Reply #11: Greenspan’s Delusions Get Much Worse With Age

[ozymandius]

Commentary by Caroline Baum

April 7 (Bloomberg) -- In case you missed the first legacy tour, former Federal Reserve Chairman Alan Greenspan is back for Part II.

Starting with an academic paper presented at the Brookings Institution on March 19 and followed by several TV interviews, “Dr. Greenspan,” as his interviewers politely refer to him, has acquired the clairvoyance he lacked at the Fed. ....

Greenspan, who was never an academic economist, chose an academic forum last month to present his most detailed defense of his stewardship of monetary policy. The paper is filled with R-squareds and t-statistics and interspersed with quotes that make him look prescient (“irrational exuberance”) and praise that can’t be retracted (from the late Milton Friedman in 2006).

It’s sad that Greenspan can’t let go because he’s making things worse for himself. His analysis of why monetary policy could not possibly be to blame for the housing bubble is seriously flawed. It was low long-term rates, depressed by capital inflows, that were responsible for the bubble in residential real estate, he claims. ....

Surely one of the hundreds of economists on the Fed staff could have explained to him that the long rate is the sum of the current and expected future short-term rates. If long-term rates are too low, jack up short-term rates more aggressively rather than in quarter-point increments. He can’t plead not-guilty. ....

He gave political support to the Bush tax cut in 2001 because -- get this -- unless the government reduced taxes, there would be no more Treasuries for the Fed to buy to conduct monetary policy! He refused to raise margin requirements in the late 1990s to defuse the technology stock bubble, arguing publicly it would have no effect. (Privately, he acknowledged it would curtail the bubble but might nail the economy in the process.) He advocated a “risk-management” approach to monetary policy and failed to exercise even a modicum of risk- management during two asset bubbles on his watch.

http://www.bloomberg.com/apps/news?pid=20601039&sid=ajtIzfWo07I0#

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This was published the morning before Greenspan testified before the Financial Inquiry Crisis Commission.