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August 30, 2005

Dean Baker Is Not an Alan Greenspan-Worshipper

Dean Baker says that Alan Greenspan-worshippers (like me) are deluded:

MaxSpeak, You Listen!: GREENSPANFEST 2005: BE GLAD YOU WEREN'T INVITED: The Federal Reserve Board is having its annual retreat at Jackson Hole, Wyoming and the agenda this year is devoted to a retrospective of Greenspan's 18-year tenure as Fed chairman. The world has not seen a greater display of obsequiousness since the death of Leonid Brezhnev....

1) Mr. Greenspan ignored the stock bubble.... The tens of millions of people who saw much of their retirement savings disappear in the crash are just out of luck, as are the pension funds that are now insolvent because their managers somehow didn't see the bubble.

The proper remedy for the bubble was actually very simple -- talk. If Greenspan used his Congressional testimony and other public speaking opportunities to lay out the case for the bubble, there is little doubt that it would have deflated long before it reached such outlandish proportions.... A fund manager that ignored Greenspan, and kept most of a portfolio in a bubble market, would undoubtedly be sued for negligence by their clients and probably have to pay every penny they owned in damages....

2) Mr. Greenspan promoted the housing bubble... Greenspan's tool for getting out of the recession created by the collapse of the stock bubble was to promote a bubble in the housing market. He did this most blatantly back in the summer of 2002.... When the housing bubble bursts, we will see the loss of $5 trillion in housing bubble wealth.... The economic fallout will also be enormous....

5) Finally, he did not tell the truth when he endorsed President Bush's tax cut in 2001....

Okay, I close with my own praise of Alan Greenspan. In 1995 and 1996 he lowered interest rates and kept them low. This allowed the unemployment rate to fall below the 6.0 percent level.... The decision to allow the unemployment rate to fall to levels that most economists thought would trigger inflation gave millions of people jobs.... The tight labor market of the late nineties allowed for the first sustained growth in real wages for most of the country's workers since the early seventies. We will benefit from this decision for years to come... the country benefited hugely because [of] Alan Greenspan..

I think Dean Baker understates how big a win Greenspan's decision to go for growth in 1995-1996 was. I agree with Dean's criticism (5): Greenspan did not understand how much damage the Bush administration was going to do to America's long-term fiscal stability, and should have worked much harder to aid the deficit-hawk wing of the Bush administration.

(1) and (2) are, I think, harder questions. Dean Baker wants Alan Greenspan to have taken on the role of investment adviser to America--telling Americans when assets are overvalued. Alan Greenspan would say that that is not his role, and that he's not very good at that role: he thought that stocks were overvalued in December of 1996, and high-tech stocks now--long after the end of the dot-com bubble--are twice what they were then. I don't think that it was as simple as "talk."

I also reject the claim that Greenspan should have raised interest rates and added to unemployment in the late 1990s to cool off stocks and in the early 2000s to cool off housing. That seems to me to be a clear loser, and a bad thing.

Where I would criticize Greenspan is in his failure to use his regulatory authority to brake some of the enthusiasm for first high-tech stocks and then housing. Organizations making it easier for individuals to make risky and ill-considered bets are creating systematic risk--and should be subject to heightened scrutiny and raised capital requirements as a result. That both stabilizes the system and potentially cools off the bubble. And that wasn't done.

But my thoughts critical of Greenspan--except in fiscal policy--are unformed. I think that of the three kinds of policy--monetary, fiscal, and financial asset--that Greenspan was concerned with, monetary policy was most important. And Greenspan has done a masterly job at monetary policy.

Posted by DeLong at August 30, 2005 04:06 PM