banks and a very few guys at the top.
Which, predictably, led to a old-fangled fraud before the very eyes of the ‘regulators’ who didn’t know what the funds were doing, how they were doing it and who they were doing it to.
Which (as sometimes happens when new-fangled meets old-fangled) stopped a ton of money in its tracks–at least at the banks. So far as I know, the guys at the top are still raking in $100 million salaries.
In a normal world, free-for-all market exuberance is followed by free-fall stock prices, recession and sometimes depression. Normally, there is government intervention by means of public works spending to pull the nose of the economic plane back up before it hits the ground.
But these are not normal times. We have a defiant president in denial and close enough to leaving office that he thinks he can bull it out and leave the war, the deficits, the carnage and the wrecked economy to the next occupant of the Oval Office. He has a determined Treasury Secretary and a newbie Fed Chairman piloting and co-piloting this plunging aircraft and there’s not much we can do but fasten our seat-belts.
In a stunning slip of the tongue just three days ago, Secretary Paulson said (Reuters);
the Treasury was “all over” the turbulence in capital markets and said he does not think shareholders of Bear Stearns — which was bought by JP Morgan Chase & Co — believe they have been bailed out by the Federal Reserve.
“The big focus on the part of all policy makers is to minimize the spillover to the real economy. We need to keep our capital markets stable, functioning well,” Paulson told NBC.
Spillover to the ‘real’ economy? The fraud and profiteering and criminality of the (apparently) unreal economy that these geniuses have sprung upon the unsuspecting, may finally and actually affect the real economy. That’s not going to be Henry Paulson, George Bush or Alan Greenspan.
But it certainly sounds like you and me.