As things – ahem – unwind, I find myself becoming more and more sympathetic to former Federal Reserve Chairman Alan Greenspan as others are becoming less and less so. [Links to two recent critiques appear at the end of this post.]
First, I wonder if the Chairman, who devoted more than a generation of his life to public service (think about that) may simply have under-estimated the greed or self-destructive nature of other "market participants.”
If so, then I am not sure that the “current crisis” is, or was, "his fault." When lemmings dive off a cliff, and you watch them, is that "your fault?" Don't know.
Second, monetary policy acts with long and variable lags (pdf warning) (i.e., you NEVER know how long the economy will take to respond to changes in Fed policy, i.e., the Fed Funds rate, you can only guess). Given this known variability, believe that the simplicity of Chairman Greenspan’s chosen policy tools (as opposed to the babble of acronyms – TARP, MIFF, TCPP, TLGP - currently in vogue) stands out as the biggest difference between policy choices then and now.
With Chairman Greenspan, I believe we knew what he was doing as he did it. We (and he) simply didn’t (and couldn’t) know how long things would take.
When Chairman Greenspan received criticism for his actions, there was nothing that limited Congressional response - to events at the time - to just words. Somebody had to do the “heavy lifting”, in real-time, right-then-and-there. While Chairman Greenspan received criticism for “speaking in riddles”, I believe that the current inconsistency between the described intent of macro-market legislation and their actual application (less than two weeks later!) is far worse.
Consider the current case of TARP, the “Troubled Assets Relief Program”. The program that became law on 3 Oct (and which was presented to Congress and the public as a program to purchase troubled assets from banks), is not what we have now (a program to make direct, focused government investment in banks). Which is better – riddles or deception?
Secretary of Defense Donald Rumsfeld, speaking in Kuwait in 2004, famously said:
As you know, you have to go to war with the Army you have, not the Army you want.
I believe that for the current bailout efforts, the “slogan” should be:
As you know, you have to fight the crisis with the legislation and policy that you have, and if that’s not what you want, then you can just make it up as you go.
Why so much complexity and duplicity now?
- R.J. Barro, Cato Institute 24th Annual Monetary Conference - Milton Friedman: Perspectives, Particularly on Monetary Policy, Nov 2006 [Includes George Stigler’s picture of Milton Friedman receiving speeding ticket. See last page].
- C. Lester, The Kansas City Star - Alan, like Atlas, shrugged - Oh, Alan. What would Ayn say?, 3 Nov 2008.
- Los Angeles Times and The New York Times, Seattle Times - Former hero Greenspan blamed for credit crisis, 24 Oct 2008.
- Aretha Franklin, I Never Loved A Man The Way I Love You - Respect, Rhapsody/Atlantic 1967