Greenspan in Retrospect
Six years ago, I wrote a highly complimentary review of Alan Greenspan's The Age of Turbulence:
Brad DeLong (September 2007): Review of Alan Greenspan's "The Age of Turbulence": For nearly 20 years Alan Greenspan… was the most powerful economic central planner the world has ever seen…. Why should a central planner be setting interest rates? The only reason is that this system appears to work less badly than the alternatives we have tried…. Greenspan is world famous because he was very good and very lucky…. He made roughly 36 substantive decisions about the direction interest rates should go. Six times I disagreed with him. Five of those six times, he was right…. That is an amazing record….
I still think most of the review still holds up well[1]. But the very end is now very questionable:
One could indict [Greenspan] on four counts: that he should not have… support[ed] the Bush tax cut… should not have… encourage[d] new U.S. homeowners to get adjustable-rate mortgages… should have done something to abort the dot-com bubble… should have done something to prevent the real estate bubble of the 2000s.
The first two counts are misdemeanors, and Greenspan pleads guilty…. The other two counts could be considered economic felonies, and here Greenspan stands his ground. Given the state of investor psychology, he says, he could have aborted the stock market and housing bubbles of the late 1990s and the early 2000s but only by paying an unacceptable price in idled factories and unemployed workers. He may be right and he may be wrong… this is a judgment call…. Greenspan's judgment on monetary policy is very good, and looks to be better than mine.
I think that Greenspan's embrace of the decline of the 30-year fixed-rate mortgage and of financial deregulation now has to be classified as not a misdemeanor but as more than an economic felony. First, it created enormous systemic risks--risks that Greenspan neither understood at the time nor guarded against, and risks that Greenspan has played a significantly counterproductive role as we have tried to deal with them since 2008. Rather than aiding those who have been trying to restore full employment, Greenspan has been complaining about how they are attempting to carry out the task.
Moreover, Greenspan's lack of concern with fraud in the 2000s now has to be classified as a more-than-economic-felony as well. Here, I think, Greenspan's Randite roots have led him astray: for Greenspan, there is moral value in not protecting people from the consequences of their actions--and "consequences of their actions" appears, for Greenspan, to include falling victim to fraud.
These two--Greenspan's unconcern with fraud and his failure to properly guard against systemic risk--are joined at the hip. As Larry Summers writes:
One of the areas where Greenspan has been most extensively criticised is in the failure of the Federal Reserve to do a better job of protecting consumers in the run-up to the financial crisis. He sidesteps the issue by asserting his focus on regulation, rather than fraud issues. But matters may not be so simple. An essential insight of the new sub-field of behavioural economics that Greenspan quotes approvingly is that people can be manipulated without being defrauded. If, as JK Galbraith observed, “Conscience is the knowledge that someone is watching”, then questions of regulation and fraud are closely related.
Let me sharpen that: Greenspan sidesteps criticism that he should have done more to protect consumers in the run-up to the financial crisis by asserting that his focus is on systemic regulation rather than fraud. But only when regulation is inappropriately lax does fraud become more than small-scale froth. And once fraud becomes more than small-scale froth--once it becomes a mass-production industry--dotting the regulatory i's and crossing the regulatory t's does nothing to control systemic risks. For large-scale fraud means that the underlying asset values and income streams that are supposed to back financial claims do not exist. And the recognition that they do not exist is the collapse of trust in the web of financial intermediation that is a financial crisis, which can become devastating.
In retrospect, Greenspan Randite belief that adults should protect themselves against 419, AAA-ratings, and other frauds rather than relying on the government was a huge howler. It made Alan Greenspan a bad choice to run the Federal Reserve in the 2000s.
I said Greenspan had batted about 35 out of 36 at the Federal Reserve. Adding on what we now see with respect to financial deregulation, tolerance of fraud, and reactions to the Lesser Depression since he left the Board of Governors, I now see him as batting 35 out of 42 or so--and his mistakes appear of greater magnitude than his successors.
So: no longer a demigod of judgment, but a mortal--and a mortal whose run of judgment since 2002 or so has been extremely bad.
[1] For example:
"The Age of Turbulence" is three books…. The first tells us who Greenspan is…. The stories are wonderful…. The second book gives Greenspan's view of the world and is, I think, least successful…. My students will read it because it will be on the midterm. But the book's target audience is likely to find this world tour a slog, and they are not incentivized by midterms.
The third book--Greenspan's account of public policy--is making the biggest splash as news. But it is news only in a very peculiar sense. That Greenspan and other committed small-government Republicans have been horrified at the turn their party has taken and have desperately sought some way to take it back from the cynical media consultants and political hacks who now run things is well-known…. Stories over the last few days have breathlessly reported selected phrases from the new book, characterizing them, as the Washington Post's Bob Woodward did, as "unusually harsh criticism [of] President Bush and the Republican Party" for abandoning "the central conservative principle of fiscal restraint." It is not surprising that a prominent economist with a lifelong commitment to sound money and sound public finance does not like the policies the current government has followed.
One piece of this third book is worth noting: Greenspan's defense of his tenure as Fed chief. Why does he need a defense? 35 out of 36 decisions is a very good batting average.
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