A 'serial bubble blower'?
Some blame former U.S. Federal Reserve chairman Alan Greenspan for the U.S. downturn. He insists they're wrong
JASON KIRBY | October 22, 2007 |
Greenspan has also taken heat for creating the environment that let U.S. deficits get out of control. Since the Republicans swept to power in the White House and Congress, America's balance sheet has been bathed in red ink. The country owes close to US$10 trillion in debt, with massive annual deficits forecast far into the future. For a free-market libertarian and Republican like Greenspan, it's been a difficult pill to swallow. But the fact is, he shares some of the blame.
America had been enjoying huge budget surpluses under the Clinton presidency. In 2001, in fact, Greenspan's fear wasn't that America had too much debt, but that by 2006, the debt would be completely paid off and the government would be left with US$500 billion a year in excess. It was a serious miscalculation on the part of budgeting officials. The surpluses were purely the result of the dot-com stock market boom, and they would vanish within months. But not before Greenspan made a fateful speech before Congress that advocated a tax break. His words gave weight to President George W. Bush's US$1.35-trillion tax break, versus a smaller tax break proposed by Democrats, even though Greenspan didn't favour one over the other. Things only got worse once the Iraq war got underway, and spending went through the roof. "My biggest frustration remained the President's unwillingness to wield his veto against out-of-control spending," Greenspan wrote in his book. "The Republicans in Congress lost their way. They swapped principle for power."
But that begs the question: why didn't Greenspan use his clout to put more pressure on the government to tighten its belt? Again, as with the housing boom, he says he did everything within his power. "The fascinating thing is I must have spent 100,000 words in testimony before the Congress [warning about out-of-control deficits] and it all fell on deaf ears," he says. "You can't be more public than in a congressional testimony. If it doesn't work there, you've had it."
Greenspan did indeed urge Congress to reinstate a deficit control mechanism that was set to expire. But as Greenspan himself has already shown, it's not the quantity of words a Fed chairman uses, but the quality. His simple phrase "irrational exuberance," uttered in 1996 to convey his concerns about a forming stock market bubble, carried more weight than any of the other thousands of words he spilled on the subject.
Whatever the criticism, Greenspan continues to wield great power, even after so long away from the Fed. When stock markets reached an all-time high last week, traders attributed the euphoria to comments by Greenspan that the credit crisis appeared to be easing. Even Cuba's Communist leader Fidel Castro scored a copy of his book, showing it off during a recent TV interview. It's almost as if there are two Fed chairmen. Bernanke, the guy who actually has his hand on the monetary lever, and Greenspan, the one who moves markets with mere words. The worry is that as Greenspan speaks out about what he sees coming down the line -- he thinks the chances of recession are less than 50/50, and he predicts a long-term increase in inflation -- he could hamper Bernanke.
Greenspan insists he will never criticize any decision made by the Fed, at least not publicly. But he has no plans to pipe down. "I'd like to believe [the markets] moved when I spoke in the last year and a half, but I frankly doubt it," he says. "The implication is I should just not talk about what my profession is, which is economic forecasting, which has been my profession since 1948. Unless I'm going to retire and become an archaeologist, I'm not sure what people want me to do." And besides, he says, no one can move markets the way billionaire Warren Buffet can, and no one is telling him to shut up.
Then again, no one has played such a key role in American history and politics for so many decades. Well, except maybe for that dim-witted shrimp farmer.