Alan Greenspan’s legacy

 

He was not a crook!

If Volcker symbolized the neoliberal turn in monetary policy, Greenspan embodied its financial side. He saw enough of the late-1990s stock-market mania to warn of “irrational exuberance,” but he treated the bubble as something the Fed should not seriously confront and continued to promote deregulation, including the dismantling of Glass-Steagall and the resistance to controls on derivatives.

That was not merely an error of forecasting. Greenspan’s faith in self-regulating finance helped produce an economy in which asset prices and executive compensation surged while wages stagnated. Financial deregulation and the gains accruing to finance were central to the rise of inequality, together with the destruction of unions and the weakening of workers’ bargaining power that had begun under Volcker.

The political consequences were predictable. Rising inequality, economic insecurity, and the sense that democracy no longer responds to ordinary people created fertile ground for the radical right. Greenspan’s late admission that laissez-faire had failed was not meaningless, but it was too little and far too late. By then the financial crisis had already revealed what his market discipline meant in practice, private gains, public rescues, and a more unequal and politically unstable society.

Warsh, beyond Powell and glory

 

Soon in a theater near you!

Kevin Warsh will have a difficult task ahead. But it is not quite the one most political and economic analysts have been emphasizing. For much of the commentariat, Warsh’s problem is that he needs to hike interest rates, and defy Trump. Many are concerned that he won't have the courage to do it.

Although he was seen as a hawk on inflation, he has been tempted by the possibility that artificial intelligence might raise productivity and allow lower interest rates. Like Alan Greenspan in the 1990s, who came to believe that the internet had reduced the inflationary impact of growth, Warsh appears, at least circumstantially, as a dove. Worse, he might do Trump's bidding and effectively end the independence of the Fed (gasps from the audience), and undermine its credibility (a terror flick for very serious economists).

But for most commentators the mild acceleration of inflation, associated to the price of oil and the war in Iran, and the uncertainty about the actual impact of AI (on that see Austan Goolsbee on Soumaya Keynes podcast) have made that position look less tenable for most analysts. Hence the renewed calls not merely to resist Trump’s pressure for lower rates, but to hike them. To imitate Powell, in this view, would be the path to respectability. Perhaps even to glory. It would also be a mistake.

Ruchir Sharma, for example, draws the conventional hard-money conclusion. Warsh, he argues, should begin his tenure by raising rates and ending the Fed’s easy-money bias. The argument is wrapped in populist language. Inflation hurts workers and the poor, while easy money fuels asset prices and benefits the rich. There is a kernel of truth there. But it is not always the case (see also). Besides rate hikes will not produce cheaper oil. The best hope there is the end of the war in Iran.

Powell was lucky. His interest-rate hikes did not produce a recession through the housing channel, reducing credit and consumption. But those hikes were not the main reason inflation came down. Inflation declined largely because the cost-push pressures associated with the pandemic value-chain disruptions and the oil shock after the Ukraine war subsided. The lesson is not that Powell became Volcker and saved the Republic. The lesson is that supply shocks eventually faded, and the Fed received more credit than it deserved.

This is the problem with the constant invocation of Volcker. As I argued before in my post on Paul Volcker’s legacy, the conventional story exaggerates the virtues of monetary toughness and obscures the social costs of disinflation. The Volcker shock was not a technocratic morality play in which courage defeated inflation. It was a brutal tightening that produced a deep recession, weakened labor, and accelerated the decline of workers bargaining power. It also caused the debt crisis and the lost decade for several developing countries. To recommend that Warsh seek his Volcker moment is to misunderstand both the causes of the current inflation and the political economy of monetary policy.

The same problem underlies what I called inflation paranoia. The New Consensus view treats inflation as always and everywhere a problem of excess demand, to be solved by the central bank through higher rates. But the recent pandemic inflation and its more recent and milder rekindling are not fundamentally excess demand, or a wage-price spiral driven by an overheated labor market and distributive conflict. It is a cost-push episode shaped by energy shocks and the previous one by logistics problems too. Again, this is NOT the 70s show.

Warsh cannot fix cost-push inflation by hiking interest rates. He can slow the economy, weaken labor markets, and perhaps prick asset bubbles. But that is not the same thing as solving the causes of inflation. There is no significant risk of high inflation. The biased lesson drawn from the Volcker legacy is that central bankers achieve greatness by inflicting pain. The better lesson is that Warsh should not seek glory by repeating Powell’s hikes or, worse, by chasing a new Volcker myth.

Bernie Sanders in 1998 on the Global Crisis and the IMF role in it

Old clip from C-SPAN. It's still worth watching. Strong critique of the failures of the IMF and neoliberal policies in leading to the crisis. We know now that the subsequent bubble pushed the major crisis for another 10 years.

Keynes and the Golden Age vs Greenspan and the Great Moderation

Great video post by Trixie the "Haiku Charlatan," who blogs at Hit or Miss. Enjoy!

Dean Baker on The Checkered Past of Ben Bernanke

By Dean Baker

The retrospectives of Ben Bernanke on his leaving the Fed seem to be coming in overly positive. While there is much that is positive about his tenure as Fed chair, many of these accounts have a rather selective view of history.
The part that is clearly wrong is treating Bernanke as a bookish academic who got plucked down in the middle of a financial crisis that was not his making. While Bernanke had a distinguished academic career, he had been in the middle of the action in Washington since 2002. That was when he was selected to be a governor of the Fed. He served as a governor at Greenspan’s side until he went to serve as head of President Bush’s Council of Economic Advisers in June of 2005. After a brief stint as the chief economist in the Bush administration he returned to take over as chair of the Fed in January of 2006.
It was during the period that Bernanke was at the Fed and his tenure in the Bush administration that the housing bubble grew to such dangerous levels. While Bernanke does not deserve as much blame for this as Greenspan, there were few people better positioned to try to deflate the housing bubble before it posed such a large risk to the economy. During this time Bernanke was dismissive of suggestions that the unprecedented run-up in house prices posed any problem. There is no evidence that he dissented in any important way from Greenspan’s view that the Fed need not be concerned about the housing bubble or the innovations in the financial industry that was supporting it.

Read rest here

Solow on Greenspan's new book and the misrepresentation of the mainstream

Solow's review was published in the New Republic here (h/t Robert Vienneau). Solow has lost nothing of his ironic and acerbic style of criticism. As noted by Vienneau there is a great line at the end about Greenspan's mentor Ayn Rand:

"It is sometimes claimed that Alan Greenspan is a closet follower of Ayn Rand; he certainly had an early association with her circle. I got through maybe half of one of those fat paperbacks when I was young, the one about the architect. Since then I have found it impossible to take Ayn Rand seriously as a novelist or a thinker. In the past I have gone on the assumption that Greenspan’s ideas about economic life are his own, just what is contained in his writings, and the Ayn Rand question does not arise. But now there is this book, with its particular misinterpretation of mainstream economics, which might be thought to reopen the question if anyone is interested."

So basically he says Greenspan might be a crank after all. Yet, Solow has actually a couple of nice things to say about the old 'maestro.' For him, the injection of liquidity after the 1987 crash, and allowing the unemployment rate to fall below 6% or so (what most considered the natural rate) suggest that "it is only fair to say that he was a very good chairman of the Fed."

This in spite of his "two big mistakes." One mistake was allowing (I would say almost promoting) the housing bubble. The other, the relevant one for Solow, was his:

"deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike."

If  being a monetary crank that shares responsibility for the deregulation of the financial sector and the current global crisis (let alone his role in the Bush tax cuts, or his promotion of cutting Social Security benefits) does not make him a terrible Fed chairman, I don't know what would.

Also, I think Solow is right, Greenspan does not represent well the more moderate New Keynesian mainstream. Yet, in many respects his sort of fringe radical right wing Ayn Rand version of the mainstream, like supply side and Austrian economics, is also part of the mainstream and shares several crucial elements. I would argue that the problem with Greenspan is NOT that he misrepresents the mainstream, but that his deregulation mantra is perfectly compatible with the mainstream. Lets not forget that Larry Summers (a New Keynesian that favors fiscal expansion and is concerned about the possibility of secular stagnation now) was during the Clinton era presiding over deregulation.

Time to Retire Greenspan and Trichet’s Pensions

From Dean Baker:

Remarkably, the two individuals who bear the greatest responsibility for the global economic disaster, former Federal Reserve Board chairman Alan Greenspan former president of the European Central Bank Jean-Claude Trichet, do not appear to be suffering at all for their failure. Both are living comfortably and continue to be sought out for their so-called expertise on economic policy. This should infuriate reasonable people everywhere.

See rest here.