Alan Greenspan: The Federal Reserve In Exile

October 23, 2008 by Douglas A. McIntyre

R218533_855025_2Liars and thieves have always been popular figures in America. Is there another country where  Billy the Kid and John Dillinger would be more well-known and highly regarded by the average citizen than Woodrow Wilson or Lyndon Johnson?

Most people love a man who can tell a good tall tale especially when he pulls the wool over the eyes of those who consider themselves especially powerful and intelligent. There is nothing wrong with making a Congressman look like a clown.

When Alan Greenspan stepped down as Chairman of The Federal Reserve in 2006 after being in charge for a decade, it was immediately clear that it was important for him to be considered more powerful and well-regarded as his successor, Ben Bernanke. His means for staying in the limelight was his magnum opus "The Age of Turbulence". He traveled the world speaking at universities, economic conferences, and book parties

Looking back, Greenspan’s book was a simple defense of his tenure at the Fed. Even before he retired he could hear the whispers that he had left interest rates too low for too long and had encouraged home ownership which could not be sustained by the living wage of many Americans.

Greenspan was unwilling to remain in Elba  running the equivalent of The Federal Reserve in exile. He made certain that he was able to advise world leaders and politicians about the state of the economy, the odds of a recession and the measures that should be taken to keep GDP on its nearly permanent move up.

Greenspan misjudged how the world would see him. He came face-to-face  with this when he visited  Congress today. He described the present credit crisis as a “once-in-a-century credit tsunami” and admitted to a modest flaw in his analysis of the economy five years ago and  in hindsight questioned his admiration for derivatives as a way to expand and improve the efficiency of the financial system.

Greenspan broke the cardinal rule of every person who has successfully misled or hornswoggled those who looked to him for advice. He admitted that he may have been wrong. In his own words, “We cannot expect perfection in any area where forecasting is required. We have to do our best but not expect infallibility or omniscience.” The moment the words left his mouth, Henry Waxman, a Democrat from California began to savage the old man. Greenspan was smart enough to inconspicuously unplug his hearing aid and ask that the questions be repeated.

Over the last year the hallmark of Greenspan’s message during his book tour was the he was right in virtually everything he had done as Fed chairman. The economy had done remarkably well on his watch. The implication was that the financial system fell apart quickly because Bernanke and other Fed governors had played their cards badly.  Greenspan even went to great lengths to say that a recession was unlikely, until a 40% drop in the stock market made him quietly retract his viewpoint

Greenspan is now faced with people looking through speeches he gave years ago, digging up comments made to newspapers and private e-mails hacked by the same people who exposed Sarah Palin’s. The press quickly dug up a talk Greenspan gave six years ago when he spoke well of derivatives as one of the finest inventions of the modern banking industry.

What no one seems willing to consider is that today’s performance by Greenspan was merely a bump in the road for him. At 82, he is one of the old people who act much younger than their chronological age. He likely has the benefit of Lipitor, Viagra, and other anti-aging drugs. He could, in fact, keep a rigorous speaking and consulting schedule going until he is well into his nineties. Greenspan may even hope to outlive Bernanke so that he can ridicule the younger man’s policies after his death.

The casual observer might have seen Greenspan’s time before Congress today as the end of a period when his thinking was held in high regard. For him, today’s testimony was merely a skirmish. With any luck, the new president will re-appoint him to his old job. If not, Greenspan still has an argument which is superficial and simple. He made American a better place to live, at least financially. If the current people running monetary policy had read the instructions he had left behind, everything would still be working just fine.

Douglas A. McIntyre