The release of Alan Greenspan’s ghostwritten memoirs The Age of Turbulence has elicited charges that he was not such a great central banker after all. Stan Collender of National Journal sees the fingerprints of the White House on these attacks: Greenspan is harshly critical of George W. Bush’s administration, after all, and to attack the credibility of Republican ex-policymakers who are critical of Bush is standard counterpunching for it. But what is one to make of the criticisms of Greenspan’s tenure at the Federal Reserve?
The indictment contains four counts: that Greenspan wrongly cheered the growth of non-standard adjustable-rate mortgages, which fueled the housing bubble; that he wrongly endorsed Bush’s tax cuts; that he should have reined in the stock market bubble of the 1990’s; and that he should have done the same with the real estate bubble of the 2000’s.
To the first two counts, Greenspan now pleads guilty. He says that he did not understand how the growth of non-standard mortgages had lured borrowers and investors into bearing dangerous risks. He was, he now says, focusing on how fixed-rate mortgages are relatively bad deals for borrowers in times of low inflation, which was a mistake.
Greenspan also pleads guilty to a mistake in early 2001. He thought that he was giving balanced testimony to Congress on government budget issues. He testified that it is important to run surpluses to pay down the debt, but that surpluses must not be so large that the government winds up owning American industry. He also testified that tax cuts are better than spending increases to keep surpluses from growing too large, but that uncertainty is enormous, so that any tax cuts should be canceled if they threatened to bring us back to an age of deficits.
Robert Rubin and Kent Conrad warned him that the press would not interpret his testimony as being balanced, and that Congress would interpret it as an excuse to abandon fiscal discipline. They were right.
Greenspan also pleads guilty to misunderstanding the character of the Bush administration. He thought that his old reality-based friends from the Ford administration were back in power. He thought that he – and Treasury Secretary Paul O’Neill – could win the quiet “inside game for sensible policy without resorting to an “outside game that would make his reappointment in 2004 unlikely. He was wrong.
But how serious are these policy-political crimes to which Greenspan now pleads guilty? In my view, they are misdemeanors. Against them you have to set what former Treasury Secretary Larry Summers calls Greenspan’s “golden glove performance at avoiding and minimizing recessions during his years at the Fed.
The “felonies of which Greenspan stands accused are the other two charges: that he should have done more to stop the stock market bubble of the late 1990’s, and that he should have done more to stop the housing bubble of the early 2000’s. Here, Greenspan holds his ground, and pleads not guilty.
The only way, he says, for the Fed to have kept stock prices in reasonable equilibrium ranges in the late 1990’s would have been to raise interest rates so high that they hit the real economy on the head with a brick. Interest rates high enough to curb stock market speculation would also have curbed construction and other forms of investment, raised unemployment, and sent the economy into recession. To cause a significant current evil in order to avoid a possible future danger when our knowledge is limited and our judgments uncertain is, Greenspan believes, unwise. In this, he is following a tradition of caution that extends from Edmund Burke to John Maynard Keynes.
Greenspan mounts a similar defense concerning the housing bubble. High construction employment has been good for American workers in the past half-decade – a period that has not produced much good for them. Higher interest rates to reduce the housing boom seem, even in retrospect, ill advised if the cost is mass unemployment. And Greenspan eschews paternalism: he would not assume the role of a regulator telling people that they cannot buy a house even though a lender is willing to finance it.
But Greenspan would have served the country and the world better if he had been somewhat more paternalist in slowing the growth of non-standard adjustable-rate mortgages. He would have served the country and the world better had he been less of a loyal Republican working the inside game of trying to convince Bush’s political advisors that good policy was important, and more of a nonpartisan steward of America’s long-term fiscal stability. Of course, such a Greenspan would never have been re-appointed.
All in all, Greenspan served the United States and the world well through his stewardship of monetary policy, especially by what he did not do: trying to stop stock and housing speculation by halting the economy in its tracks.
J. Bradford DeLong, Professor of Economics at the University of California at Berkeley, was Assistant US Treasury Secretary during the Clinton administration. This commentary is published by DAILY NEWS EGYPT in collaboration with Project Syndicate (www.project-syndicate.org)
