Sunday, April 05, 2009
The battle over Alan Greenspan's legacy
There is a war going on over Alan Greenspan's legacy, and the extent to which, as the Fed's Chairman, he presided over and indeed caused the credit bubble that burst last year. I am not nearly expert enough to sort this one out on my own, but Susan Lee has served up a version of the leading argument against Greenspan. Lee's article is interesting at one level, but incomplete. It seems to me that the Fed was led astray (and caused interest rates to stay low) because its usual signal to tighten, rising inflation, did not show up in consumer prices. Why? Because the movement of so much low-end manufacturing to China drove down costs so far that it offset the inflation that otherwise would have materialized at the cash register. But the money had to go somewhere and so it went into assets: Houses, stocks, and finally commodities (which at the end began to make people nervous about consumer price inflation).
Now, you can say that the Fed should have known this and there were certainly economists and analysts who argued that this was happening, but it takes extraordinary resolve, even for a Fed Chairman, to shut down a bull market in stocks and housing prices arbitrarily. There is also the problem, though, that for most of the period the economic recovery was "jobless." How is that relevant? Well, the Federal Reserve, unlike most central banks, has the mandate to address unemployment, not just the monetary base and the creation of credit. If inflation is low and employment is not as high as policymakers think it ought to be, then the Fed at least arguably has a mandate to promote economic growth.
Maybe we need to change that.
5 Comments:
By 
, at
Sun Apr 05, 09:30:00 AM:
The LIBERALLES: Equal Opportunity
Demonizers
By , at
Sun Apr 05, 10:25:00 AM:
Greenspan was overly reliant on mathematically models just like the Global Warming folks. Garbage In, Garbage Out. Instead of questioning the data, he turned off all common sense. It was obvious that California housing prices could not continue to rise 20 percent every year, yet he is telling bankers to offer more non-prime loans.
Why, because his models only had data going back 20 years. If it had gone back 30 years his models would have shown the what happens when housing prices start falling. He admitted this to the House.
The lesson should be that we can not rely on mathematical models, because the data is ALWAYS incomplete.
By 
Viking Kaj, at
Sun Apr 05, 11:27:00 AM:
It's not jus the Fed, it's the congress and the executive too.
There has been a dedicated conspiracy at the highest levels to do anything to avoid a recession, and keep America addicted to debt both public and private, since 1993.
Low interest rates are just part of it. Misreporting of inflation is another.
Greenspan was just another Washington flunky, addicted to power.
These people know what they are doing and they don't care.
The inevitable result is a degradation of the American currency and our imminent arrival as a banana republic.
By Viking Kaj, at
Sun Apr 05, 11:31:00 AM:
By the way, if you don't believe government misreported inflation, look at what happened to the price of gold or the Euro/Dollar exchange rate over the last 10 years. The CPI only went up at a rate of 1-3 % a year, while in real terms we had something closer to 6-7% compounded.
It was a swindle organized by our own government.
By D.E. Cloutier, at
Sun Apr 05, 01:03:00 PM:
Kelley Holland, NY Times ("Is It Time to Retrain B-Schools?"), 14 March 09:
"Critics of business education have many complaints. Some say the schools have become too scientific, too detached from real-world issues. Others say students are taught to come up with hasty solutions to complicated problems. Another group contends that schools give students a limited and distorted view of their role — that they graduate with a focus on maximizing shareholder value and only a limited understanding of ethical and social considerations essential to business leadership."
I am among those who place some of the blame for the current economic mess on business schools.
NY Times link:
http://www.nytimes.com/2009/03/15/business/15school.html
Meanwhile, there is more on the debate at the Harvard Business Publishing Web site.
Bronwyn Fryer: "Have a few bad-apple business school alumni spoiled the economic barrel? Or is the problem more systemic -- have schools themselves contributed to the global financial crisis by selecting the wrong kinds of students and teaching them the wrong things?"
http://blogs.harvardbusiness.org/how-to-fix-business-schools/2009/04/the-hbr-debate-end-of-round-1.html
