Alan Greenspan has presided over more 100-year events in the last 20 years than the rest of us do in a lifetime. As chairman of the Federal Reserve from August 1987 through January 2006, the Maestro was ahead of the pack when he sniffed out a secular increase in productivity growth, the result of a "once-in-a-lifetime" technological boom. But if he was right about productivity, he was wrong about the policy prescription.
"Prices should have fallen" as companies are able to produce more with less, said Paul Kasriel, chief economist at the Northern Trust in Chicago. "He fought it tooth and nail. The money had to go somewhere. It went into Nasdaq stocks." The burst tech-stock bubble exposed a rash of corporate malfeasance and accounting scandals. An "infectious greed seemed to grip much of our business community", producing a "once-in-a-generation frenzy of speculation that is now over", Greenspan told Congress on 16 July 2002. Even as he was declaring an end to that generational frenzy, another was already unfolding. Millions of condo flippers were riding ultra-low interest rates to ultra-high profits, extracting equity from their homes in the process. Now many homeowners owe more than their house is worth. Of course, Greenspan argued against the idea of a "bubble in home prices for the nation as a whole", conceding only "signs of froth in some local markets". At the time, home prices were rising at 15% a year.
Interspersed with the big bubbles in stocks and residential real estate were some singular events for which the cure was always lower interest rates. Following the near-collapse of hedge fund Long-Term Capital Management in 1998, Greenspan cut the Federal funds rate by 75 basis points to address the "seizing up of financial markets". Once again, he misjudged the seizure's effect on the economy, which didn't miss a beat. The Nasdaq was the beneficiary of the Fed's largesse, rising 86% the following year.
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Greenspan's ability to identify bubbles by his own admission, impossible when he was at the Fed has improved in the last two years. Everywhere you turned he was identifying a housing bubble, handicapping recession odds, spouting the wisdom gleaned from half a century of following the US economy. "He's like the forensic pathologist brought in as an expert on how to fix things when in fact he played a large role in causing the problems," said Bill Fleckenstein, president of Fleckenstein Capital, and author of Greenspan's Bubbles
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Last month, Greenspan was on CNBC with Maria Bartiromo and Paul McCulley, managing director at Pacific Investment Management in California. Pimco is one of Greenspan's three main consulting clients, a relationship that was never disclosed to the audience. It was positively quaint to see Greenspan and McCulley talking shop discussing the likelihood of US recession, slowing global growth and concerns about solvency for the benefit of bond investors, er, the viewing audience. All that was missing was a phone number on the screen: Call 1-800-4PIMCO. And yes, the solvency crisis is a "once-in-a-century phenomenon", says Greenspan. Last week, he was on the front page of The Wall Street Journal with a forecast for a bottom in housing. "Home prices in the US are likely to start to stabilise or touch bottom sometime in the first half of 2009." Lest he be too clear, the master of garblements qualified his forecast, saying "prices could continue to drift lower through 2009 and beyond". What doesn't seem to have dawned on Greenspan or those who interview him is the thread that connects all these events: Greenspan himself. He presided over two bubbles, one bust and lots of little easy-money rescues. In a stroke of impeccable timing, he left the Fed in January 2006, a month that holds the once-in-a-century record for single-family housing starts. Greenspan was widely criticised for his appearance at a private Wall Street function for investors one week after leaving the central bank. A year later, I defended his right to earn a living after 18 years as a public servant. My point was that Greenspan can talk all he wants. You can choose not to listen.
But it's a woman's prerogative to change her mind. So here goes. There is something unseemly about Greenspan's conduct. Ex-presidents don't criticise US foreign policy in times of war, Jimmy Carter notwithstanding. The same unspoken rule should apply to economic policy. Unlike his predecessor, Paul Volcker, Greenspan cannot leave the global stage or the media spotlight. Ben Bernanke may be the new Fed quarterback, but Greenspan is still calling in plays (or commenting on them) from the sidelines. The juxtaposition of his TV and print appearances with the economic and financial fallout from his policies isn't helping his reputation. There's enough blame to go around for what started as the subprime crisis, but surely Greenspan, the country's chief economic policy maker for 18 years, must shoulder the lion's share. So here's my advice, Mr. Greenspan. Give speeches for $150,000 a pop and share your wisdom with your key clients, who must pay you handsomely. When the press calls, just say "no comment". This is an acquired skill, but I'm sure you'll catch on. As an economist, surely you appreciate scarcity value.
First published on Bloomberg.com.
Bill Bonner is away.
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