I Protest!

Arnold Kling writes:

EconLog | Library of Economics and Liberty: It should also be noted that Brad DeLong hates Greenspan and adores Bernanke...

Ummm... No. I like Alan Greenspan a lot. I now think he was wrong not to move aggressively to curb the housing bubble of the 2000s. But I think all in all he did a very good job as a central banker over 18 years:

http://www.google.com/search?num=100&hl=en&client=safari&rls=en-us&q=site%3Adelong.typepad.com+greenspan+excellent&btnG=Search

Comments

[Charles]

You don't think he held rates high for far too long in 1990-1?

I also think that when a government official fails to do a duty that has been assigned to him, that's a pretty serious thing. Greenspan was given the duty of overseeing bank lending standards. While that was not the epicenter of the problem, effective regulation there might have forced the recognition of the problem occurring in the shadow banks into the open.

Greenspan's tenure was relatively easy as things go. Yes, yes, Asian crisis, LTCM, etc.... but the economy was pretty sound, and the budget deficit was being brought under control.

I think Greenspan had good staff and was smart enough to listen to them. By contrast, Volcker had good staff, listened to them, and knew his stuff.

[jfaughnan]

I think Kling is confusing you with Paul (Nobel) K, who's long been critical of Greenspan. I can attest that you've been relatively kind to Mr. G.

[Nat]

I am of the (admittedly non-professional) opinion that Greenspan not only failed to curb the bubble, but actively inflated it. His mortgage recommendations were a disgrace. Housing made the economy look better when the last recovery was essentially jobless. Those housing related jobs helped W and the party out.

[Fred]

Greenspan could have limited the damage from dot.com bubble by increasing margin requirements when he noted the "irrational exuberance" occurring in the market.

[Captain Quirk]

Arnold Kling will never allow something as trivial as a fact to get in the way of his beliefs. My favorite of his in the past few years: his repeated attempts to argue that housing prices were reasonable, e.g.:

http://econlog.econlib.org//archives/2007/09/two_stories_of.html

[christofay]

Greenspan at the least was playing to the audience the longer he sat. He learned the wrong lesson from his irrational exuberance remarks which was to be a crowd pleaser. His targeted interest rate policy was definitely wrong. He missed moving against the first asset inflation, the tech bubble, he pumped in too much liquidity leading into Y2K, his view on productivity is an opinion and not rock steady, and he definitely promulgated the second asset inflation, the housing bubble. He also politicized the fed especially for Cheney's/Rove's all oars of the fed govt for Bush. I also don't appreciate him following the Phil Wendy Gramm model, after I do for private industry, upon retirement from public service what can private industry do for me.

So the fed no longer is independent, it is now a function of political activity. Bernanke is the handmaiden to Paulson. Paulson worked at the bank that was selling short the securities that it was collecting fees from for creating.

[T griffin]

Greenspan seems to think that the models that failed are actually still good, just not populated with enough data over a long enough period.

Models like he taked about in his testimony can only deal with risk:

1. Probabilities known: RISK.

2. Probabilities unknown: UNCERTAINTY.

3. IGNORANCE. One can’t sensibly assign probabilities to the unknown states of the world.

See Zeckhauser: www.economics.harvard.edu/faculty/ibragimov/files/Richard.ppt

Or Mandelbrot/Taleb: http://www.pbs.org/newshour/video/module.html?mod=0&pkg=21102008&seg=5

[Gigi]

Greenspan was a disaster. Not only did he keep interest rates too low for too long (as a political favor to the Bush administration), he also fought any type of regulation or transparency in the derivatives market. He was ignorant of history, ignorant of finance and ignorant of human behavior. Other than that, he was mediocre.

[ottnott]

The captain of the Titanic was doing a good job, all in all, up until that thing with the iceberg.

Bubbles aside, his embrace of the Bush tax cuts is enough reason to condemn him.

[vtcodger]

Well, the model indicated that the likelihood of an iceberg in that particular place at that particular time was vanishingly small. Besides which, the Titanic -- built with the best of early 20th Century technology -- was known to be pretty much unsinkable. Expanding that theme to the Greenspan era is left as an exercise for the reader. And yes -- his enablement of the Bush tax cuts was totally irresponsible.

[bakho]

Greenspan is praised for his monetary policy (until after 2000) but denounced for his anti-regulatory policy. However, the Greenspan tenure was characterized by an extended period of low inflation. Workers had very little power to raise wages. Republican Congresses did little to raise the minimum wage or peg it to inflation. Oil prices were declining or low throughout much of his tenure because of the Carter energy policies. Given this domestic economic environment, were there really a lot of decisions that would have been made much differently if someone other than Greenspan was Fed chairman?

IOW, Would we be better off today if Greenspan would have been replaced by someone with similar monetary policy who would have taken regulatory policy more seriously? Would we have been better off with a Fed chairman that did not worry about the possibility of paying down the surplus or that having a surplus might lead to more government benefits for health care, education and infrastructure?

[Epigon]

bakho asks:

"Given this domestic economic environment, were there really a lot of decisions that would have been made much differently if someone other than Greenspan was Fed chairman?"

Quite possibly. IIRC, Dr. DeLong once wrote that there were eight (or so) occasions when he and Greenspan differed on the correct interest rate policy and that, in retrospect, Greenspan had been right on five of them.

Not that this excuses any of G.'s other follies, such as the tax cuts.

To my mind Greenspan's greatest folly was the justification he gave for believing that financial institutions would self-regulate in the derivatives market: that they would value their reputations with a view toward future transactions. Given that by the time the dust settled the individuals who made the bad decisions would long ago have enriched themselves, this is a position some could believe only if they desperately wanted to. Which, of course, he did.

[rea]

Well the Captain of the Titanic's mistake was to listen to the desires of the ownership, who wanted a record speed run to New York. Greenspan made a similar mistake catering to the desires of the administration, which wanted economic trouble postponed until after the 2008 election, and nearly got what it wanted.

[michael e sullivan]

I'm more interested in Kling's fundamental criticisms of what caused the current problems, because they seem compelling to me. Basically he's saying that a bubble was created in securitized loans versus more traditional loans primarily due to financial actors rationally (if selfishly) responding to huge regulatory arbitrage opportunities. And that it was, in fact, feasible to see in 2002-3 that this was happening and do something about changing the regulations (Admittedly, AK himself was arguing in 2006(7?) that the housing bubble wasn't really a bubble, so feasible or not, he didn't see it either).

The reason this didn't happen is that said arbitrage was making republican cronies a *lot* of money, and as long as we avoided the big bad martingale chicken that finally came home to roost this past quarter, it was making the economy look better, putting more people in homes, etc. which all conspired to keep it off anybody's political agenda to do something about the wonky regulation, except a few crazy quants who started to notice the systemic risk.

[Graham]

Even if you didn't criticize Greenspan, I'd like to hear what you think about what's he's said in the past week or so.
Basically he argued that
The models that we used to evaluate securities and risk in financial markets were Nobel Prize-winning models. It's just that we input the wrong data... since we were relying on market information from the past ten years only.

Doesn't this challenge most every basic financial model we've been using? How are we to fix the problem here?
http://www.greenfaucet.com/technical-analysis/greenspan-dont-blame-the-nobel-winning-models/93210
This author really ripped him apart, making his comments seem childish but isn't their a big concern here that we've haven't just messed up, but that we've been doing the wrong thing for quite some time??

[bakho]

Epigon writes:
"Dr. DeLong once wrote that there were eight (or so) occasions when he and Greenspan differed on the correct interest rate policy and that, in retrospect, Greenspan had been right on five of them."

Ok. But remember that Greenspan was privy to more inside information than DeLong. Also, Greenspan practiced "incrementalism" so a mistake could be quickly corrected.

I don't think that Fed Chairmen or FBI directors should serve more than 1 term because term limits change the dynamics of the decision process and power structure.

[bakho]

Put another way DeLong agreed w/ AG on all but about 8 decisions. On 3 of those, AG got them wrong and DeLong would have got them right compared to 5 right 3 wrong for AG. So someone like DeLong would have produced basically the same monetary policy, as AG but paid far more attention to better regulatory policy.

With AG, his weakness in regulatory affairs accumulated mistakes over an 18 year period. What are the chances that a different Fed chairman would have fixed some of the weaknesses?

[Bram Cohen]

The problem with Greenspan isn't so much any one particular piece of judgement, (although there is now plenty to point fingers at there) as that he was a member of Ayn Rand's cult, which should have disqualified him from the job in the first place. Predictably, he carried out policies which essentially followed the teachings of the cult, and unsurprisingly, they failed miserably. Hopefully in a few years Ayn Rand will be almost universally viewed as a joke, rather than worshipped by a significant fraction of the few people who have actually heard of her as is the case right now.

[Pedro Bento]

Pray tell, Bram, what policy prescription did Ayn Rand ever make for the Fed, besides having it shut down?

[Bram Cohen]

Pedro: 'Do no regulation' The irony of such a person being put in charge of the fed is quite something, but not more ironic than the executive being run by someone who believes that the executive is inherently incompetent.