Greenspan Points Fingers, But Takes No Blame

by: Felix Salmon

The WSJ has got its hands on Alan Greenspan's new book, and it certainly sounds like he's more interested in making excuses and pointing fingers than he is in taking responsibility for the consequences of his actions. The Republicans "deserved to lose" in the last midterms, he says, because of their failures on the fiscal-policy front. Clearly, they weren't concerned enough about the risks of running large and permanent deficits: they should have listened to the Maestro.

Except they they did listen to the Maestro. Let's turn to Paul O'Neill's book, The Price of Loyalty, pages 60-62. Alan Greenspan is meeting with Senator Kent Conrad, who's worried about Greenspan's forthcoming Congressional testimony on the subject of the White House's proposed tax cuts. "What you'll do," he tells Greenspan, "is throw fiscal responsibility out the window."

How does Greenspan respond?

"Senator, I'm deeply worried about too much accumulation of money in the hands of the federal government. To the extent that we run cash surpluses, the government will accumulate cash, and, to get some reasonable return on that money, will have to invest it in the markets. Investments of this size, by the government, will politicize the economy. Nothing could be worse."

That's right: While the likes of Kent Conrad were rightly concerned about fiscal deficits, Greenspan was much more worried about fiscal surpluses. It seems that Greenspan was worried about exactly the wrong thing.

But everyone's allowed one mistake, it's not like this is something he made a habit of, or anything... or... let's go back to the WSJ for a second.

Many economists say the Fed, by cutting short-term interest rates to 1% in mid-2003 and keeping them there for a year, helped foster a housing bubble that is now bursting. In his book, which was largely written before much of the recent turmoil in credit markets, Mr. Greenspan defends the policy. "We wanted to shut down the possibility of corrosive deflation," he writes. "We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address....It was a decision done right."

Yep, the biggest risk that Greenspan saw was deflation, and he was happy to blow bubbles in order to "shut down" that risk.

Are we seeing a pattern here? In the first case, Greenspan was overly worried about the corrosive effects of long-term fiscal surpluses. In the second case, Greenspan was overly worried about the corrosive effects of a negative inflation rate. In both cases, Greenspan advocated the wrong policy because he was worried about something which (a) never happened; (b) never even came close to happening; and (c) has pretty much never happened economic history, anywhere.

But it doesn't seem like we're going to be getting much in the way of apologies from The Age of Turbulence.

Update: The NYT has more, including the interesting fact that "Greenspan reserves his highest praise for Bill Clinton". Ah, hindsight. He also is quoted conceding that "Conrad and Rubin were right" on fiscal policy. But at the end of the piece he's quoted yet another time as worrying too much about something which really doesn't deserve such concern:

Mr. Greenspan generically defends the Fed’s action, writing: “I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support.”

The benefits of broadened home ownership? Protection of property rights? Um, did anybody, anywhere, suggest for one second that if the Fed raised interest rates then property rights might be at risk? And in case Greenspan didn't notice, well over half the homes in the US are already lived in by their owners. The broadening of that number during the property boom was small indeed. Greenspan's excuses seem incredibly weak: why can't he simply admit he was wrong?