Wednesday, April 9, 2008

Greenspan's Policies Questioned

Finding a Scapegoat

Now that Ben Bernanke has told us that a recession is imminent, this week's hot economy topic is finding a scapegoat. The most likely candidate: Alan Greenspan. Did Greenspan, who was praised at the time for growing the US economy during the 1990s, get us into this mess?

Former Fed chairman Alan Greenspan's policies were questioned in a front page WSJ article yesterday. Mr. Greenspan responded in an interview and strongly defended his actioins as head of the Fed.

The primary criticisms were:

  • The Fed lowered interest rates in 2001-2003 and kept those rates low for too long. This encouraged mortgage borrowing, leading to escalating housing prices and eventually to the housing market collapse. This criticism was mentioned by Prof Woo in last week's lecture.
  • The Fed was not aggressive enough in regulating banks and their mortgage lending practices, specifically subprime lending, and their subsequent risk exposure.
One comment (by the writer of the article) that I found particularly interesting was the Greenspan "has long maintained that bubbles are an unavoidable feature of a dynamic economy."

For more criticism of Greenspan, you may want to read Greenspan's Fraud: How Two Decades of His Policies Have Undermined the Global Economy by Ravi Batra.

I'd be interested in finding a more positive (or at least balanced) retrospective view of Greenspan's policies... if one exists!

On the WSJ blog entry related to this article, there's an informal, unscientific survey that asks the question: How has your opinion of Alan Greenspan changed since he left the Fed? Ask of this writing, the results have been:
3% It has risen
45% It has fallen
27% It has remained low
21% It has remained high
4% Something else

It doesn't surprise me that the results of a survey embedded within a negative article about Greenspan and his policies would be skewed in this way.

See Greenspan's article in the Financial Times (April 6, 2008) entitled The Fed is Blameless on the Property Bubble. See also his article (March 16, 2008) We Will Never Have a Perfect Model of Risk.

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