Ex-Fed Chairman Chides Current One...
(Paul Volcker salvaged americas economy 28 years ago...he should know better than most!)
By MICHAEL M. GRYNBAUM
Published: April 9, 2008
The biggest financial crisis in a generation — a downturn that officials at the Federal Reserve acknowledged in minutes released Tuesday might be “prolonged and severe” — is turning the traditionally reserved and omniscient central bank into an institution that seems to be in the throes of family therapy.
Related
Text: Minutes of the Meeting
CNBC Video: Alan Greenspan Defends Legacy - Part 1 | Part 2
In a speech on Tuesday, Paul A. Volcker, the imposing former Fed chief who felled the runaway inflation of the 1980s, chided the current chairman, Ben S. Bernanke, for toeing “the very edge” of the bank’s legal authority in orchestrating last month’s bailout of the beleaguered investment bank Bear Stearns.
“Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank,” Mr. Volcker told members of the Economic Club of New York.
His remarks came on the same day that Alan Greenspan, Mr. Bernanke’s immediate predecessor as chairman, deflected criticism of his tenure in an interview with The Wall Street Journal, dismissing as “unfair” claims that his policies stoked an untenable housing bubble.
But in defending his own stewardship of the economy over 18 years, a period of generally healthy growth and low inflation, Mr. Greenspan was forced to dredge up some painful memories that have come back to haunt the Fed.
“I don’t know of any time when previous chairmen were so openly discursive about the current arrangements,” said Allan H. Meltzer, an economist at Carnegie Mellon and the leading historian of Fed policy. In the past, he said, “they just didn’t discuss.”
Indeed, Mr. Volcker also implicitly questioned Mr. Greenspan’s cheerleading of the “bright new financial system,” that “for all its talented participants, for all its rich rewards, has failed the test of the marketplace.”
In his time as chairman, Mr. Volcker insisted that the Fed speak in a single, firm voice, and he sought to quell dissent in its ranks. He faced only one open revolt on the board of governors, in 1986, which nearly led to his resignation. But it was his challenger, Preston Martin, who stepped down.
Mr. Greenspan continued the autocratic tradition, gaining a reputation for opaque policy pronouncements that, like Mr. Volcker’s, required a carefully cultivated expertise to interpret. And he stood firm: in his interview Mr. Greenspan said he did not regret a single decision he made during his time as the Fed chairman.
Mr. Bernanke, who took over the chairmanship in 2006 promising greater transparency for the central bank, has struggled to maintain the same level of support.
Minutes released on Tuesday of the Fed’s March 18 policy meeting revealed strenuous disagreements among top central bankers, with 2 of the 10 officials present voting against the decision to lower interest rates by three-quarters of a point.
While not unprecedented, it was the first dual dissent since September 2002.
“It’s a club, and the members of the club tend to be supportive of a club, and particularly of the chairman,” Professor Meltzer said. “It’s not popular to dissent.”
The dissenters — Richard W. Fisher of the Dallas Fed and Charles I. Plosser of the Philadelphia branch — said that a rate cut would further fuel inflation, which has grown faster than anticipated on the back of high prices for gasoline and food.
Mr. Plosser argued that the Fed “could not afford to wait until there was clear evidence that inflation expectations were no longer anchored, as by then it would be too late to prevent a further increase in inflation pressures.”
The dissenters also argued that the Fed’s other efforts to restore confidence among lenders — including its decision to provide cheap loans to investment banks in exchange for relatively risky collateral — were a more effective and time-sensitive approach to improving the economy.
“Two voting members who explicitly see the world differently is a notable development,” said Robert Barbera, chief economist at ITG, an investment and research firm.
Ultimately, the minutes said, “most members judged that a substantial easing in the stance of monetary policy was warranted.”
At the meeting, most of the members said they believed that the economy would probably contract in the first half of the year, and they said a “prolonged and severe economic downturn could not be ruled out.”
The housing slump has shown few signs of recovery, central bankers said in the minutes, and they predicted home values would continue to drop.
Fed officials also confirmed that the central bank found itself in an extremely difficult situation. “Members noted that appropriately calibrating the stance of policy was difficult,” the minutes said, as officials weighed the benefits of lowering interest rates against the possibility that inflation would get out of hand.
Professor Meltzer concurred. “Bernanke is under tremendous pressure from the Congress, from the market, and from the president likely,” he said. “As Mr. Greenspan has discovered, even after you leave, you run into people who criticize what you did even though they may have applauded it when you did it.” |
