Greenspan fights back.
http://money.cnn.com/2010/02/05/news/economy/greenspan.fortune/index.htm
Allan Greenspan does make some convincing arguments. His main thesis was there was no way that the Fed could have changed policy or prevented the housing bubble, doing so would have been difficult to implement and would have caused global growth and most importantly US Growth to tank. I agree with half his assessment. Yes, it would have been difficult to implement, but that's his job. His job is to set monetary policy and keep all prices stable. He absurdly overlooked asset price inflation not because it was impossible for him to do so, but because Wall Street wanted it that way. President Bush would not have liked Greenspan to put the brakes on the economy this soon after 9/11. Again, it was Greenspan's responsibility to the country not to Wall Street or the executive branch. He failed here and what we got was a housing bubble that exploded because lending standards went into the toilet because credit was in abundance. Money was easy. If rates were kept higher the incentive to take undo risk diminishes. There would have never been this huge tsunami of credit chasing returns that put the economy on an unsustainable path. Lower rates were the reason for everything that happened soon after. It was the main ingredient to the stew.
I agree with Greenspan that housing was already flying well before 2002, starting in 1998. I believe that it took MBS/CMO investors some 3-4 years to get over the CMO implosion of 1994. Also once MERS was established, it allowed securitization to take on much more responsibility. MERS was established in 1995, once this event happened, it was much easier for MBS to be tracked. BUT. Housing was not of control in 1998. It only started to take off when rates were pushed so low that alternative mortgage products like ARMS became a huge product that lenders can sell. When rates suddenly moved back up it was these ARMS that ruined home owners.
The global savings glut is not a valid argument and it doesn't let the Fed off the hook for bad monetary policy. The dollar was generally a stronger currency throughout the 90's when rates were kept higher and we running surpluses, after 9/11, Tax Cuts, and Bush, surpluses became deficits coupled with much lower rates made global savings glut a reality. Again. Lower Rates was the problem. Lower rates and too much credit/liquidity killed the dollar. China as well as others did become market economies, they just recycled cheap dollars back into our credit markets and economy. Driving long term interest rates also lower. Housing was a global bubble, and other countries experienced much more pain then the US did, but they all took their cue from the FED and US Treasury which has always caved in to big business. Its ludicrous to think that the global savings glut primarily made mortgage rates decouple from the Fed Funds Rate.
Greenspan's main thesis is we all have to live with bubbles. There is no way to align policy to make them go away. I agree with him on some level, but that doesn't mean that the tax payer has to bail out bankers when bubbles pop. There was no need to keep rates so low for so long a time.
We have many things that are flat out wrong with our society and economy. The main theme is the current Too Big To Fail policy regarding the banks. But we wouldn't even be talking about TBTF if the Fed was more responsible in setting monetary targets. Bubbles happen all throughout history, it was the Fed's job to closely monitor this bubble and they completely deferred to Wall Street because it was in Wall Street's best interests to make sure they didn't blow up? This is Greenspan's argument that Wall Street knew much more about the markets then the Fed does. Inmates running the asylum is not a policy.
"Greenspan's main thesis is we all have to live with bubbles. There is no way to align policy to make them go away. I agree with him on some level, but that doesn't mean that the tax payer has to bail out bankers when bubbles pop. There was no need to keep rates so low for so long a time."
ReplyDeleteThe reason the Fed exists (or its excuse for having been created) was to eliminate bubbles. Since its policymakers are either unwilling or unable to do so, what exactly is its purpose?
To set discount rates? OK, but their manipulation (or lack thereof) creates bubbles. So why waste the money in the first place? Let the rate float publicly, set a gov't rate through the treasury and let the private sector base it off of that (or vice versa).
Banker of last resort? We've already determined that TBTF needs to go, FDIC defends depositors, why save the gamblers? The only way the markets will actually self regulate is if those who fuck up are allowed to fail. Remember, sometimes your purpose in life is only to serve as a warning to others.
Open Market Operations? No reason that only the Fed can't do this, what exactly does the treasury do again? Oh yeah, "The Department of the Treasury operates and maintains systems that are critical to the nation's financial infrastructure, such as the production of coin and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government." (ustreas.gov) So if I'm reading this right, The FED = Department of redundancy department.
We need to stop blurring the line between whats good for the country and whats good for the private sector. I know it wont happen anytime soon, and probably not in my lifetime, but I'm looking forward to the day when these guys finally run out of answers.
RZ- The Fed was never created to eliminate bubbles. This is clearly wrong. This is Ron Paul talking. The Fed Reserve System was primarily created largely a response to prior financial panics and bank runs, the most severe of which being the Panic of 1907. But since 1907 it has evolved: it now does or has this to do:
ReplyDelete1. Conducting the nation's monetary policy by influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates. - This is the mandate
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system, and protect the credit rights of consumers.
3. Maintaining stability of the financial system and containing systemic risk that may arise in financial markets.
4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.
The problem with the Fed is the old school thinking of Milton Friedman that Inflation is a monetary phenomena. That the rate of inflation can be managed with an appr rate policy. This is so wrong! The economy runs rampant. They look for inflation in all of the wrong places.
They already do let the rate (FED Funds) Float. Remember the fed gives a target for FFD but sets the discount.
You make a lot of good points. Bubbles are hear to stay. TBTF should not be allowed and the only way to fix that problem is to change the market structure.
Many people say get rid of the Fed. if you read my prior post, you will realize that even though I don't like them either, what is the other option? We cant be left without a central bank.