January 13, 2006

Economist on Greenspan: "His legacy will linger in the shape of the biggest economic imbalances in American history"


This important article from the Economist today on Greenspan and Bubbles, a source of articles on our situation that I find incredibly spot-on. I highly recommend reading this article in its entirety.

On Mr Greenspan's watch, America has also experienced the biggest stockmarket and housing bubbles in history. Presiding over one bubble could be seen as bad luck; presiding over two smacks of carelessness.

The Greenspan era will not end on January 31st. Instead, his legacy will linger in the shape of the biggest economic imbalances in American history: a negative household saving rate and a record current-account deficit (see chart 1). Until these imbalances unwind—a process that could prove painful—it is too soon to applaud Mr Greenspan's record.

The Economist's long-running quarrel with Mr Greenspan is that he chose not to restrain the stockmarket bubble in the late 1990s or to curb today's housing bubble. He has declared himself vindicated in not pricking the equity bubble with higher interest rates, but instead to let it burst and then cut rates sharply to “mop up” the damage.

Asset-price inflation can be as harmful as conventional inflation. A sudden collapse in share or house prices can trigger a deep downturn.

When the party ends, Mr Greenspan will not be there to clean up the mess. But end it surely will.

9 comments:

Wes D said...

Greenspan is derilect of his duty.

It's grossly difficult to time and pop bubbles, but to be responsible for a mini-housing bubble that burst in 1990, a major stock market bubble in 2000, and a MAJOR housing bubble that is bursting as I write is unacceptable.

There was also some pressure. The story goes that Bush I lost re-election because Greenspan was not aggressive enough in stimulating the economy so he let it get into overdrive late 2003/2004 to save Bush II.

I believe that Greenspan will not be remembered fondly in the history books. People hosting parties always look great during but after everyone gets DWI's going home it wasn't such a great idea.

bayh_Allen_2008 said...

I disagree....Greenspan has done a good job

Unemployment is lower than when Greenspan became Fed chairman

Productivity growth is nearly a full percentage point faster

Real wages are higher

The stock market has more than doubled, even after adjusting for inflation.

1% to 2% was normal economic growth - now we consider 3%-plus to be normal growth

He has steered the U.S. economy successfully through the the tech boom, Asian financial crisis, stock market bubble, tech bust, recession, Enron, and terrorist attacks

What's not to like?

FOUR MORE YEARS!

FOUR MORE YEARS!

000000000000000000000000000000000000 said...

Greenspan is a smart guy. After reading his article on perpetuating the welfare state I feel the government was shrewd in bringing them over to their team!

Anonymous said...

Alan Greenspan got a pass during the stock market collapse, and deflected much criticism by simply dropping rates to the floor which simply shifted money flows to residential real estate.

I predict Alan Greenspan’s so-called “legacy” will not escape this housing bubble. And the American people will not be as naive this time. I predict that the congress will create a new charter for the Federal Reserve, and Ben Bernanke will not be allowed to dump rates as a way to protect or restore asset prices.

The Fed’s primary purpose is to create price stability, and that includes asset prices.

foxwoodlief said...

Well who else is to blame? How about the President and Congress? Big business and lobbyists? Big government that taxes and spends and wastes resources, exports jobs, depresses US wages leaving only asset bubbles to keep American's from realizing that their way of life has been sold to the highest bidder overseas?

Capitalism is born in greed.

We can become isolationist, recall all our troops from overseas, cut all foreign aid, stop importing foreign goods and reinvest in making things in the USA creating jobs and an internal economy. I guess we can spend our way out of the mess like Japan.

Wes D said...

Unemployment is lower than when Greenspan became Fed chairman

True.

Productivity growth is nearly a full percentage point faster

True.

Real wages are higher
True, but buying power on those wages is the same as 30 years ago, so that makes it a wash or worse.

The stock market has more than doubled, even after adjusting for inflation.

Some argue that the stock market is still overvalued.

1% to 2% was normal economic growth - now we consider 3%-plus to be normal growth

Not true. Here's a sample chart from 1980-forward. It's valid because the early 80s we were battling high inflation and the economy still did well under Paul Volcker. GSpan took over in 1987.

1980 -0.23
1981 2.52
1982 -1.94
1983 4.52
1984 7.19
1985 4.13
1986 3.47
1987 3.38
1988 4.13
1989 3.54
1990 1.88
1991 -0.17
1992 3.33
1993 2.67
1994 4.02
1995 2.50
1996 3.70
1997 4.50
1998 4.17
1999 4.45
2000 3.66
2001 0.51
2002 2.19
2003 3.12
2004 ~3.53

He has steered the U.S. economy successfully through the the tech boom, Asian financial crisis, stock market bubble, tech bust, recession, Enron, and terrorist attacks

He gets credit for cleaning up messes he created. He ADMITTED that he chose to let the tech bubble run it's course and cleanup the mess afterwards instead of preventing a problem.

What's not to like?

GSpan is a brilliant economist. There is a lot to like but history will not be as kind on his legacy after the housing bubble evaporates. Even a 10% drop in median prices will be catacylsmic for a generation of investors.

Jack Straw said...

"Even a 10% drop in median prices will be catacylsmic for a generation of investors."

I think moman just pinpointed who is to blame.

If Citibank cuts my Visa rates, can I blame them maxing it out on designer jeans at $200 a pair? Sure I can. Children do that sort of thing all the time.

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