WASHINGTON – DECEMBER 17: Former Federal Reserve Chairman Alan Greenspan testifies during a Senate Homeland Security and Governmental Affairs Committee hearing on Capitol Hill December 17, 2009 in Washington, DC. The committee hears testimony about why Congress should create a bipartisan task force to help secure America’s economic future and proposals for securing it. (Photo by Mark Wilson/Getty Images)
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Alan Greenspan was out of government and worried that his staff were not being thorough enough in their analysis. One was “telling clients that a hot housing market” was “overwhelming the economy.”
No problem, the empiricist at Greenspan would do his own research. What he found surprised him. He soon found that the clerk had “absolutely no idea of the magnitude of this phenomenon.” All of this comes from Sebastian Mallaby’s 2016 biography of Greenspan, The man who knew (My review here).
Of course, mortgage lending had exploded. It was six times the normal amount of the previous decade. House prices had tripled. Memories of the 2000s…
Except what you’re reading is a true story 1977. The timeline belies the narrative that the Fed’s low interest rate policies led to 21St century housing boom. The Fed funds rate skyrocketed in the 1970s.
This is important mainly because it has long been accepted wisdom that the Fed’s lack of “easy money” was the source of the real estate boom of the 2000s. The narrative portrayed the Fed as some kind of otherable to command cheap, inexpensive credit, so that the moneyed would turn up their noses at complex and other truths about the genius of savings, as long as the Fed said so. No, not serious.
It’s all worth thinking about as the myriad obituaries for Greenspan come out. Expect a lot of “yes but” comments suggesting that Greenspan made credit “easy” as if the Fed could and could crash the markets, and that by doing so, he planted the seeds for the so-called “financial crisis.” Greenspan did no such thing.
The reality is that the George W. Bush administration, in a repeat of the Nixon/Ford/Carter 1970s, reversed the reliable dollar policies of the Reagan and Clinton eras. With the dollar in decline, investors seeking future dollar income streams flocked to hard, existing wealth less vulnerable to devaluation. This was not Fed policy simply because the Fed does not, nor has it ever, determined the exchange value of the dollar. This means that a weak dollar was not Greenspan’s policy.
As for the 2008 “crisis” that occurred when Greenspan returned to the private sector, to accuse him of government interference in the natural, healthy, corrective functioning of the market was one thing, but it happened and unfortunately will happen in the days to come. The analysis will be stupid. State intervention is a crisis. Huge amounts from this 2008 lead to huge crises, none of them “financial”.
Which brings us to the other narrative to unfold after Greenspan: the Fed chair “steered the economy” through all sorts of crises (1998, 9/11, 1987, etc.) on the way to booming growth. Nonsense too. Central planning that fails in good times is hardly valid in bad.
What made Greenspan look so good from 1987-2000 and so bad from 2000-2006 was that economic policy (including dollar policy) under Reagan and Clinton was largely good and was awful under George W. Bush. When money is reliable, investment increases along with growth. Growth is less evident when money is not reliable.
What’s sad is that former free marketeer Greenspan knew all this. Which means that if he had a weakness, it was that he was human. Really, who wouldn’t embrace the accolades of ‘The Maestro’ coming his way? Greenspan’s human nature means he took credit for policies he had nothing to do with, only for his misguided willingness to take credit that isn’t his to come back to wrongly haunt him when politics took a negative turn.
Greenspan was neither a genius nor a villain despite what you are now being told.
