Pointing fingers - Alan Greenspan to be blamed for the economic crisis?

I blogged about Alan Greenspan in January 2006, just before he left office as Chairman of the US Federal Reserve. In that entry, I wrote about him based on an article I read in the Economist. Although he has been acclaimed by many economists as 'the greatest central banker who ever lived', some critics had their reservations on him. Here's my entry that I wrote almost 3 years ago:

Ahead of his retirement, he has been widely and extravagantly acclaimed by economic commentators, investors and politicians. He has been honoured and left a legend with a well-rehearsed quote to his name, 'The greatest central banker who ever lived.'

To refresh our memories, here is a snippet of Alan Greenspan background :-

He originally took office as Chairman and to fill an unexpired term as a member of the Board on August 11, 1987. Dr. Greenspan was reappointed to the Board to a full 14-year term, which began February 1, 1992, and ends January 31, 2006. He has been designated Chairman by Presidents Reagan, Bush, Clinton, and Bush.

Dr. Greenspan was born on March 6, 1926, in New York City. He received a B.S. in economics (summa cum laude) in 1948, an M.A. in economics in 1950, and a Ph.D. in economics in 1977, all from New York University. Dr. Greenspan also has performed advanced graduate study at Columbia University.

From 1954 to 1974 and from 1977 to 1987, Dr. Greenspan was Chairman and President of Townsend-Greenspan & Co., Inc., an economic consulting firm in New York City. From 1974 to 1977, he served as Chairman of the President's Council of Economic Advisers under President Ford, and from 1981 to 1983, as Chairman of the National Commission on Social Security Reform.

Dr. Greenspan has also served as a member of President Reagan's Economic Policy Advisory Board, a member of Time magazine's Board of Economists, a senior adviser to the Brookings Panel on Economic Activity, and a consultant to the Congressional Budget Office.

His previous Presidential appointments include the President's Foreign Intelligence Advisory Board, the Commission on Financial Structure and Regulation, the Commission on an All-Volunteer Armed Force, and the Task Force on Economic Growth.

Before his appointment to the Board, Dr. Greenspan served as a corporate director for Aluminum Company of America (Alcoa); Automatic Data Processing, Inc.; Capital Cities/ABC, Inc.; General Foods, Inc.; J.P. Morgan & Co., Inc.; Morgan Guaranty Trust Company of New York; Mobil Corporation; and The Pittston Company.

His noncorporate positions have included Member of the Board of Trustees, The Rand Corporation; Director, Institute for International Economics; Member of the Board of Overseers, Hoover Institution (at Stanford University); and Vice Chairman and Trustee, Economic Club of New York.

Dr. Greenspan has served as Chairman of the Conference of Business Economists, President and Fellow of the National Association of Business Economists, and Director of the National Economists Club.

Dr. Greenspan has received honorary degrees from Harvard, Yale, Pennsylvania, Leuven (Belgium), Notre Dame, Wake Forest, Colgate, and Edinburgh universities. His other awards include the Thomas Jefferson Award for the greatest public service performed by an elected or appointed official, presented by the American Institute for Public Service, 1976 (joint recipient with Dr. Arthur Burns and William Simon); election as a Fellow of the American Statistical Association, 1989; decorated Legion of Honor (Commander) France, 2000; recipient of the American Philosophical Society’s Benjamin Franklin Award for Distinguished Public Service, 1998, and election as a member of the society, 2000; honorary Knight Commander of the British Empire, 2002; and the first recipient of the Gerald R. Ford Medal for Distinguished Public Service, 2003.

On the surface of things, one could presume that Alan Greenspan struck up a miracle in favour of America's fate during his 18 1/2 years in office. During most of his service in office, America enjoy rapid growth with low inflation. In addition, he successfully steered the economy around a series of financial hazards. He is credited with saving the world economy—from the stockmarket crashes of 1987 and 2000-01, and from Russia's default and the near collapse of LTCM, a hedge fund, in 1998—by pumping in liquidity when it was vulnerable.

Many have predict that the reign of America's economy has reached its peek and gloomy days now await. Gloomy days will not be caused by Greenspan's departure but by his departuring souvenirs: the biggest economic imbalances in America.

Commentators are now debating if the works of Alan Greenspan is worth its current glory or did he instead leave a time-bomb in America's hands?

America's market demand significantly outweighs and outraces market supply. The Federal Reserve's policies of the past decade looks like its having painful long-term costs. We should not forget that Mr Greenspan was long criticised by economic commentator's for not trying to restrain the stockmarket bubble in the late 1990s. And after its burst, Alan Greenspan, inflated a housing bubble by holding low interest rates for so long. By borrowing against capital gains, households consume more than their monthly income. Although robust consumer spending has boosted GDP growth, this is a short-term benefit at a huge cost of a negative personal saving rate.

In all this seriousness, Ben Bernanke, Mr Greenspan's successor had to cheek to say that America's current-account deficit is the inevitable consequence of a saving glut in the rest of the world.

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It seems that those critics rightly disagreed with Alan Greenspan. Although everything seemed smooth sailing during the time he was in office, he left a time bomb that was only waiting to explode. Tragically, no one including Greenspan himself expected the time bomb he helped create to be this destructive.


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Read this recent article by Seattle Times


WASHINGTON — As Federal Reserve chairman, Alan Greenspan testified before Congress dozens of times over almost two decades.

Time after time, lawmakers solicited the economic wisdom of "the Oracle."

But not Thursday.

This time, instead of praise, lawmakers heaped blame on the 82-year-old economist for the current crisis and asked him time and again whether he had been wrong, why he had been wrong and whether he was sorry.

Grim-faced, Greenspan could offer only a limited defense.

Almost three years after stepping down as the Fed chair, a humbled Greenspan admitted he had put too much faith in the self-correcting power of free markets and had failed to foresee the self-destructive power of wanton mortgage lending.

In his trademark gravelly monotone, he acknowledged he was in a state of "shocked disbelief" at the breakdown of credit markets that triggered what he called "a once-in-a-century credit tsunami."

"This crisis ... has turned out to be much broader than anything I could have imagined," he told the House Oversight and Government Reform Committee. "Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment."

The appearance was his first in such a public forum since the crisis began and provided a dramatic bookend for the demise of the economic boom and the unmaking of his reputation.

Critics, including many economists, now blame the former Fed chairman for the financial crisis that is tipping the economy into a potentially deep recession. Greenspan's critics say he encouraged the bubble in housing prices by keeping interest rates too low for too long and he failed to rein in the explosive growth of risky and often fraudulent mortgage lending.

Near the end of the four-hour grilling, which he shared with John Snow, the former Treasury secretary, and Christopher Cox, chairman of the Securities and Exchange Commission, Greenspan suffered a final indignity.

The man dubbed "the Maestro" for orchestrating fiscal policy during 18 years as Fed chief found himself likened to one of the great goats of baseball.

"I feel like I'm looking out there at three Bill Buckners," said Rep. John Yarmuth, D-Ky., referring to the Boston Red Sox first baseman who botched an easy grounder in the 1986 World Series. "All of you let the ball go through your legs."

Snow and Cox took a lot of criticism as well. But it was unprecedented to see Greenspan booed for a crucial error.

Under tough questioning from committee Chairman Henry Waxman, D-Calif., and other Democrats, Greenspan said he was wrong in assuming free-market forces would prevent the current crisis.

"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Greenspan said.

The crisis exposed a "flaw" in his strong market-based ideology, he said.

"That's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well," Greenspan said.

The hearing was the third in a series Waxman is holding to identify the causes of the financial crisis. Greenspan knew he was in for a tough day. And Waxman hit him at the start.

"For too long, the prevailing attitude in Washington has been that the market always knows best," Waxman said. "The Federal Reserve had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market. But its longtime chairman, Alan Greenspan, rejected pleas that he intervene."

Greenspan's critics have complained that, starting in 2001, he kept interest rates too low to help bolster the U.S. economy after the bursting of the dot-com bubble and the terrorist attacks of Sept. 11 that year. That easy credit, they say, fueled a runaway housing boom.

They also allege his free-market ideology kept him from using Federal Reserve authority to regulate adjustable-rate mortgages and complex financial derivatives — regulation that could have helped prevent the current crisis.

Waxman, noting the former Fed chairman had been one of the nation's leading voices for deregulation, displayed past statements in which Greenspan had argued that government regulators were no better than markets at imposing discipline.

"Were you wrong?" Waxman asked.

"Partially," the former Fed chairman reluctantly answered, before trying to parse his concession as thinly as possible.

Greenspan, celebrated in a 2000 book by Bob Woodward, presided over the Fed for 18 years before he stepped down in January 2006. He steered the economy through one of the longest booms in history, while also presiding over a period of declining inflation.

But as the Fed slashed interest rates to nearly all-time lows from 2001 until mid-2004, housing prices climbed far faster than inflation or household income year after year. By 2004, a growing number of economists were warning that a speculative bubble in home prices and home construction was under way, which posed the risk of a housing bust.

Greenspan brushed aside worries about a potential bubble, arguing housing prices had never endured a nationwide decline and a bust was highly unlikely.

Greenspan, along with most other banking regulators in Washington, also resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages that allowed people to borrow far more than they could afford.

The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act, or HOEPA. But it took little action during the long housing boom, and less than 1 percent of all mortgages were subjected to restrictions under that law.

This year, the Fed dramatically tightened its restrictions. But by that time, the subprime market, as well as the market for other kinds of exotic mortgages, already had been wiped out.