Eric Fry...on vacation: (continuing GreenMan indictment)
- "A cycle of Greenspan revisionism is long overdue,"
writes James Grant in the latest issue of Grant's
Interest Rate Observer. "Many are the lapses of judgment
for which the chairman will sooner or later be called to
account.
"A bare-bones indictment of the Greenspan stewardship
would number six counts. For the first three, we are
indebted to Andrew Smithers and Stephen Wright, British
economists (though not yet knights)...The six are: 1) He
refused to intervene to prick a bubble that he knew, or
should have known, would cost the United States dearly.
2) He believed that the stock market is efficient (if
not perfectly efficient in the academic sense, then
efficient enough to be bubble-proof). 3) Though he
refused to intervene to cap the rise in stock prices, he
repeatedly intervened to stop declines. 4) By suffering
a bubble to be blown, he was party to the distortion of
the structure of the U.S. economy, a distortion that has
persisted to this day. Its symptoms include excessive
productive capacity, excessive indebtedness, inadequate
savings and immense current-account deficits. 5) In an
attempt to revive the economy, revitalize the financial
markets and/or to curry favor with the incumbent
political party, the Fed must create more credit than it
otherwise would have to do, in this way risking a new
inflationary cycle. 6) Amid the crisis of confidence he
did so much to bring about, the chairman, on July 16,
passed a marble-mouthed remark about "infectious greed."
"Our historical guardians of financial information were
overwhelmed," he added, omitting reference to "our
historical guardians of margin regulation" or "our
historical guardians of credit growth," i.e., himself.
- "Central bankers are not supposed to be either
optimistic or popular," writes William Greider in the
Washington Post. "They are supposed to be the national
scold - the economic regulators who worry constantly
over what might go wrong and impose restraints before
public opinion or the markets see any problem. In that
sense, the Federal Reserve went off the rails in the
bubbling '90s. Though still celebrated for wise
stewardship, the Fed failed its core function as the
disinterested governor."
"Greenspan's first pivotal error occurred back in 1996,
when he and other Fed governors first recognized a price
bubble forming ominously in stock markets. Then-governor
Lawrence Lindsey (now the president's economic adviser)
urged the chairman to act promptly. Raising margin rates
would tighten stock-market borrowing...and ring a loud
warning bell for giddy investors. But Greenspan waved
off Lindsey's prescient plea. A few months later, the
chairman did speak once of 'irrational exuberance,' but
the markets reacted badly. He dropped the subject."
- Instead of restraining the excesses of the late 1990s,
says Greider, Alan Greenspan became one of the stock
market's most conspicuous and enthusiastic cheerleaders.
"By the summer of 1999," writes Mark Zandi of Barron's,
"Greenspan was forcefully arguing that policymakers
should not directly respond to a potential bubble.
Greenspan's uncharacteristically clear views provided
the intellectual cover investors needed for their
frenzied stock buying. Told by the Fed Chairman that it
was unclear whether or not there was a bubble, investors
bought; told that if a bubble existed and it burst, they
could be sure that the worst of their financial pain
would be mitigated by aggressive monetary easing,
investors bought at even higher prices."
- To be sure, investors believed what they wanted to
believe. But the Fed Chairman was at least an accomplice
to the national self-delusion that "Dow 36,000" was an
inevitable near-term price target.
- "Taking decisive action [early on] would have required
courage," Greider concludes. "[Greenspan] would have
been compelled to take on the Fed's foremost
constituency - Wall Street banks and brokerages - where
he is most loved. Instead, Greenspan's popularity soared
with the booming economy."
- Incredibly, says James Grant, the Fed Chairman's
bubble-era popularity persists, even though the bubble
(which he nurtured) has already burst. "On July 26-28,
Gallup/CNN/USA Today asked Americans what they thought
of him," Grant writes. "Sixty-two percent had a
favorable opinion, only 16% an unfavorable one; 12% had
no opinion, and 10% had never heard of the
gentleman...[Greenspan] personified the boom on the
upside, yet now, on the downside, he appears to
personify hope. He was a celebrity CEO in the good
times, yet now, in a time of recrimination, he is still
no villain. Truly, he lives a blessed existence.
"In addition to the previously cited opinion poll, there
is evidence to support this claim in the daily polls
conducted in the stock market and the gold market. If
the public doubted that some greater intelligence were
guiding the nation's financial destiny, we believe,
stock prices would be lower. And if the world were
persuaded that the chairman has been bluffing, the gold
price would be higher. The gold price, we think, is the
reciprocal of the reputation of the world's central
bankers, Greenspan's most of all." |
