DeLong Defends Alan Greenspan
Alan Greenspan’s come under a lot of retroactive criticism for having kept interest rates so low in the wake of the tech stock crash in order to help spark the housing boom that’s now come undone. Brad DeLong considers the issue of whether or not this is a fair criticism, and comes down tentatively on Greenspan’s side. I tend to agree with Brad about this. If you’re faced with the choice between “severe recession now” or “mild recession now and possibility of severe recession later” I think it’s difficult to say that picking the “severe recession now” door is the right one. You have to keep in mind, after all, that the “severe recession now” scenario hardly ensures an absence of serious future recessions.
Meanwhile, even in retrospect I don’t see any serious argument that the situation that existed as of January 2005 made the Panic of 2008 inevitable. He lists three real Fed mistakes that came later and contributed to the crisis:
— The Federal Reserve and the Treasury decided to nationalize AIG rather than to support AIG’s counterparties last fall, allowing financiers to pretend that their strategies were fundamentally sound rather than things that would have shut down their firms had the Feds not paid AIG’s bills.
— The Federal Reserve and the Treasury decided to let Lehman Brothers go into an uncontrolled bankruptcy last fall in order to try to teach financiers that having an ill-capitalized counterparty was not riskless and that people should not expect the government to come to their rescue always.
— The long-ago decision was made to eschew principles-based regulation and allow the shadow banking sector to grow unregulated with respect to its leverage and its compensation schemes in the belief that government regulation of finance should be minimal and that the government’s guarantee of the commercial banking system was enough to keep us out of messes like the one we are currently in.
Closer to home, I think you can very fairly tag Greenspan with the charge that having implemented the policy he implemented in 2001–2002 he developed a striking lack of candor about what was happening as of 2004–2005. There was plenty of time for policymakers to start waving people off the implicit assumptions they’d started making about housing prices. The trouble, however, was the trouble you’ll always have when it comes to bubble-popping. George W Bush didn’t want to say that prosperity was being based on a mirage, he wanted to say that prosperity was being based on his wise leadership. Many Bush critics—Paul Krugman, say—were happy to make the mirage argument. But then you had Harry Reid (D-NV) leading the Democratic opposition in the Senate and also representing one of the frothiest bubbles in the country. And individual critiques aside, the general point is that as long as the bubble lasts it’s mostly beneficial to most people, so nobody accountable to the voters is going to want to end the party or even point out that the party must end.
But the Fed is supposed to be insulated from this kind of pressure and more able to call it like it is.
29 Responses to “DeLong Defends Alan Greenspan”
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June 20th, 2009 at 9:10 am
“I think you can very fairly tag Greenspan with the charge that having implemented the policy he implemented in 2001–2002 he developed a striking lack of candor about what was happening as of 2004–2005. There was plenty of time for policymakers to start waving people off the implicit assumptions they’d started making about housing prices.”
This is true both in the narrow sense that you intend it, but also in a larger sense.
What Greenspan did in the ‘01-’02 time period is perfectly defensible policy making.
What he did later in his reign is very close to criminal.
He was so determined to forestall any pain until he got out the door that he essentially was an active architect of an après moi, le déluge policy.
June 20th, 2009 at 9:32 am
While the Ayn Randians all scream that every Congressperson should have Atlas Shrugged, failing to realize that one of Rands main disciples was in control all along.
June 20th, 2009 at 9:39 am
The fundamental mistake that DeLong makes is implying that the Fed can control economic policy. But then, if he didn’t do that he may well not make tenure.
Whether interest rates are low or not is a relatively minor consideration. What people are allowed to do with money is much more important. Crazy leverage, unsupervised securitization, naked CDSs and fraudulent mortgages did us in.
June 20th, 2009 at 9:51 am
Greenspan actually urged prospective homeowners to get adjustable rate mortgages, in order to keep the housing bubble going. At the time, the media gave him the aura of the wisest man in Washington, and treated anyone who disagreed with him as a crackpot. He was fully aware of this and deliberately kept the bubble going to protect his reputation, ensuring the collapse. The Fed is the most politically shielded regulator in our government precisely so it can make the politically difficult decisions to protect the larger economy. Greenspan completely failed in this duty.
June 20th, 2009 at 9:57 am
It seems every time I look at a historical graph -it could be the ratio of empty peanut shells in a peanut bag- the line on the graph starts ascending at a 35 to 45 degree angle starting around the years 1982-84.*
Its uncanny. The Nation hopped on a rollercoaster in the Reagan years and said “lets see where this crazy ride takes us.” Now we know. It ascends fairly rapidly, goes through a wild sequence of ups and downs, and then commences an inevitable anti-gravity free fall -starting in the autumn of 2008.
Once the rollercoaster reached top speed I don’t think there was much policy makers could do to alter its course. Greenspan, one its designers, had his hands in the air and was yelling “whippee” just like the rest of us.
*Note: One of the exceptions to the ascending graph line, is of course, real middle-class income. Somehow that line has held steady for 30 plus years.
June 20th, 2009 at 9:58 am
f you’re faced with the choice between “severe recession now” or “mild recession now and possibility of severe recession later” I think it’s difficult to say that picking the “severe recession now” door is the right one.
I do not think that the absence of an activist Fed Policy would have made the 2001-2002 recession that severe. The fact of the matter is that despite claims that tight monetary policy from the Fed helped to prolong the Great Depression (a lie that Amity Shlaes, the CFR-puppet, repeats in her tome The Forgotten Man) that the Fed dropped the discount rate from 6% to 1.5% from 1929 to 1931. It simply prolonged the problems by keeping firms in business that were not profitable and would have to go under eventually.
It should be noted that the Great Depression was not terribly severe in its first year, certainly not as severe as the earlier 1920-1921 depression, suggesting that the factors that started the Great Depression did not cause its severity, rather the policies of Hoover (including browbeating companies into not letting wages fall when profits went negative) turned a moderate economic correction into the Great Depression.
June 20th, 2009 at 10:07 am
Greenspan:Bush::Burns:Nixon
‘nuf said.
June 20th, 2009 at 10:11 am
One thing Greenspan could have done is rail against Bush’s deficits. Benanke has been more responsible.
June 20th, 2009 at 10:13 am
As far as I can tell, the link is dead both here and at Brad’s site.
June 20th, 2009 at 10:20 am
Criticism of Greenspan must be cumulative. The post 2001 periods policies were of a piece that reached back to 1987 and would take a weighty essay to even begin to outline.
What is always ignored is that the Feds first job, the job it was created for, was to help insure the quality of member bank assets. (bank assets are the loans on it’s books and the securities they own) Not insure directly but to demand that member banks maintain quality assets. Not only didn’t the Fed do that it allowed the banking giants to keep assets, crummy ones, off their balance sheets. I believe this was criminal negligence on the part of the Fed.
I will grant the large investment banks, now all gone, were not under the Feds purview.
Greenspan was the worst central banker of all time. Some may argue the worst was John Law, the first central banker. However Law had no history from which to learn.
Beneath the surface the deflation is continuing apace.
June 20th, 2009 at 10:29 am
“Greenspan:Bush::Burns:Nixon”
Yup.
“As far as I can tell, the link is dead both here and at Brad’s site.”
Yup, again. The Randians must’ve gotten to Brad.
June 20th, 2009 at 10:40 am
“But the Fed is supposed to be insulated from this kind of pressure and more able to call it like it is.”
But of course it isn’t:
“House price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.” — Fed Chairman Ben Bernanke, Oct. 20, 2005
Either Bernanke was a complete idiot or was a willing pumpster for the housing bubble as long as it was making huge profits for the Fed’s Wall Street bankster friends.
June 20th, 2009 at 10:54 am
I will not delve on low interests for lack of knowledge-agreeing with the Bush tax cuts was as irresponsible view as someone in his position can have and advocating resetable mortgages for low fixed income individuals is outrageous and not part of his job description. Finally is blindness to greed is comical.
June 20th, 2009 at 11:02 am
Let’s not forget the role Democrats had in all this. Greenspan was not alone in the confluence of factors bringing the banking system to a near halt. Mr. Rubin was very instrumental, as was Geithner and Summers. It even extends to the Democrats sponsors of the ill-considered Gramm legislation.
Then we have Barney Frank and lover helping things along, with cheerleading from Maxine Waters and co. No, this was not a one man sideshow, as much as Democrats wish to keep their roles quiet.
June 20th, 2009 at 11:06 am
Perhaps McArdle finally found her 2X4.
June 20th, 2009 at 11:36 am
Greenspan’s greatest sin in my eyes was not speaking forthrightly about BushCo tax cuts. By throwing our fiscal house into disarray, he made our abilities to fight this debacle we are now in more difficult. When Clinton became President, Greenspan held Clinton’s feet to the fire regarding fiscal responsibility. No such treatment for BushCo. Thus, Greenspan is a partisan hack and all can be viewed through that filter and it just makes his decision making more suspect not more or less forgiven. Krugman was right about it from Day 1.
June 20th, 2009 at 11:39 am
Bullshit. Bullshit. Bullshit.
1) I closed the door on this revisionist crap back on Sept 29,2008 — in a post here. I will reiterate:
From the 2006 Joint Economic Report (Majority Opinion) issued by the House and Senate Banking Committees in the 109th Republican Congress:
————
“Over the last several years, the housing and real estate sectors have experienced `bubble-like’ conditions. After increasing rapidly and persistently for a number of years, housing permits, starts, existing and new home sales, and other housing-related indicators breeched new record territory. Real estate prices increased dramatically.
Many economists have predicted a `bubble-like’ adjustment to this run-up in asset prices. Others point out that real-estate `bubbles’ are largely regional and not national in nature. Therefore, there is little the national government can or should do to rectify these problems, aside from maintaining the central bank’s role as a lender of last resort. Additionally, financial firms can better manage risk than was earlier the case. And bank portfolios are in better shape than they were previously. These considerations, together with the fact that the current decline in real estate asset prices has not yet produced the many serious problems pessimists have predicted, has led others (including former Fed Chairman Alan Greenspan) to contend that our real estate problems are mostly behind us. ”
Ref: http://thomas.loc.gov/cgi-bin/cpquery/?&maxdocs=500&variant=y&sid=TSOPZqrb4&refer=&r_n=hr726.109&db_id=109&item=&&w_p=Joint+Economic&attr=0&sel=TOC_4803&
Section: Brief Overview”
2) Greenspan didn’t just cause the crisis — he conned the Congressional Oversight Committee responsible for detecting and preventing the crisis.
(Well, the Republicans wanted to be conned, obviously. Kinda like the slut in the back seat of the car who makes a feeble, token protest for form’s sake.)
3) So why have the American voters never heard a FUCKING PEEP from the News Media about the Joint Economic Committee and its past documented deliberations?
June 20th, 2009 at 11:53 am
This is, unfortunately, correct.
June 20th, 2009 at 11:55 am
Within the framework of conservative economic policy, Greenspan was completely right. The housing bubble wasn’t some vile accident – it was our substitute for a nice, FDR like stimulus of the economy after the tech crash. The alternative would have been policies like Obama’s – the surplus at that point could have been spent on government programs that seeded R and D, repaired infrastructure, and generally distributed money from the gov to the bottomfeeders – the 80 percent of Americans who are really just working scum. Instead, we had a virtuous conservative policy that distributed money to those who were successful, to those who were geniuses – upper management, hedge fund managers, and that whole oligarchy. Disappointingly, the oligarchy now has to put up with a radical Muslim socialist! Who, fortunately, has hired a man who understands economics – Larry Summers – to make sure that the predators can keep predating. Useless, vile, rentseeking rich people can still live life to the fullest in this declining republic! and isn’t that what we all really want?
June 20th, 2009 at 1:34 pm
The link isn’t working so I can’t assess DeLong’s argument. But while I certainly agree Point #3 was Greenspan’s greatest sin, off hand I don’t see an excuse for Greenspan leaving the Fed rate so low for so long. This has to be understood in context: the low Fed rate was part of what made it possible for an unsustainable distribution of real income growth and unsustainable fiscal policies to stumble along for a couple more years before the whole thing blew up in a dramatic fashion. We’ll never know for sure if removing these smoke-and-mirror efforts would have led to better policies sooner, nor how much damage could have been prevented if it had done so, but in retrospect it sure looks worth trying.
June 20th, 2009 at 1:49 pm
the Fed dropped the discount rate from 6% to 1.5% from 1929 to 1931.
Inflation was running at -8.94% in 1931 it hit -10.3% in 1932. That means real interest rates in 1931 were 10.44%.
What do you suppose would happen in 2009 if we had real interest rates of 10.44%?
I’m of the school that imagine such a scenario would trigger a massive economic calamity.
June 20th, 2009 at 2:55 pm
the Fed dropped the discount rate from 6% to 1.5% from 1929 to 1931.
Inflation was running at -8.94% in 1931 it hit -10.3% in 1932. That means real interest rates in 1931 were 10.44%.
What do you suppose would happen in 2009 if we had real interest rates of 10.44%?
I’m of the school that imagine such a scenario would trigger a massive economic calamity.
P.S. – Sorry, forgot to tell you great post!
June 20th, 2009 at 3:15 pm
What is always ignored is that the Feds first job, the job it was created for, was to help insure the quality of member bank assets.
That’s what the Fed wants you to think.
The Fed was actually created as a way for rich bankers to get control of the nation’s money supply to line their pockets.
June 20th, 2009 at 4:46 pm
Then we have Barney Frank and lover helping things along, with cheerleading from Maxine Waters and co.
Tacky. Maxine Water, even if you credited her with everything under the sun, would barely make a 1/10 of the damage done, 1987-2009.
No, this was not a one man sideshow, as much as Democrats wish to keep their roles quiet.
This is absolutely not a one-man sideshow. All these motherfuckers were in on this con job, and we still haven’t finished accumulating damage from it yet.
Greenspan, St. Germain, Gramm, Schumer, Frank, Dodd, Summers, Rubin, Bush I, Bush II, Clinton, Lloyd Bentsen. Oh, what the hell, Cramer, Mankiw… not to mention virtually every Republican Senator from ‘86 to uh, now.
“I have a little list, they never will be missed.”
max
['And they managed to save the Communist Party of the People' Republic of China when they were on the ropes. Never have so few done so much damage to so many.']
June 20th, 2009 at 9:09 pm
The Fed was actually created as a way for rich bankers to get control of the nation’s money supply to line their pockets.
JP Morgan and his pals already had plenty of control over the economy and lots of lining in their pockets. Just consider that Morgan directed the mergers that consolidated the railroads, consolidated transatlantic shipping, formed General Electric, and created US Steel (at a time when all of that really mattered)–there probably isn’t another person in history (at least not a non-government-official) that had a more direct role in shaping the U.S. economy.
The actual problem is that JP Morgan and his pals had ended up spending a bunch of their own money dealing with several financial crises, most recently the Panics of 1893 and 1907. And they were sick of doing it themselves, so they pushed to form the Fed to take on that role instead.
So, yes, the Fed was in part addressing a personal problem of JP Morgan and his pals. But what cranks like Glaivester don’t want to admit is that the prior series of financial crises were in fact a real problem for the economy too.
As a final side note: JP Morgan died in March 1931, a few days short of his 76th birthday. The Fed wasn’t created until December 1931 (with the enactment of the Federal Reserve Act).
June 20th, 2009 at 9:41 pm
Matt’s half right — by 2002, there was nothing the Fed could do but inflate a bubble. But by that logic, the bank crash wasn’t avoidable in 2005; it was barely avoidable in 1994.
June 21st, 2009 at 12:24 am
Actually, real estate prices generally dropped in major urban markets from the recession of 1991 until around 1996. The bank crash that was barely avoided in the early 90s was simply accomplished by government collusion in the fraudulent violation of statutes relating to solvency. Own a bank – and the law is no problem. In fact, the government sanctioned violation of the law back then was considered a big big triumph – the economists, bankers and regulators all bragged about it.
And the reason for that is: they are scum.
June 21st, 2009 at 12:27 am
And, of course, the Fed was created under Wilson, as the result of the Aldritch commission, with the legislation signed in 1913.
June 21st, 2009 at 1:17 am
And, of course, the Fed was created under Wilson, as the result of the Aldritch commission, with the legislation signed in 1913.
Yep, that should have been 1913, both for Morgan’s death and the creation of the Fed. I’m not sure why I typed 1931, not just once but twice.