Alan Greenspan, myth and reality

The other day Paul Krugman took Alan Greenspan to task an I added my two cents worth over at Running Scared. It's not too surprising that Krugman and I would not be real Greenspan fans but in Foreign Policy the chief economist at Morgan Stanley, Stephen S. Roach, destroys some myths about Mr. Greenspans tenure at the fed. It is a long commentary so I will present the points and high lights. Go to the source for the details.

U.S. Federal Reserve Board Chairman Alan Greenspan is credited with simultaneously achieving record-low inflation, spawning the largest economic boom in U.S. history, and saving the world from financial collapse. But, when Greenspan steps down next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Has the world's most revered central banker unwittingly set up the global economy for disaster?

• "Greenspan Is Responsible for the U.S. Economic Boom of the 1990s"
  Only in part. The United States experienced an extraordinary period of prosperity in the 1990s. Between 1993 and 2000, 21 million new jobs were created in the United States, and in 2000 the country's unemployment rate briefly dipped below 4 percent for the first time in 30 years. During this boom, the U.S. economy grew at nearly 4 percent a year, adding more than $2 trillion to real U.S. gross domestic product (GDP)-more than the annual output of France.
  [......]
  Greenspan's leadership in monetary policy undoubtedly played an important role in fostering the conditions that allowed the U.S. economy to surge in the 1990s. The chairman helped achieve the economy's high-performance potential during that time period. But no one should believe that the economic boom of the 1990s was the work of just one man or just one monetary policy.


• "Greenspan Defeated Inflation in the United States"
  No. Credit for breaking the back of double-digit inflation goes to Paul Volcker, Greenspan's tough and courageous predecessor. In the summer of 1979, when Volcker assumed the reins at the Federal Reserve, inflation was raging at 12 percent a year. Eight years later, when Alan Greenspan took over, the inflation rate stood at around 4 percent. During Greenspan's 17-year era, inflation slowed further to 2.5 percent per year. But 80 percent of the drop in inflation occurred under Volcker's stewardship at the Fed.


• "Greenspan Rescued the United States from a Stock Market Meltdown"
  Maybe, but at what cost? In early 2004, Greenspan gave a speech to the American Economic Association, arguing that the Fed should feel vindicated in its efforts to contain the 2000 stock market shakeout. By slashing the federal funds rate-the interest rate at which the Fed lends money to other banks-by 5.5 percentage points between January 2001 and June 2003, the Fed limited the severity of the recession that followed the burst of the bubble.
  
  That cure may cause bigger problems down the road. Bubbles have developed in other asset markets (especially corporate bonds, mortgage-backed securities, and emerging-market debt). And Greenspan's rock-bottom interest rates have led to the biggest bubble of all: residential property. Annual inflation in U.S. home prices is now running at a 25-year high of 8.8 percent, with 15 states experiencing double-digit increases in residential property values between mid-2003 and mid-2004.


• "Greenspan Saved the World from the 1997-98 Asian Financial Crisis"
  False. Time magazine devoted its February 1999 cover to the "Committee to Save the World." Featured were then U.S. Treasury Secretary Robert Rubin, then Deputy Secretary Lawrence Summers, and Greenspan, all celebrating the end of the worst global financial crisis in more than 60 years. In truth, the world weathered the Asian financial storm only to chart increasingly dangerous waters in the years that followed.
  
  Global economic imbalances have intensified dramatically since 1999. The United States' gaping current account deficit says it all-$665 billion in mid-2004, equal to a record 5.7 percent of U.S. GDP. Never in history has the world financed such a massive deficit. The United States is sucking up more than 80 percent of the world's surplus savings, requiring capital inflows that average $2.6 billion per business day. And the U.S. deficit is bound to get worse before it gets better.


• "Greenspan Spells a Strong Dollar"
  Not necessarily. Until recently, the dollar has generally been stable during Greenspan's 17-year tenure, a noteworthy accomplishment for any central banker. An exception came in 1994 and early 1995, when the dollar weakened sharply, only to regain its strength in the latter half of the 1990s.
  
  But the dollar's past may not be prologue. Global imbalances-underscored by America's record balance-of-payments gap-are best corrected through a cheaper dollar. A cheaper dollar means higher U.S. interest rates, which in turn will suppress U.S. spending and enable a long overdue rebuilding of national savings. Conversely, other currencies will strengthen, forcing the export-led economies of Asia and Europe to embrace long-overdue reforms, including lowering tariffs and making labor markets more flexible.


• "Greenspan Leaves the U.S. Economy in Good Shape for the Future"
  The jury is still out. By congressional mandate, the Fed's goals include price stability, full employment, and economic growth. Greenspan's Fed has made progress on all three.
  
  However, some unintended consequences of Greenspan's efforts may jeopardize the United States' long-term economic future. Consider the profound shortfall in U.S. savings. The United States' net national saving rate-the combined saving of households, businesses, and government-fell to 0.4 percent of national income in early 2003, and it has since risen to just 2 percent. Lacking in domestic savings, the United States must import savings from abroad and run massive current account deficits to attract that capital.

I suggest you read the entire article as it was necessary to leave out much detail here. The point of Mr. Roach's commentary is that Alan Greenspan is not the man the myth makes him out to be. He has received credit for things he had little control over and has made plenty of mistakes our children may pay for. Mr. Roach's final point is that Alan Greenspan will not be difficult to replace.