Handout on Greenspanism and Its Critique

Greenspanism: For and Against: http://www.j-bradford-delong.net/2007_pdf/20070912_Greenspanism

Lunch Audio File

Comments

[spencer]

You need to discuss the question that because of the capital spending during the bubble are we actually better off because of the bubble even when you consider the cost of the crash.

[rex]

Why should we immediately dismiss strong regulatory action as a way of stopping bubbles from forming? I think that's letting Greenspan off the hook. Greenspan cannot say that regulation is ineffective at stopping bubbles because he never tried it. Not only did Greenspan not use the regulatory tools at his disposal, he actively worked for even further deregulation that enabled the bubble to form.
Predatory lending is against the law. The Fed is obligated to enforce that law. Luring people to borrow more than they can afford to repay is by definition predatory lending. It doesn't require any special insight by a central banker to identify a bubble created by lax lending standards; all it requires is a diligent cop on the beat.
If the Fed had enforced laws that prevent people from borrowing more than they can repay, the bubble would never have formed. In a normal world, most people are constrained in their bids on real estate to some fraction of their income. This constraint puts a ceiling on home prices, because people cannot bid more for a house than they can obtain a mortgage for. Greenspan (and the other deregulators) helped eliminate those constraints. Now we have half of the people of California living in homes they cannot afford.
Greenspan (and many many others) created a moral hazard by allowing financial firms to easily securitize their predatory loans, thus shielding those who underwrote the loans from the ultimate consequences of the utterly predictable default.
Of all the self-serving, arrogant and destructive things Greenspan ever said, this will have to rank near the top: “The human
race has never found a way to confront bubbles."

I like to think that the human race has figured out a few things in the past few million years, such as the value of having social institutions staffed by competent and well-meaning fellow creatures who know about our species' weakness for greed and the other vices were are subject to.
Could there have been a less suitable man for the job than Mr. Greenspan?

[Matt]

Arnold Kling is worried about "confirming bias", and the example of cofirming bias might be irrational exuberance.

Anyway, this seems like cutting edge stuff, soemthing hard to work on in one shot.

[Matt]

Looks OK for me.

In my mind though, I always have to transform this into one line of the system covariance matrix for the economy. his form makes inflation an output.

Inflation is really pricing power that the central bank has. The banks, expecially a monopoly bank, has as its output monetary services. Inflation is the effect of the monetary bank trying to excercise its pricing power.

The inflation it creates is passed along from right to left on X, and from short term to long term on the yield curve. It gets dstributed in the economy proportional to risk, which also has frequency spectrum.

Solving Brad's equations in Z transform yields a direct compution of frequency spectrum of inflation.

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