Inflation Expectations and the Federal Reserve
Treason of the Intellectuals, Part CCCXIV

John Berry of Bloomberg Is Pro-Greenspan...

In his column for Bloomberg this week, he takes up his sword on the pro-Greenspan side of the debate:

Greenspan Sticks to His Guns, as Well He Should: Pat Oliphant used his sharp pen to spear former Federal Reserve Chairman Alan Greenspan in a cartoon.... In it a woman says to her book club, "And now our author of the week, Mr. Alan Greenspan, will read to us, explaining how none of that which we are now in, is in any way his fault." A tiny Greenspan begins, "Argle bargle mumbledy bumbledy jumble tumble was fiscally wamboofer."...

Greenspan's... "Age of Turbulence"... is a straightforward exposition, with the help of former Fortune writer Peter Petre, of his background, his unusual bottom-up approach to analyzing the U.S. economy and his observations of and role in public policy over an eventful half century.... Greenspan admits to some mistakes and explains how he made them. In other instances, he doesn't even begin to satisfy most of his critics because he still thinks his position is correct. The prime example is his view that it is impossible to know when a large increase in asset prices -- whether it's in equities or housing -- is a bubble. He argues that the Fed generally can't deflate a bubble without crunching the economy.

On bubbles, Greenspan is right. Even bubble-guru Robert Shiller, a Yale University economist wrote Sept. 20 in the Japan Times that house-price increases were rising rapidly long before the Fed cut its target for the overnight interest rate to just 1 percent in 2003.... Shiller noted that Greenspan has said that "the world's monetary authorities cannot control bubbles. [Greenspan] is mostly right: the best thing that monetary authorities could have done, given their other priorities and concerns, is to lean against the real estate bubble, not stop it from inflating."...

[Greenspan's] attention to detail led him to one of his singular policy-making successes as Fed chairman: The identification of a surge of productivity growth in the mid-1990s....

One mistake Greenspan acknowledges -- with very harsh words -- is his expectation that President George W. Bush would pursue a conservative fiscal course once his 2001 tax cut was in place. Greenspan defends his support of a tax cut in his January 2001 Congressional testimony.... Even as he supported a tax cut, he urged that it be phased in and that if the revenue weren't there, that portions of the cut be rescinded. Greenspan says he was warned the day before by former Treasury Secretary Robert Rubin that... "the risk is, you lose the political mind-set of fiscal discipline." He didn't change his testimony, and he agrees in the book that Rubin's prediction came true....

In a review of the book published in the Los Angeles Times on Sept. 17, economics professor J. Bradford DeLong of the University of California at Berkeley, wrote, "Greenspan is world famous because he was very good and very lucky" as Fed chairman. During his tenure at the Federal Reserve, he made roughly 36 substantive decisions about the direction interest rates should go. Six times I disagreed with him. Five of those six times, I was wrong," DeLong said. The one exception: He should have cut interest rates in the summer of 2000 after the stock market bubble burst, he said. One can argue, as several Fed officials have, that the 50 basis-point increases in February 1995 and May 2000 were mistakes too.

Overall, Greenspan's record remains a sterling one.

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