Greenspan: Always Wrong


Interesting review of a new book on former Fed chair Alan Greenspan. The book's theme is summed up by its title: Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, by Frederick Sheehan.

Reviewer Ryan McMaken hits the low points of a man who never deserved his awesome reputation, and was an imaginative apologist for inflation and the notion that what went up was naturally going to stay up:

Sheehan meticulously documents Greenspan's commentary through the 1990s and into the last decade. From 1987 to the end of his term, Greenspan inflated the money supply nonstop. Interest rates, while occasionally moved slightly upward by Greenspan's Fed, fell again and again with Greenspan always claiming that there was neither a stock market bubble (as he did in 1999) nor a housing bubble (as he did in 2006).

In all this time, Greenspan virtually never considered inflation to be a serious problem, or even a potential problem….Greenspan instead created convoluted theories to explain why such inflation was not a problem, and why growth would constantly provide a fail-safe protection against price inflation.

His most famous theory of this sort was his productivity theory. For years, Greenspan waxed philosophical about how productivity due to new technologies would prevent imbalances in the economy from such massively loose monetary policy. This theory, coupled with a restructuring of the CPI to drive down the official inflation rate in the 1990's, allowed Greenspan to claim there was hidden wealth being created behind the dour statistics….

Greenspan criticized American consumers for not spending enough on consumer goods and real estate. For Greenspan, consumer spending was essential regardless of where one got the money. So, in 2001 when Greenspan, who greatly approved of cashing out home equity to buy consumer goods, observed that the "general level of consumer expenditures seems to be holding up, I suspect in large part because of capital gains in homes," the next great bubble had already been set in motion…..

Greenspan also had no qualms about becoming the real estate industry's best friend in denouncing all talk of a housing bubble. In 2002, building on Greenspan's forecast, the chief economist at the National Association of Home Builders declared that "[t]he time has come to put this issue to rest. The nation's home builders have said it…and now Alan Greenspan has said it once again, in no uncertain terms; there is no such thing as a current or impending house price bubble."….

Although Greenspan had always had a terrible record on perceiving trends in the economy, Sheehan's story shows a Greenspan who becomes increasingly out to lunch with each passing year as he spun more and more outlandish theories about hidden profits and productivity in the economy that no one else could see…..

Sheehan excellently catalogs Greenspan's rise to power as an affable technocratic politician who played the part of an economist with a knack for numbers and for justifying inflationary policies that made Presidents and Congressmen happy. Greenspan always told everyone what they wanted to hear. The rich and famous basked in his perceived genius.

Check out Reason magazine's November 2006 forum on Greenspan's legacy (and the prospects for Bernanke), featuring one of the last interviews with monetary economics legend Milton Friedman.