Saturday, September 15, 2007

I've Been a Greenspan Skeptic for Some Time

It all began when Alan Greenspan talked about "irrational exuberance", then later climbed on the bandwagon when the market kept rising. In later years, I heard a staunchly Republican economist of some note talk about Mr. Greenspan pumping the economy in time to avoid an economic downturn for the 2004 election. And this was more than a year before the election.

Yet, when I come across the following excerpt from his memoir, I am not surprised. In fact, it explains perfectly to me why Mr. Greenspan is now heaping praise on Bill Clinton.

Selectively truthful?

Greenspan was intensely criticized for endorsing a large tax cut in 2001 in congressional testimony during the first weeks of the Bush administration. He notes that he was recommending any tax cut, even a smaller one proposed by some Democrats. But he acknowledges that those who had warned him about the perception he was backing Bush's plan were right. "The tax-cut testimony proved to be politically explosive," he writes.

Yet, he adds: "While politics had not been my intent, I'd misjudged the emotions of the moment. . . . Yet I'd have given the same testimony if Al Gore had been president."


ross said...

I wouldn't take Greenspan on his word here about supporting a Dem led tax initiative equally.

And while he may well have kept his foot on the accelerator through the middle of 2004 which, if politically motivated, suggests an ugly streak in him, Greenspan's low interest rates were likely not as important as the low long-term rates which have been kept down by reserve accumulation among countries that were keeping the dollar values of their currencies down, by Japan until March 2004, and by China, the GCC and others since.

Those low long-term rates, combined with no small amount of fraud and stupidity in the US mortgage industry and financial circles, sustained the housing and credit bubbles.

Jun Okumura said...


You are absolutely right. I am no exception to the general tendency to overvalue the power of central banks to affect the long end of the yield curve. But it seems that Mr. Greenspan did use that and other fallacies to help sustain the "fraud and stupidity" and keep the US economy rolling for so long, and magnified the scope of the current setback and its effects. With the complicity of Japanese and Chinese authorities, yes; so there's a lot of blame to go around.

As for the Bush administration's tax policies, I'm sure that Mr. Greenspan would have initiatives of similar macroeconomic impact – albeit of very different distributive effects - from President Gore.