Former Fed chairman Alan Greenspan took to the pages of The Financial Times and the Wall Street Journal to defend his legacy this week. He didn't salvage it.
Not that Greenspan deserves all the blame for the current credit crisis. But he clearly deserves some of it.
No, says Greenspan, there have been real estate booms everywhere. Why pick on the U.S. and him? Except that securitization and the subprime mess are decidedly America's responsibility. Europe and Japan then piled on. And American interest rates are highly influential over international rates.
Greenspan cut short rates sharply, which may think was wrong. I think that's a little overstated. But his true failures lay in two areas. One, he refused to acknowledge the Fed had any responsibility for asset bubbles. Two, he refused to get tougher on regulating the banks. These are major, even historical, failures.
Many warned about these issues as they were occurring, including very orthodox figures like Henry Kaufman, formerly economic guru of Salomon Brothers. So any charge of Monday morning quarterbacking is not valid.
Did Greenspan have to raise rates and jeopardize growth in such a broad-brush way? No, said Kaufman. He could raise margin requirements or otherwise make it more difficult for banks to lend when asset prices were rising fast.
Is it impossible to know when we are in a bubble? This is a typical Greenspan claim, really a rationalization of his free market ideology. It is impossible to know when we are at the top of a bubble, sure. But it is no more difficult to know than to know that the economy is running too hot compared to projected productivity gains, as Andrew Smithers points out in a letter in today's Financial Times. The Fed makes difficult judgments all the time.
Here's what I think is the giveaway on Greenspan's thinking. Greenspan, in defending his lack of regulating the banks more closely, argues in the FT that, "Bank loan officers know far more about the risk and workings of their counterparts than do bank regulators." The quote betrays his bias. Walter Wriston, like almost every banker, used to say this all the time in trying to in win more freedom for his First National City Bank to raise money and make loans everywhere and anywhere -- eventually resulting in whopping levels of bad debt in South America.
Here's a good example of how much bankers know. Wriston's bank was the biggest lender to Penn Central in 1970 when it went bankrupt. Guess what. Management lied to him about how the company was doing. He was furious. He demanded the chairman resign. He didn't know how bad it all was at Penn Central, he pleaded. He asked Nixon to bail Penn Central out, and thereby First National City as well. So much for free market ideology when the chips were down. Nixon refused, but his pal, Arthur Burns, now chairman of the Fed, left the discount window wide open that weekend in a smaller replay of recent events. Wriston was saved from his arrogance.
The truth is that Wriston had a vested interest to believe management even when it lied because he could make money on it. The Federal Reserve and other regulators do not. That is the key reason why we need regulation. It is simply remarkable that Greenspan falls back on this old falsehood, that business knows the risks, government doesn't. Nonsense. Business often wants to look the other way and ignore the risks because it can be so profitable to do so.
Is Greenspan really that simplistic a thinker? Well, let me defer that. But he has a point of view that is not based on the evidence, contrary to what he claims. It is base don a faith that served him very well. The nation?