Category Archives: unsustainable debt

The Legacy of Alan Greenspan

Saw a clip of Alan Greenspan speaking on CNBC last week. I have noticed a few recent appearances of his where he diplomatically raised some red flags: the dangers of our financial situation, failure of the current monetary policies, upcoming market disruption, and more. Some of you may remember that Alan Greenspan chaired the Federal Reserve from 1987 to 2006. He was called “the Maestro”, the central figure in the “Committee to Save the World” back in 1999. Turned out that the world had to be saved from that committee. After he turned the Fed over to Bernanke, the Maestro was promptly thrown under the bus, blamed – deservedly so – that his famed “Greenspan Put” and ultra-low interest rates have provided fuel for the market bubbles in 2000 and 2007. While he can’t be directly blamed for the mid-90’s financial deregulation that removed protections against reckless speculation and rise of financial “crony capitalism”, he was influential enough to meaningfully oppose it – and have not done so.

But there are certain ironies in this situation. Firstly, Greenspan’s monetary policies look outright conservative compared to what his successors wrought. In 2004, Greenspan lowered the Federal funds rate to 1% for one year. Bernanke and Yellen had the rate at zero or so for six years now. The “Bernanke Put” made Greenspan’s look like a joke. Greenspan at least was cognizant of the growing bubbles, warning of “irrational exuberance” before the dot-com fiasco and of the real-estate bubble in 2007. Bernanke, on the other hand, even in July of 2007 claimed that there is no real estate bubble and that the economy will grow in 2008. Bernanke was anointed a hero that saved the global economy. The history will judge, just like it judged Greenspan. I am quite sure that after the next crisis Bernanke and Yellen will be thrown under the bus for their policies. Which they will deserve even more that “the Maestro.”

The second irony is that Greenspan used to believe in responsible monetary policies, limiting politicians’ ability to print money at will. Why did he turn away from his earlier views while at the Federal Reserve? Partly might have been his naiveté: Greenspan himself had admitted that he underestimated self-destructive ability of unchecked finance and inability/unwillingness of regulators to properly oversee the industry. More likely, like most humans he was seduced by the power of his position and adjusted his views to serve the needs of the government that was re-appointing him every four years.

I may well be wrong but from his recent appearances it seems that Greenspan may have come some of the way back to his earlier views, lobbing occasional grenades at our addiction to debt, ultra-loose monetary policies, growing inequality, etc. But his careful, diplomatic jabs are drowning in the “all is well” symphony of the economic profession that by-and-large has been captured by the state. Nobody’s paying attention.

Mr. Greenspan, if you truly believe that the current policies are wrong, that – as 17 Nobel Laureates in Economics argue – these policies are destroying the future of our children, take off the gloves, raise your voice. You are still “the Maestro”, people will listen if you speak loudly and with conviction. Like King Theoden in the LOTR, ride out one more time. You are 89. What legacy are you going to leave?