Tuesday, January 24, 2006

Greenspan's Legacy

Excellent article by Nell Henderson at the Washington Post about Alan Greenspan and the US economy.

My favorite bits:

Under Greenspan's watch, the economy thrived despite stock market crashes, international financial crises, terrorist attacks, wars and other shocks. No wonder, as Greenspan prepares to retire next week, economists have lauded him as the greatest central banker ever.

Still, his legacy will be judged not just by his record at the Fed, but also by the economy he bequeaths. And when he leaves office Jan. 31, Greenspan leaves a nation awash in debt -- record household debt and a record trade gap.

...low interest rates worked like an intoxicant on consumers, who snapped up new cars and trucks with no-interest loans and seized on low mortgage rates to buy new homes and refinance old home loans. Household spending rose in 2001, 2002, and 2004, even as the wealth and income of the typical household fell or remained flat in the same period, according to an analysis by Moody's Economy.com... household debt rose faster in recent years than wealth or disposable income, reaching an unprecedented 126.1 percent of after-tax income in the third quarter, double its 1980 level.

When questioned on Capitol Hill in June about criticism that the Fed's strategy had helped inflate a housing bubble, Greenspan suggested that such imbalances were an acceptable price for avoiding another depression or a Japan-like economic stagnation. "We knew that in the process of what we were doing -- that is, addressing the consequence of a very severe deflation of a [stock] bubble -- carried with it potential side effects," Greenspan said. "As best we can judge, things have turned out reasonably as we had expected, both positively and negatively, but in our judgment, the positive effects of the policy far exceeded the negative ones."

So there you have it straight from the Maestro's mouth - the housing bubble is an acceptable price, and a predictable and necessary side effect of rescuing the economy from the last bubble.

Which leaves one to ask, what (or who) will rescue us from the curent bubble (or is it still just froth)?

Ghosts from another time...
As we near the time of Greenspan's exit, let me quote from John Kenneth Galbraith in "The Great Crash":

A bubble can be easily punctured. But to incise it with a needle so that is subsides gradually is a task of no small delicacy. Among those who sensed what was happening in early 1929, there was some hope but no confidence that the boom could be made to subside. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated. The eventual disaster also had the inestimable advantage of allowing a few more days, weeks, or months of life.

When reflecting on the current state of affairs, definitely wait for the sands of time to flow before passing ultimate judgement on the success of our current Fed.

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