Economist's View: Greenspan’s Legacy

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Greenspan’s Legacy

The final chapter is still being written, but from the sound of things, you’d think Greenspan was already gone:

What they say, The Observer: Stephen Roach, chief economist at Morgan Stanley: 'There's an awful lot of issues he's had to cope with. He's done a masterful job in dealing with many of them. But the starting-point in terms of his legacy for me is the way in which he has failed to stop the process of asset bubbles, starting with equities and now into property. 'In the late 1990s he should have been predisposed very differently in addressing the equity bubble. Not only did he fail to use margin requirements as a signaling measure, but he continued to extol the virtues of a productivity-led boom. It is argued that he can deal with bubbles after the fact, but it may be a solution that only works once. Now we have another bubble, and it's an even bigger one.

'It depends on how deeply you look at the economy: on the surface, growth is solid, inflation is low, unemployment is low; but when you look just below the surface, you see some very serious problems. After his "irrational exuberance" speech, he took a lot of political flak, and he did alter his stance. In retrospect that was a serious mistake.'

Ravi Batra, professor of economics at the Southern Methodist University, Dallas, and author of Greenspan's Fraud: 'He helped to bring about a rise in taxes for the poor: he's the author of regressive taxes for America, which led to very poor economic growth rates. That policy had consequences for the whole world. In the UK and Germany, tax policy became regressive, and led to a slowdown in demand growth. 'In terms of monetary policy, he caused the stock market bubble in the US, and he used his monetary policy to suppress wage gains. He would raise interest rates on the pretext that it would cause inflation whenever wages threatened to rise. Greenspan's monetary policy helped to create the stock market bubble.' 'He favoured the financial economy because he wanted to get reappointed as chairman of the Fed again and again: and Wall Street is the key to the reappointment.'

Charles Goodhart, former member of the Bank of England's Monetary Policy Committee: 'He is a great figure. He took over in rather difficult circumstances, immediately before the crash in 1987, and he managed to keep everything going through that. He handled the financial crises in the 1990s very effectively. There are those who say he recognised irrational exuberance early, and then changed his mind. At the same time, it's got to be said that he saw the acceleration in American labour productivity far earlier than anyone else did. 'You could say he missed the stock market bubble, but even if he had read it right, what could he have done about it? Given that inflation was relatively stable, and the economy was getting on very well, it would have been very difficult.'

Sir Digby Jones, director general of the CBI: 'Alan Greenspan is the doyenne of central bankers. The first two thirds of his tenure were hugely successful. He never played to the crowd; he raised or cut interest rates when he judged best, not the market. But he probably overstayed his welcome. Although he was not the only one responsible, America's trade deficit has ballooned and the country is in hock to China. It happened on his watch.'

John Calverley, chief economist at American Express and author of Bubbles and How to Survive Them: 'He was very good at dealing with a weak economy, and with the aftermath of a bubble. He dealt with the 1987 stock market crash very well: he immediately cut interest rates and made sure it didn't have a lasting impact. He did the same thing again in 2001-02, when he cut interest rates to one per cent. The criticism would be that he's not quite so hot at dealing with the boom period. 'He talked about irrational exuberance, but when prices started to go up again, he backed away. He became a bit of a cheerleader for the technology and general stock bubble. I think generally the economy is strong, but the one cloud on the horizon is house prices.'

Posted by Mark Thoma on August 21, 2005 at 02:16 AM