|Alan Greenspan: "Don't Blame Me"|
By Edward Ericson Jr.
As a reporter with a passing interest in economics, the worship of Alan Greenspan has puzzled and irked me for two decades. The allegedly "brilliant" chairman of the Federal Reserve, who speaks with the clarity of an autistic middle-schooler, was nonetheless feted as an "oracle," first by the business press and later by the so-called mainstream media, culminating in the inevitable hagiography by Bob Woodward, Maestro.
It never made sense to me.
Despite soaring measures of GDP, general wealth and other economic indicators, I experienced the 1980s, 1990s, and 2000s as an economic struggle. So did just about everyone I know.
Everywhere I looked, people who worked for a living were losing their jobs, suffering pay cuts, scrambling to "retrain" for something more ephemeral and less associated with the production of actual goods. Getting rich, meanwhile, were people who were working an edge: swampland and time-share salesmen, politicians with cell phone franchises they won in a government lottery, hedge-funders, dotcom hotshots, outsourcers, privatizers and house-flippers.
Their business models--the ones I got to see up close, at least--seemed to have in common the provision of money for nothing. They profited from others' ignorance, or from government connections, or from borrowing huge sums of money and taking a cut. In Greenspan's economy, the winners were precisely those who did not work, who bent or broke the rules.
Greenspan's prescription: fewer rules to break, fewer regulators.
It all seemed destined to end badly, which is why I greeted the current economic turmoil with some hope. Finally, I thought, people's eyes might be opened to the fraud at the center of our economic system. Finally, Greenspan's reputation will be recast more in line with reality.
So far, nothing.
So it was with interest I read Greenspan's essay in today's Wall Street Journal (pay site), "The Fed Didn't Cause The Housing Bubble."
Perhaps because Greenspan has seldom been compelled to defend himself, he does so with the same myopia he employed in running the U.S. economy into a ditch. Like a middleschooler with an Ayn Rand fixation, Greenspan ignores the world as we know it and instead debates "my good friend and former colleague, Stanford University Professor John Taylor, with whom I have rarely disagreed."
Taylor says Greenspan should have raised interest rates in 2003, and then all would have been well. Greenspan disagrees, and on this tiny point he is credible (once you chop through his prose):
Moreover, while I believe the "Taylor Rule" is a useful first approximation to the path of monetary policy, its parameters and predictions derive from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the sole basis for successful policy analysis or advice, with or without the benefit of hindsight.
Naturally, Greenspan prefers the assessment by Milton Friedman:
In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."
This leads Greenspan back to the error which actually led to this crisis--the one policy prescription to which people like Greenspan remain unshakably wed, deregulation:
However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living.
This unquestioned faith in the power of "unbridled financial innovation," this notion--unsupported by any evidence--that such innovation is not only an important part of the productive economy, but also crucial to "enhance standards of living," is the core of Greenspan's error.
How do we know that Greenspan's self-serving WSJ essay is short-sighted--perhaps disingenuously so? Because the record of deregulation's failure is not five years old; it is 20 or 30 years old. From the 1987 stock market crash and the Savings and Loan fiasco to the dissolution of Enron in 2001 and AIG's present predicament, the common denominator is regulatory withdrawal followed by massive looting and fraud.
The best recent illustration of this came Monday, as the Columbia Journalism Review's Elinore Longobardi unearthed a series of forgotten GAO reports warning about the dangers of derivatives.
The first report came in 1994. The main reason you never heard of it? Greenspan said it was piffle.
Here's how Dow Jones reported the thing as it spiraled into oblivion. Keep in mind, had derivative instruments been regulated in the mid 1990s and forced onto public markets, today's banking crisis would almost certainly never have happened. Neither would Enron have ended the way it did, nor would the hedge fund Long Term Capital Management been able to lever itself up to the point where its collapse required a $5 billion bailout in 1998.
Federal Reserve Chairman Alan Greenspan was asked at a derivatives hearing before Markey's House Telecommunications and Finance Subcommittee last week to assess the chances that a derivatives-caused mess might lead to a taxpayer bailout. "Negligible," replied Greenspan, who with that one word squeezed the air out of the GAO's laboriously constructed bailout scenario. There was no more talk of a taxpayer bailout at the hearing, or elsewhere.
Would that Alan Greenspan's error were his alone, and not the bedrock principle of the Republican Party, and most of the Democrats as well.