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Tuesday, July 08, 2003

In Defence of Alan Greenspan

I'm a 'party liner' for no man (or woman), and certainly not for Alan Greenspan, but there are certain kinds of argument that I think are so worthless that I just can't stop myself from climbing onto the soap box. Take the article posted below for example. Now regular readers here will be aware that I am a critic of the whole monetarist approach to the deflation problem. This includes Ben Bernanke, and of course Sir Alan, but I think it's also important to have a little perspective here.

The important thing to realise is that these problems we are facing are new. (Tired old dogmatists who want to tell us that everything is an eternal re-run of the same beware!). And when you face new problems, there are no ready made pointers. Of course history can be a guide, but as things unfold history has a nasty habit of appearing in a new light, of being 're-interpreted'. History, of course, hasn't changed, but our angle of interest has.

Now poor Alan Greenspan has had the bad luck to face two new and important developments in rapid succession, one damn thing after the other as they say. First it was the 'new economy' of the ninetees, and make no mistake about it, there was something new. The tired old hacks never stopped repeating the mantra that 'it's all hype', and probably saw their argument confirmed when after the boom came the dot-com crash. But this would be an extremely superficial way of looking at things. Apart from the obvious impact of the internet, and the 'death of distance', the 90's also saw what is obviously the most extensive globalisation process in history, the awakening of what is bound to become the biggest economy in the history of the planet (China), and the growing tendency for 'increasing returns' dynamics to play a leading role in economic processes. (Small parenthesis: the internet is obviously the biggest 'big thing' ever, China is the biggest economy ever to have industrialised, this globalisation process is the biggest one to date. Now what does this tell us: that each time the tide rises one level higher - it's not saying anything special to say that this wave of technological, socio-economic and demographic changes is the biggest to date, it's just obvious, it would be wouldn't it, simply because it's the most recent. And if you don't believe me have a look at some of Kurzweil's exponential curves. The interesting question is whether or not this process can touch a limit - here it may be helpful to think of Per Bak and How Nature Works , or as Dylan would say: 'every grain of sand can change the mountain'. This has to do with emergence, self organising criticality, and topics for another day. But it is worth noting that both the pessimists and the optimists have one thing in common, they are forever telling us that the critical limit has just been reached!).

Going back to Greenspan, he at least recognised that something new was happening, and tried to 'ride the tiger'. That he rode and failed should not be taken as evidence for anything very special, except that it is another case of 'to err is human'. But this is uncomfortable for us since we like our central bankers to be gods, which they plainly can't be. Now if you examine most of the critics of the Greenspan of the ninetees (and here I have to include Krugman and Roach even though I respect them a lot) you will find that the root of much of the criticism is a strong dose of cynicism about 'new economy' type processes. This is fine, and coherent, but I don't accept the premise. Something new did happen, and we are still living with the consequences. You will find a lot less 'Greenspan bashing' from those who accept this point.

Now fast forward five years to the dot-com crash. What is the new problem increasingly on the agenda: deflation. And who is in the forefront of keeping the world aware of the ever-present danger. Why Alan Greenspan, of course. I repeat, I would differ with the remedy, but at least give the man credit for seeing the problem.

Now if we come to Duisenberg, I think the best policy is to say nothing. On neither of these topics has he had anything memorable to say. Sorry, I'll correct that: the only memorable comments are memorable for their crass stupidity. In addition he has a monumental and pathological communication problem. Two left feet as we say in the UK. So summing up: both men may be considered to have been challenged and found wanting. But one of them has been a man of his times, and has been there where the issues were, while the other.............

BTW on the substantive point of the 25bp cut. I think it was a difficult call. Maybe he did the best thing available and maybe he didn't. Only time will tell, it depends in part if the US recovery really is coming, in which case he needs to try to take some heat out of the housing market now to avoid problems later. Of course if, as I suspect, the recovery may be much weaker than the equity markets anticipate, then choking the bond markets may prove to have been an important error. But it's always easy to be right after the event.

In pulling the rug out from under global bond markets, Alan Greenspan, chairman of the Federal Reserve, has done Wim Duisenberg, his counterpart at the European Central Bank, a big favour. He has undermined the popular myth that it is Mr Duisenberg and the ECB that have problems communicating with markets - unlike the Fed, which is a paragon of virtue and effectiveness when it comes to getting its message across. But who could fairly criticise the ECB now that the Fed has misled investors so badly and caused financial carnage by cutting only a quarter of a percentage point off interest rates at its June meeting - after sending numerous signals to the markets that a half-point cut was in the offing? Who could argue that the ECB has the monopoly on poor communications, given the Fed's subsequent communiqué - a badly worded and confusing text apparently intended to clarify and explain the Fed's stance on the economy? This is not the first time Mr Greenspan's credibility has come into question. To his critics he is the "double bubble" man. First, Mr Greenspan egged on the stock market to bubble proportions with incessant happy talk about the alleged limitless capabilities of US productivity. That story did not have a happy ending, as we all know.

Some Europeans may take comfort from the Fed's troubles but this is not a situation in which bad news for the US is good news for Europe. The US economy must recover in order for Europe to do so, and the Fed's loss of credibility may well slow down the US recovery. Still, the frequent attacks on the ECB and Mr Duisenberg in both the markets and the media have often had as their implicit assumption the view that the Fed would do it better. This was always unfair. But now we know that it was untrue as well. Mr Greenspan is the "double bubble" man - not Mr Duisenberg. The Fed's fall from grace is valuable if only for putting the achievements - and shortcomings - of the ECB and Mr Duisenberg into proper perspective.
Source: Melvyn Krauss, Financial Times

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