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Dear Greenspan, Go Away

Written By Brian Hicks

Posted April 7, 2008

It was Greenspan who used to praise derivatives market growth as a boon for market stability, while ignoring calls for the regulation of the mortgage market.  Yet, he alleges that most of the blame should be put on the financial industry.

But if Greenspan hadn’t dropped the ball on banking supervision or market structure, the pain wouldn’t be as great as it is now.

According to

“Alan Greenspan has hit back at critics who blame the Federal Reserve under his leadership for causing the US housing bubble by keeping interest rates too low for too long in the early 2000s, saying the evidence of any link between monetary policy and the bubble was “statistically very fragile”.

Writing in the Economists’ Forum on, Mr Greenspan says he is “puzzled” why so many commentators seek to explain the US housing bubble in terms of Fed actions when many other economies with different central banks and different monetary policies also saw rapid house price gains.

The former Fed chairman says the most likely cause of this global house price boom was a “dramatic fall in real long term interest rates” around the world, which he believes was caused by abundant global savings.

In any event, Mr Greenspan says, it is only with hindsight that it looks like the US economic recovery was well enough entrenched before 2004 to allow the Fed to start raising interest rates sooner than it did.

“With inflation falling to quite low levels, that was not the way the pre-2004 period was experienced at the time,” he says.

In his article, Mr Greenspan reaffirms his long-held belief that central banks cannot effectively “lean against the wind” by setting monetary policy a little tighter than it would otherwise have been during asset price booms.

However, he writes “if it turns out it is feasible” to conduct monetary policy in this way, “I would become a strong supporter of leaning against the wind.”

Mr Greenspan also takes issue with those who blame lax regulation by the Fed for allowing a serious deterioration in underwriting standards in the mortage industry. The problem, Mr Greenspan argues, “is not the lack of regulation, but unrealistic expectations about what regulators are able to prevent”.

The former Fed chief says the core of the subprime problem “lies with the misjudgments of the investment community”. The scramble to invest in what were initially highly profitable subprime loans would have overwhelmed any regulatory effort to slow the growth of this sector, he claims.

Mr. Greenspan says the “fierceness” of the retreat from risk since the crisis began in August “surprised” him and had “shaken” his view of the range of possible economic outcomes.

But he remained firmly of the view ‘that free competitive markets are the unrivalled way to organize economies'”

Worse, he doesn’t believe we’ve entered a recession that we’re already in.

When the recession started in July 1990, we heard:

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].”
Chairman Greenspan, July 1990

“…those who argue that we are already in a recession I think are reasonably certain to be wrong.”
Greenspan, August 1990

“… the economy has not yet slipped into recession.”
Greenspan, October 1990

Nowadays, he’s telling the Spanish El Pais, “The US had not yet entered the recessionary state which would be marked by sharp falls in orders, strong rises in unemployment and intensive weakening of the economy.”

Go away, Greenspan.