Greenspan: Guilty as Charged

In Foreign Policy, longtime Morgan Stanley economist (currently serving as Chairman of Morgan Stanley - Asia) provides us with a much-needed history lesson of Fed monetary policy failures, throwing some well deserved cold water on former Chairman Alan Greenspan's triumphalist attempts to secure his legacy as the 'maestro of Wall Street'.

Roach helpfully recalls that:

[D]uring the 18 ½ years [Greenspan] spent at the helm of the Fed, guided by the belief that the U.S. public wants rapid, albeit noninflationary, economic growth. A politically compliant central banker, he has stated in his best-selling memoirs that he believes the independence of the Federal Reserve is not set in stone—implying that there is always huge pressure to keep the growth machine humming. A market libertarian, he has long argued that regulatory intrusion slows the economy. [. . .]

Greenspan’s handling of the housing bubble is the smoking gun. The Greenspan mantra is that markets know best—that central bankers should not attempt to override the verdict of millions of market participants by declaring that an asset bubble has formed. After all, there are the costs to economic growth to consider if monetary policy is used to deflate such bubbles. And why should any modern economy have to incur those costs? After all, goes the script, the authorities always have the wherewithal to clean up any post-bubble mess. [. . .]

Increasingly supported by the confluence of both property and credit bubbles, U.S. consumers spent well beyond their means. Personal consumption climbed to an unheard-of 72 percent of real GDP in 2007—a record for the United States and, for that matter, for any leading economy in modern history. At the same time, household debt soared to a record 134 percent of disposable personal income. America certainly achieved the rapid growth that Greenspan felt the body politic wanted. [. . .]

Of course, squabbling over Alan Greenspan’s place in history is not going to get us out of this crisis. But vigorous debate about the past is absolutely essential if we are to avoid such a quagmire in the future. As always, the search for scapegoats is on. Rating agencies, regulators, Wall Street, loan sharks, property speculators, and subprime homeowners will all pay a steep price. Some, of course, already have. In the end, I suspect the Federal Reserve will also pay a steep price, losing some autonomy when Congress adds financial stability to the Fed’s mandated charge of maintaining full employment and price stability. As well it should. The central bank’s stewardship of the U.S. economy is far too important to be left to politics and ideology.

For more criticism of Greenspan, see William Greider's article for The Nation last September "Greenspan's Fraud" as well as Ravi Batra's book by the same name.