WASHINGTON – DECEMBER 17: Former Federal Reserve Chairman Alan Greenspan testifies during a Senate Homeland Security and Governmental Affairs Committee hearing on Capitol Hill on December 17, 2009 in Washington, DC. The committee is hearing testimony on why Congress should establish a bipartisan task force to help safeguard America�s economic future and proposals to secure It. (Photo by Mark Wilson/Getty Images)
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Alan Greenspan was out of government, and worried his employees weren’t being thorough enough in their analysis. One “had been telling clients that a hot housing market” was “turbocharging the economy.”
No problem, the empiricist in Greenspan would conduct his own research. What he found astonished him. He soon found the employee “had absolutely no idea of the size of this phenomenon.”
Sure enough, mortgage issuance had exploded. It was six times the normal amount of the previous decade. Housing prices had tripled. Memories of the 2000s…
Except that what you read is a true story from 1977. The timing counters the narrative that the Fed’s low-rate policies drove the 21st century housing boom. The Fed’s funds rate was soaring in the 70s.
This is important mainly because it’s long been accepted wisdom that the impossibility of “easy money” from the Fed was the source of the housing boom in the 2000s. The narrative portrayed the Fed as some kind of other, capable of decreeing cheap, costless credit such that those with title to money would turn their noses up to compounding and other truths about the genius of saving so long as the Fed said so. No, not serious.
It’s all worth thinking about as the myriad obituaries come out about Greenspan. Expect lots of “yes, but” commentary suggesting that Greenspan made credit “easy” as though the Fed could and can overwhelm markets, and that having done this, he planted the seeds for the so-called “financial crisis.” Greenspan did no such thing.
The reality is that the George W. Bush administration, in a replay of the Nixon/Ford/Carter 1970s, reversed the credible dollar policies of the Reagan and Clinton era. With the dollar in decline, investors who are pursuing future income streams in dollars, flocked into hard, existing wealth least vulnerable to devaluation. This wasn’t Fed policy simply because the Fed doesn’t, nor has it ever set the exchange value of the dollar. Meaning a weak dollar wasn’t Greenspan’s policy.
As for the “crisis” in 2008 that happened once Greenspan was back in the private sector, to blame him for government intervention in the natural, healthy, corrective workings of the market was quite something, but it was done and it sadly will be done in the coming days. The analysis will be nonsensical. Government intervention is a crisis. Enormous amounts of it a la 2008 result in huge crises, none of them “financial.”
Which brings us to the other narrative that will reveal itself post-Greenspan: the Fed Chair “steered the economy” through all manner of crises (1998, 9/11, 1987, etc.) on the way to booming growth. Nonsense too. Central planning that fails in good times hardly gains validity in the bad.
What made Greenspan look so good from 1987-2000, and so bad from 2000-2006 was that economic policy (including dollar policy) under Reagan and Clinton was largely good, and it was awful under George W. Bush. When money is trusted, investment increases alongside growth. Growth is less evident when money isn’t trusted.
What’s sad is that the former free-market devotee in Greenspan knew all this. Which means if he had a weakness, it was that he was human. Really, who wouldn’t embrace “The Maestro” encomiums thrown his or her way? Greenspan’s human nature means he took credit for policies he had nothing to do with, only for the errant willingness of him to take credit not due to him to come back to wrongly haunt him when policy took a negative turn.
Greenspan was neither a genius nor a villain despite what you’re being told now.