Fed or BOJ -- Which One Screwed Up More?
By William Pesek Jr.
Tokyo, Sept. 3 (Bloomberg) -- The Federal Reserve's annual confab in Jackson Hole, Wyoming is the financial glitterati's premier A-list event. If you get an invite, you matter.
If anyone wasn't happy to be there this year, it probably was Yutaka Yamaguchi, deputy governor of the Bank of Japan. Considering a speaker at the symposium said Japan's monetary policy ``arguably represents the world's worst monetary-policy mistake since the Great Depression,'' it seems a safe assumption.
That statement, from Princeton University economist Lars E.O. Svensson, put the BOJ squarely on the defensive. Yamaguchi retorted that he was ``skeptical'' that the central bank alone was to blame for Japan's economic woes.
Yet Yamaguchi wasn't the only central banker in Jackson Hole defending his institution. Fed Chairman Alan Greenspan, the man many used to call the best Fed leader ever, also was in legacy- enhancement mode. He opened the conference with a defense of the Fed's actions in the late 1990s as a bubble in U.S. assets grew. Some investors blame the Fed for failing to act against it.
That the Fed and the BOJ find themselves on the defensive these days is telling indeed. Their perceived crimes may be different -- the Fed for fueling a bubble, the BOJ for not stopping deflation -- but the upshot is the same: Central bankers who screwed up.
Clueless
In fact, questions about the Fed and BOJ seem to have let everyone's favorite whipping boy, the European Central Bank, off the hook. Now that the euro has stabilized and is hovering near parity with the U.S. dollar, ECB President Wim Duisenberg is off the hot seat.
The attention now is on who screwed up more -- the Fed or the BOJ? Most will conclude Japan wins the award for most clueless central bank -- and perhaps for good reason.
The BOJ, at the behest of Japan's government, left the monetary spigots open too long in the 1980s and fed a speculative bubble. It then raised rates to pop it, went too far, and took too long to loosen rates in the 1990s. The result was a ``lost decade'' in the world's second biggest economy.
But Greenspan, perhaps single-handedly, also took some steps in the late 1990s that investors and many Americans are likely to regret in the years ahead. The mania in stocks that made rock stars out of CEOs and multi-millionaires out of teenage dot- com'ers was in part Greenspan's creation.
New Economy
It wasn't that the Fed didn't raise rates. Greenspan correctly made that point in Jackson Hole Friday, saying ``no low- risk, low-cost, incremental monetary tightening exists that can reliably deflate a bubble.'' If Japan's own experience in the late 1980s tells us anything, it's that interest rates can be too blunt a tool to deflate a bubble.
No, Greenspan's problem was that he became part of the boom, and the rationale behind it. Nothing wrong with the Fed giving the economy room to roam, but Greenspan become an unabashed cheerleader of the so-called New Economy. By thinking aloud about the wonders that might come from computers, productivity and the Internet, the world's most influential economist made it okay for skeptics to get on the bandwagon.
A central banker, let's face it, isn't supposed to be liked. He's supposed to be the curmudgeon in the room at all times, the one who fears the worst even when things seem grand. The old saying about the Fed being there to take away the punchbowl just as the party is getting started is true. In the 1990s, though, Greenspan seemed to forget that.
Celebrity
Far from hiding the punchbowl, he refilled it. So did the media, which treated the dour economist like a Hollywood celebrity. Mainstream magazines such as People pictured Greenspan on the same pages with Madonna, Tom Hanks and the Rolling Stones. Time magazine not only dubbed him a member of the ``Committee to Save the World,'' but also considered him for its Person of the Year award.
The fame had to be intoxicating for a man more used to spending time wallowing in the unglamorous world of economic statistics. And somewhere along the way, Greenspan seemed to forget his vital role as disinterested regulator. In some ways, he became more a participant in global markets than overseer of them.
With his what-me-worry? persona, Greenspan ignored suggestions from other Fed officials that stocks were rising too fast. Some who suggested boosting margin requirements were overruled. Greenspan finally raised the issue of ``irrational exuberance'' in December 1996. When he was criticized for doing so, he dropped the issue.
As stocks boomed, unemployment fell and wages rose, everyone felt good -- and Greenspan basked in the euphoria. He had joined the economic celebration himself. Later, when Greenspan & Co. belatedly began hiking rates, it did so too aggressively. It's since had to correct that mistake by cutting them.
So, yes, the Bank of Japan gets plenty of blame for Japan's 11-year malaise. But it remains to be seen how much harm Greenspan's tenure in the late 1990s did to the U.S. economy. Remember, it took Japan over a decade to realize its own policy mistakes. |
