Greenspan Just Captive to Conventional Wisdom of His Time

In his whirlwind media tour to defend his record, Federal Reserve chairman Alan Greenspan does not blame himself but the global savings glut that pushed interest rates to exceptionally low levels around the world. He tried to get rates up in 2004, he says, but the glut won’t let him.

But as I pointed out in the fifth and sixth posts to this blog way back on Jan. 31 and Feb. 1 of 2006 (around the time accolades were pouring in for “The Maestro” upon his retirement), many external forces did favor him. They included: i) freedom from the obligation to finance a Cold War and/or shooting war like Korea and Vietnam, ii) freedom from having to deal with an oil shock like in 1973-74, and the iii) damping of inflation due to the low prices of imported goods from emerging countries.

In other words, unlike most of his predecessors, Greenspan had one of the more ideal environments in which to conduct monetary policy in pursuit of economic stability. Still, I don’t fault him on a personal level. I see him more the captive of the conventional wisdom of his time, i.e. all central bankers had to do was stabilize inflation around a 2% rate in the consumer price index (for more on this, see Ensuring Financial Stability).

The problem with the prevailing price stability rule is that it ignores inflation outside of the consumer sector, particularly rises in asset prices. The latter should be in the monetary standard as well, in my opinion. Greenspan still does not see it that way: he has been telling interviewers it isn't the job of central bankers to thwart bubbles.

In my previous posts back in Jan and Feb of 2006, I wished current Fed chairman Ben Bernanke good luck. That still stands.

Comments

[Malkiel:]

I agree with the idea that people work within an environment and that criticisms of Greenspan's interest rate policies as being somehow responsible for corrupt credit practices later is too much of a stretch. It's like blaming all the authorities who could have nabbed Bin Laden in the 90's for 9/11; none of us, from street level to the top of the government, could have imagined dealing with a serious conspiracy to do what they finally did, so villifying people who missed the chances is beside the point. We lived in one environment then and a different one now, and our foresight today is no better for the next bubble or the next disaster...

2008 Apr 11 04:02 PM

[cpeterka:]

So, why do we pay him the big bucks, if he can't see into the future?
What good is that?
Reacting to a crisis AFTER it happens, we can all do that.
He's supposed to see the crisis coming.

2008 Apr 11 05:26 PM

[EUARTE:]

You are being very kind to Greenspan. We did not need him following conventional wisdom. He was there to be at least a little smarter than that. He was not. He was purely interested in keeping the job. He never did much which would upset the president in power. Staying in office was his only real goal. To this day he pretends that he had no responsibility for anything negative. Pride and keeping those high fee speaking engagements is the total goal. Shame on you Al.

2008 Apr 12 12:43 PM

[mallarde:]

There are people that predicted what Bin Laden would conspire to do. I was reminded by some work associates soon after 9/11 that I suggested that if terrorists really wanted to inflict damage they would hijack a plane into a skyscraper.

I am not sure what the largest criticism of Greenspan is today, but he should be shrewd enough to not bow to conventional wisdom.

2008 Apr 12 08:17 PM

[pharma:]

Yes, Greensh*t was a great Fed chairman. His answer to any problem: poor more money on it. So, he was a great bubble creator. Al was not up to the job.

We live in the age of mediocrity. Just look at our last three presidents (including the present one) or the present presidential contenders. They had/have no idea of what they were/are doing and potential consequences their actions could bring.

2008 Apr 12 10:23 PM