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Reid on Greenspan
Just about everyone's quoted it already, so I'll refrain. And I've criticized the Chairman's bait-and-switch (ably summarized by Paul Krugman) in the past, so I'll let what Krugman says stand. Instead, let me add a little background to the effect that Senator Reid has some sort of long-standing beef with Greenspan that, unlike the standard-line critique we're hearing, seems to actually be grounded in his conduct in doing his actual job -- running the Federal Reserve. I don't have real ideas about how that job should be done, but I am aware that there seems to be a very widespread consensus that Greenspan has done a good job of this. Setting the interests rates and so forth. Insofar as people have complaints about the man, it overwhelmingly concerns his freelancing as a fiscal policy analyst. I'd be interested in knowing what kind of critiques of his interest rate policy are out there.
March 4, 2005 | Permalink
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Comments
My feeling, as an average joe, is that Greenspan, by stepping on the breaks on a level far far FAR below optimal (in my mind) employment levels, basically caused the recession.
My feeling is that there's too much concern among economists of all stripes of maintaining stock value (which is so far from based in reality it's not even funny), and not enough towards long-term economic and social stability.
And Greenspan is a prime architect of that.
Posted by: Karmakin | Mar 4, 2005 1:31:45 AM
Some people blame Greenspan for the size of the bubble in the '90s. But it seems that just as many progressives think Greenspan's policy pronouncements ignore the plight of working Americans, Senator Reid thinks his monetary policy does the same.
Posted by: Matt Singer | Mar 4, 2005 1:36:47 AM
AFAIK, Reid was unhappy that Greenspan was keeping interest rates so high during the mid-90's, before Greenspan shifted gears and acknowledged the technology driven productivity revolution.
I'm agnostic about this particular complaint. I think a more valid complaint is that Greenspan waited 12 months too long to pop the market bubble, which made the fallout dramatically worse.
-----
"Senator Reid has some sort of long-standing beef with Greenspan that, unlike the standard-line critique we're hearing, seems to actually be grounded in his conduct in doing his actual job -- running the Federal Reserve."
I'd say that providing some guidance to the political system on how their actions affect the fiscal health of the country is part of Greenspan's job description. And on that count, he deserves nothing but criticism.
If he had fulfilled the apolitical role envisioned by the Fed's charter, instead of acting like a Republican apparatchik over the past 4 years, Bush's disastrous fiscal policies might have had more difficulty becoming law.
Posted by: Petey | Mar 4, 2005 1:42:48 AM
Some (see John Cassidy: dot.Con) fault him for keeping interest rates too low in the late '90s and in doing so let the internet bubble expand too much. But there were good reasons not to raise interest rates at those moments in the late 1990s when critics would have had him raise rates: LTCM crisis ('98) and Asian crisis in particular ('99). So it is unclear when he ought to have pricked the bubble. He could also be blamed for policy in the last 4 years, that somehow he ought to be raising rates because low rates are driving a possibly ruinous housing bubble, but the economy has been sufficiently sluggish that he would also be blamed for being unfair to workers if he did.
On the whole, then, its unclear what a valid line of critique is. We have to keep in mind, though, that a policy of low interest rates is typically thought of as beneficial to "the people", with a risk of the inflation that the business community dislikes. But Greenspan has benefited from enormous productivity increases which have enabled him to keep interest rates low without creating inflation.
But you should really ask Brad Delong about this...
Posted by: Isaac | Mar 4, 2005 1:43:21 AM
Whoa! Dude's like Andrew Jackson!
Reid:
"President Bush said last week Greenspan, 77, deserves another term, but Reid has voted against Greenspan's Senate confirmation in the past and said he will again. 'My opposition is to the Federal Reserve System itself,' Reid said. 'I think it is the most secretive, nonaccessible part of government that we have'."
• Las Vegas Review Journal, April 28, 2003
Posted by: praktike | Mar 4, 2005 1:43:24 AM
"But there were good reasons not to raise interest rates at those moments in the late 1990s when critics would have had him raise rates"
As multiple critics pointed out at the time, by raising margin requirements instead of interest rates in the late 90's, Greenspan could have inflicted pain on the market without inflicting the broader pain on the economy that goes along with increasing interest rates. A better Fed Chairman would have used this tool to pop the bubble with less dislocation than what went down in 2000.
It's also to Greenspan's discredit that he remained neutral in Clinton's fight with Congressional Republicans to strengthen the SEC in the mid-90's.
Posted by: Petey | Mar 4, 2005 1:56:08 AM
Petey,
Good point, I hadn't thought of that. But since the crisises (sp?) I mentioned concerned the market, and the bubble was internal to the market, it's unclear how something internal to the market like raising margin requirements would solve the problem. He didn't raise rates precisely because he wanted to avoid inflicting harm on the market, not because he wanted to avoid harming the broader economy. While raising margin requirements is an underused tool, I don't entirely see how it would have been an effective tool in this instance.
Posted by: Isaac | Mar 4, 2005 2:02:16 AM
Greenspan let the bubble get bigger and bigger. He didn't jawbone the market, or raise margin requirements (as many here point out). While it seemed obvious to many that it was a bubble (remember day traders?), all Greenspan would say was something along the lines of high-tech transforming the economy and related productivity increases that would justify huge P/E ratios. Then, when the bubble collapsed, Greenspan said something to the effect that he hadn't PERSONALLY experienced a bubble, so how was he to know?
Posted by: Quiddity | Mar 4, 2005 2:24:35 AM
Uh, it's patently just bullshit that the Fed Chairman is applauded for speaking in such dense and cryptic language.
Folks on the inside know what he's saying. With the little knowledge of finance I got from my craptacular MBA I can tell you what he's saying.
It's cryptic. It's obscure. See what the /. say about security through obscurity.
And even such other aholes as Milton Friedman would suggest replacing the Fed with a machine. (Or so I remember from an another ahole economist that taught macro at Haas, Andy the Ahole Rose)
Posted by: jerry | Mar 4, 2005 3:02:45 AM
I think you all give Greenspan too much credit. The bubble was caused by money coming from VCs and baby boomer 401K plans. Even when Greenspan did start raising the rates it had no affect on the markets. The raising of interest rates would have only hurt the construction and home sales markets domestically.
Posted by: Kdawg | Mar 4, 2005 3:03:42 AM
I think you all give Greenspan too much credit. The bubble was caused by money coming from VCs and baby boomer 401K plans. Even when Greenspan did start raising the rates it had no affect on the markets. The raising of interest rates would have only hurt the construction and home sales markets domestically.
Posted by: Kdawg | Mar 4, 2005 3:05:41 AM
Greenspan let the bubble get bigger and bigger. He didn't jawbone the market
BULLSH*T!
In fact, Greenspan was the ONLY ONE in the entire government who ACTUALLY DID try to talk the market down. Remember "irrational exuberance"?
He was, unfortunately, screwed over by the horrific decisions of Robert Rubin and Larry Summers - and their bosses! - to let the bubble continue. Which are primary reasons that Rubin and Summers were mediocre, AT BEST, Treasury Secretaries.
Posted by: Al | Mar 4, 2005 3:05:56 AM
First, in the fall of 1990, Greenspan raised interest rates too high and too fast in anticipation of high oil prices during the first Gulf War. The high oil prices never came.
Second, instead of raising interest rates in the late 1990s when stocks prices were clearly inflated, Greenspan waited until the summer of 2000 to raise interest rates at a time the economy was probably leveling off; he argued that the interest rates had to be raised because the economy was overheating. The timing of the rate hikes close to the 2000 election also had a political taint to it that has never been properly explained.
Third, after ten years of pushing fiscal responsibility, Greenspan's mumbo jumbo about the need to erase the budget surplus by supporting Bush's tax cuts is simply inexplicable and inconsistent with fiscal responsibility.
Fourth, Greenspan's support of Bush's attempt to privatize (discontinue) social security which as we know would incur trillions in debt is again inexplicable and inconsistent with fiscal responsibility.
Fifth, Greenspan's support of a consumption tax seems utterly political and inconsistent with the function of a Chairman of the Federal Reserve. One could argue that by raising the payroll tax for social security back in the 80s, Greenspan was in effect following the lead of the regressive tax policies of Margaret Thatcher. Regressive though it may have been, at least the payroll tax directly benefited the poor, working class, and the middle class. Keep in mind that Thatcher's regressive tax policies were a disaster. Adding more regressive taxation at a time when broad swaths of American workers are seeing little improvement in their earnings, however, is simply beyond the pale.
We need a Fed Chairman who works for all Americans, not just wealthy Republicans. Continuing to pretend that Greenspan is some sort of economic oracle is simply nonsense.
Posted by: Craig | Mar 4, 2005 3:10:04 AM
It's also to Greenspan's discredit that he remained neutral in Clinton's fight with Congressional Republicans to strengthen the SEC in the mid-90's.
This is also utter crap.
The SEC had MORE THAN SUFFICIENT power and resources to do its job in the '90s. The problem was that the completely incompetent Arthurt Leavitt CHOSE NOT TO. Instead of strengthening the Division of Enforcement, he let it drift - choosing instead to waste the SEC's time, money and energy trying to completly overhaul securities regulations (a failure known as the "Aircraft Carrier").
Well, guess what, the Aircraft Carrier sunk. And all that time and money was flushed down the toilet, when it would have been put to good use catching Enron. Which Arthur Leavitt's incompetent SEC completely failed to do.
The SEC was a cash cow in the '90s - it brought in so much money that the Clinton Administration was embarrassed by how much they were costing companies registering securities, so the fees for registations were cut about in half. But Leavitt was so very bad, that even with all that money, he couldn't catch Enron. Thoroughly pathetic.
Posted by: Al | Mar 4, 2005 3:12:33 AM
First, in the fall of 1990, Greenspan raised interest rates too high and too fast in anticipation of high oil prices during the first Gulf War.
This I'll completely agree with. He also screwed Bush 41 out of a second term by failing to lower interest rates to cushion the '91 recession.
Why Bush 43 likes Greenspan so much baffles me, since Greenspan was probably the person the most responsible for maing sure 41 didn't get that second term.
Posted by: Al | Mar 4, 2005 3:14:45 AM
Setting the interests rates and so forth.
If you are prejudiced towards containing inflation at the price of higher unemployment - is setting interests rates such a difficult task? I don't think so.
It would've been a difficult task if he was genuinely trying to optimize this thing, but he is not; he's pretty much only trying to minimize the inflation. Big deal.
Posted by: abb1 | Mar 4, 2005 4:40:17 AM
Greenspan was confused by economic growth patterns in 1997 and 1998, thinking that inflation constantly must have been on the hroizon, and... he kept interest rates too high, making investment in the US excessively attractive and contributing to the catastrophe in emerging markets ("Asian Flu," etc...) that was underappreciated in its severity by most Americans.
Greenspan responsible? Not directly, but... his tactics gave investors a much better alternative to sticking it out in, say, Malaysia, and when you are discussing a panic, as in 1997-98, all contributing factors end up mattering more than they would otherwise.
This also is not "post hoc ergo propter hoc," at least it isn't to the extent to which the fact that I was making those arguments at the time innoculates me.
Posted by: Jeff | Mar 4, 2005 8:18:06 AM
Greenspan, as good as he is, hasn't been able to figure out how to repeal the business cycle. I personally don't hold that against him.
And, if you look at the two recessions that have occurred durring his watch, you must concede that, by historical standards, they've both been mild, shallow, and brief. To the extent his policy-making has anything to do with this state of affairs, I reckon his tenure must be judged a success.
Posted by: P. B. Almeida | Mar 4, 2005 8:35:39 AM
> LTCM crisis ('98)
Just another variation on the old adage: lose $20,000 in your 401(k) and you have a problem; lose $200 billion in your arbitrage fund and the Fed has a problem.
Of all the things Greenspan has done, bailing out LTCM has to be about the least defensible.
BTW, I know a guy who used to attend the double-secret insider meetings with Greenspan. While Greenspan was talking if anyone in the audience started nodding his head in agreement, Greenspan would start using more and more obscure language until /everyone/ in the room was confused. So it is not true that there is a group of insiders who understand what he is saying.
Cranky
Posted by: Cranky Observer | Mar 4, 2005 8:45:32 AM
The argument about margin requirements is, in my opinion, pretty weak. While this would have indisputably punctured the bubble in 1929, by 1999 margin requirements were 50%. The incremental decrease in leverage from, say, 50% to 60%, would not have been enough to pop a bubble where prices were rising 30% a year or more in hot offerings. Also, as I understand it, most of the leverage in the market was of the do-it-yourself variety--mortgage and credit card debt, or corporate debt, financing trading--than of the traditional margin account.
Posted by: Jane Galt | Mar 4, 2005 10:04:11 AM
I construct a Fed policy index based on the spread between the unemployment rate and inflation -- a kind of Taylor rule. This index implies that Fed policy under Greenspan was no different then policy would have been if you had applied a mechanical decision rule based on what drove fed policy in earlier eras.
In other words, a computer would have done exactly what he did.
Posted by: spencer | Mar 4, 2005 10:06:38 AM
Jane Galt adds a good point, but I believe the consensus among economists is that we really do not know what raising the margin requirements would have done. We can say with certainty that Greenspan did not do it, and that at the very least it would have acted as signal, along with his other pronouncements to indicate that the Fed thought there was a bubble.
I think he should have done it, but the real problem was in the market itself.
Posted by: theCoach | Mar 4, 2005 10:44:00 AM
Good points above; just a minor observation. In Paul O'Neill's book Price Of Loyalty, there's quite a few conversations between Paul and Alan - the two go back more than a couple administrations, and had worked closely in the past. Greenspan in those conversations during the early years of the Bush administration was nothing like what we saw in public - a serious concern for deficits, all for putting in stops so that if the tax cuts didn't achieve their aim of stimulation they would be reigned in, etc. Like I said, nothing like the public Greenspan we've come to know and throw darts at. I kept wondering if perhaps the Bushies had some dirt on him, but with reflection, maybe he's just wrong...
Posted by: Gregory | Mar 4, 2005 11:48:25 AM
Why Bush 43 likes Greenspan so much baffles me, since Greenspan was probably the person the most responsible for maing sure 41 didn't get that second term.
Maybe because Greenspan is a partisan Republican hack that has been obsessively fellating the Bush 43 White House to make up for his error in not adequately serving Bush 41.
Posted by: cmdicely | Mar 4, 2005 11:54:32 AM
Al, you ignorant slut. Greenspan talked about a bubble very early in the bubble, but then converted to the cause of the "New Economy", and became one of its biggest boosters in Washington.
Arthur Levitt's reforms _were_ necessary, and the fact that they were killed in Congress is a disgrace to everyone involved, Democrat and Republican alike.
Posted by: Walt Pohl | Mar 4, 2005 11:55:06 AM
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