In Greenspan's book, ideology trumps data

December 17, 2013 12:25 PM

Greenspan’s Iron Law is that the sum of these two numbers is approximately constant, at least for the last half-century in the United States. That is a pretty fraught claim: it means that every time the United States adds a billion dollars to Social Security benefits or Medicare payments or unemployment insurance outlays we are forcing a billion-dollar reduction in family saving or in the retained earnings of business, or an increase in government deficits, or some combination of these. ... So what is the evidence for it? Nobel-prize winning economist Robert Solow finds Alan Greenspan's latest book to be ideologically driven and embarrassing, a pity for someone who, Solow writes, was, when looking at his whole tenure, a very good chairman of the Fed.
posted by shivohum (27 comments total)

"...a very good chairman of the Fed."
No. No he wasn't. His continued push for more and more deregulation and horribly lack of any action to prevent market bubbles has created more and more of the wealth disparity gap in the Western world. Fuck him and the horse he rode in on.

Also, fuck him especially for being an acolyte of Ayn Rand.
posted by daq at 12:30 PM on December 17, 2013 [23 favorites]

Brad DeLong: I Don't Know What Map Alan Greenspan Has Or What Territory He Is Trying To Cover But He Seems To Me To Be Lost, Assessing Alan Greenspan: Monday DeLong Self-Smackdown
posted by the man of twists and turns at 12:41 PM on December 17, 2013 [1 favorite]

His policies toed the anti-inflationary, easy-credit, neoliberal economics line that led directly to the eventual financial crisis. If that's your idea of a good Fed chair, then I guess he was very good. I take a much dimmer view.
posted by saulgoodman at 12:46 PM on December 17, 2013

Greenspan is a very good chairman of the Fed, like a gardener who brings in bumper harvests every year until he retires... and then you discover that the garden has eroded down to the clay, is over-saturated with fertilizers, and the tiller won't start because it has never been oiled.

In retrospect, maybe we could have done with a few less bushels of zucchini, if it bought us better care of our gardens and tools.
posted by IAmBroom at 12:49 PM on December 17, 2013 [58 favorites]

His policies toed the anti-inflationary, easy-credit, neoliberal economics line that led directly to the eventual financial crisis.

Which specific policies are you talking about? In hindsight you could say that rates should have been raised more quickly after the economic recovery in the mid 2000s but it's not even clear if that would have helped given how inherently dysfunctional the mortgage-backed security system was in general.
posted by burnmp3s at 1:03 PM on December 17, 2013 [1 favorite]

A pilot who crashes a plane should not be remembered for the majority of the flight spent in the air.
posted by mhoye at 1:07 PM on December 17, 2013 [11 favorites]

That was a fun read. He has a few things to say about the purported connection between Rand and Greenspan, near the end of the review. The last line is killer:

The Alan Greenspan I admired was a pragmatic central banker who was able to believe both the data and his eyes and to ignore the people who already knew the answer without looking. The author of this book makes a show of both, but not really. His eyes are too often closed and he seems to be listening to another voice, with quite conventional opinions, coming from somewhere stage right.
posted by bumpkin at 1:14 PM on December 17, 2013

Maybe people complaining about a line in the pull quote could read the fucking article, which addresses these claims in length and provides some of the same criticisms they're reflexively making?
posted by klangklangston at 1:14 PM on December 17, 2013 [9 favorites]

Paul Krugman's been making this point for some time now -- that among right wing economists, when data conflicts with ideology, ideology seems to win out time and again. He even coined the phrase "the hack gap" to describe the lack of symmetrical ideological fixation on the left (not that lefty economists aren't ideological, but that they tend to adapt to new data). Under those terms, Greenspan's hewing to an ideological line despite a dearth of data isn't embarrassing; changing his position would be.
posted by Gelatin at 1:24 PM on December 17, 2013 [5 favorites]

A pilot who crashes a plane should not be remembered for the majority of the flight spent in the air.

It's not as if Greenspan was in control of making investment decisions for the banks that made the financial crisis happen though, even if ideologically he gives too much credit to free markets being able to regulate themselves. As the article says, the only obvious way he could have prevented a crash would have been to shut down the economy during the housing boom by raising interest rates until it turned into a recession. That would have prevented the meltdown that did actually happen, but it wouldn't have solved the root problem that way too many banks were willing to make insanely dangerous investments in the housing market when they had the opportunity to do so.
posted by burnmp3s at 1:26 PM on December 17, 2013 [2 favorites]

It's not as if Greenspan was in control of making investment decisions for the banks that made the financial crisis happen though, even if ideologically he gives too much credit to free markets being able to regulate themselves.

Remember the booming late 1990s where everyone used to beanplate everything Greenspan said for possible clues as to where he was going to take interest rates at the next Fed meeting? Maybe with all that attention upon him, he could have said something worthwhile about the way banks were operating and the risks they were assuming....
posted by RonButNotStupid at 1:42 PM on December 17, 2013 [2 favorites]

New suggested title: "If I Did It" by Alan Greenspan
posted by ao4047 at 1:47 PM on December 17, 2013 [15 favorites]

Remember the 1990s, when Wall Street had shrines to Greenspan and computer programs that parsed his every word in search of trading leads?

Oh yeah, that was all made up too.
posted by chavenet at 2:05 PM on December 17, 2013

Which specific policies are you talking about? In hindsight you could say that rates should have been raised more quickly after the economic recovery in the mid 2000s but it's not even clear if that would have helped given how inherently dysfunctional the mortgage-backed security system was in general.

It's probably not fair to single Greenspan out for it (he didn't do anything new, only occupied the chair as a place holder and did the same as every other recent chair), but for years now the Fed has maintained low rates for its institutional lending programs and generally adopted policies designed to make commercial and consumer credit cheap enough to mask the effects of wage stagnation (with the trade-off being that it's forced a greater proportion of consumer spending into debt-spending as prices have continued to keep pace with or exceed GDP growth, which has been decoupled completely from wage growth by this point). Basically, the Fed's longstanding policies (which Greenspan continued) have prolonged the inevitable collapse in the real economy by encouraging cheap access to credit, which consumers have been forced to use to make up for the stagnation of their wages just to buy what in many parts of the country are basic necessities for living and being economically productive like homes and vehicles (yes, I know bicycles, but many employers actually require vehicle ownership as a condition of employment). No one today even remotely dreams of buying their homes or cars outright. I can still remember when even working and middle class people could and did expect to buy homes and vehicles outright, or at least, on very short term loans compared to today. The result is most consumers are caught in a long-term losing debt cycle, continually accruing new debt and effectively paying interest on nearly every dollar they earn (which means that their real wages are shrinking even more than the numbers might suggest, once you consider how much of every dollar served is required to service long-term structural debt).
posted by saulgoodman at 2:23 PM on December 17, 2013 [4 favorites]

Note: This isn't a politically partisan divide either, it's Washington consensus stuff. Both Dems and Republicans have promoted easy credit. And it's tricky, because now that we depend on credit so much, it does hurt a lot in the short term to see credit become less freely available.
posted by saulgoodman at 2:26 PM on December 17, 2013

it means that every time the United States adds a billion dollars to Social Security benefits or Medicare payments or unemployment insurance outlays we are forcing a billion-dollar reduction in family saving or in the retained earnings of business, or an increase in government deficits, or some combination of these.

Well, no ... you can also inflate the currency, or did I miss the point?
posted by ZenMasterThis at 2:31 PM on December 17, 2013

> His policies toed the anti-inflationary, easy-credit, neoliberal economics line

This must be something that goes beyond econ 101, in which easy credit is inflationary and tight credit is anti-inflationary and you can't have both at once. Expatiate a bit on this maybe?
posted by jfuller at 2:49 PM on December 17, 2013

How Janet Yellen's Agenda Could Transform Washington - "The Fed nominee is an old-school progressive economist. Just wait until she starts sharing her passions."

Every Federal Reserve Board chairman comes into office with a secret agenda, a hidden passion. It's the sort of thing you don't hear about at the confirmation hearings, and yet it is often this grand passion—suddenly given voice in the world's bulliest economic pulpit—that shapes the nation's future in unexpected ways. Alan Greenspan, the erstwhile "maestro" of the Fed, wanted to turn finance into the kind of laissez-faire market that his mentor Ayn Rand, the uber-libertarian author, had always envisioned. The result was the across-the-board deregulation of banking. When Ben Bernanke took over Greenspan's job, he appeared to be just another conservative economist in the mold of his predecessor (who had endorsed him). But his great passion was applying his life's work as a scholar of the Great Depression to stop another one...

Above all, according to colleagues, she takes the nation's worst problems, especially unemployment, as a deeply personal challenge. Yellen, who is all but certain to be confirmed, represents a strain of interventionist thinking that has not found expression at such a high level in Washington in decades—at least since Ronald Reagan and his Milton Friedman-inspired attempt to shrink the size of government. That philosophy still dictates the agenda; even the last two Democratic presidents, Clinton and Barack Obama, have advanced (or bowed to) get-government-out-of-the-way policies, and the GOP's no-new-tax religion prevents any concessions for a broader budget deal.

Yellen, unlike Greenspan or a pre-2008 Bernanke, is probably the last person you'd hear repeating one of Reagan's favorite jokes: "The nine scariest words in the English language are: 'I'm from the government, and I'm here to help.' " According to more than a half-dozen longtime friends and colleagues, she has two grand passions that will require government to help in a very big way: reducing chronically high unemployment—which is the focus of her life's work and is probably the single biggest economic problem in America today—and reining in Wall Street's excesses. Yellen already appears to be settling the Fed's eternal debate about the relative threats of unemployment and inflation; she declared bluntly in her testimony that joblessness is the issue of the moment. Based on her past positions, she is also likely to try to alter the discussion in Washington on issues ranging from the size and power of the big banks to the need for a higher minimum wage and extended jobless benefits. And at a time when Obama has declared that income inequality is "the defining challenge of our time," and polls show that a majority of Americans no longer believe their country offers equal opportunity to all, Yellen brings a raft of well-thought-out—and decidedly activist—views to these issues.

posted by kliuless at 3:14 PM on December 17, 2013 [5 favorites]

Not much time to elaborate, but here's a simple/stupid link with some further discussion of the Fed's anti-inflationary toolset...
posted by saulgoodman at 3:24 PM on December 17, 2013 [1 favorite]

Greenspan was no mere acolyte of Ayn Rand, he was one of the disciples-- and a gold bug:

Editor's note - It may surprise more than a few gold devotees to learn they have an ideological friend in none other than Federal Reserve Board chairman Alan Greenspan. Starting in the 1950s, in fact, Greenspan was a stalwart member of Ayn Rand's intellectual inner circle. A self-designated "objectivist", Rand preached a strongly libertarian view, applying it to politics and economics, as well as to religion and popular culture. Under her influence, Greenspan wrote for the first issue of what was to become the widely-circulated Objectivist Newsletter. When Gerald Ford appointed him to the Council of Economic Advisors, Greenspan invited Rand to his swearing-in ceremony. He even attended her funeral in 1982. In 1967, Rand published her non-fiction book, Capitalism, the Unknown Ideal. In it, she included Gold and Economic Freedom, the essay by Alan Greenspan which appears below. Drawing heavily from Murray Rothbard's much longer The Mystery of Banking, Greenspan argues persuasively in favor of a gold standard and against the concept of a central bank.

Here are the last two paragraphs of Greenspan's essay Gold and Economic Freedom referred to in the quote:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

The economic collapse wasn't a blunder on Greenspan's part, it was a triumph and the consummation of his career.
posted by jamjam at 4:03 PM on December 17, 2013 [3 favorites]

The Fed uses monetary policy to keep the money supply relatively constant (ensuring that people with a lot of it have a better bet of not losing out to ordinary currency deflation, which is the real fear people on Wall Street are talking about when they worry vaguely about inflation) while using its rate setting powers to keep access to consumer and commercial credit so cheap it's basically free for big banking institutions. So consumer prices could keep pace or exceed GDP growth, fueled by credit, while real money supply and wages grew at a much slower pace or stagnated. Rinse, lather, repeat for 30 years. Then the clock struck twelve and all the magical credit-charmed carriages turned back to pumpkins and rats. It wasn't deliberate, most likely. I'm willing to give policymakers some benefit of the doubt here; they're only human like the rest of us. Bad assumptions, economic reasoning by rote/with ideological blinders on, general lack of vision and short term political pressures are the likeliest culprits.
posted by saulgoodman at 4:48 PM on December 17, 2013 [1 favorite]

"Robert Solow finds Alan Greenspan's latest book to be ideologically driven and embarrassing..."

I'm shocked, shocked!
posted by markkraft at 5:21 PM on December 17, 2013

"Well, no ... you can also inflate the currency, or did I miss the point?"

Inflation devalues savings (for example, 10 percent inflation on a dollar means that you now need 1.10 to buy what a buck used to). So, inflating currency devalues savings.
posted by klangklangston at 6:30 PM on December 17, 2013

Picture a table tilted heavily to one end and gold coins rolling down it, out of the pockets of ordinary working people at the high end of the table, toward a relatively few super-wealthy owners and investors at the low end. That's sort of what the system Rand's influence engrained in US economic policy would look like in a diagram. It's what Greenspan believed in, its definitely fair to acknowledge the man's biases and their influence on his almost theatrically oracular performance in the chairman's seat. "Pay no attention to the man behind the curtain," or something, wasn't it?
posted by saulgoodman at 7:46 PM on December 17, 2013 [1 favorite]

He just sat in the chair well, that is all Solow is saying. It takes a knack to look that relaxed in one of those taut leather back aches.
posted by TwelveTwo at 8:33 PM on December 17, 2013

A man who claims, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” is a fool or a scoundrel. What authority they assume is vapor.
posted by carping demon at 11:36 PM on December 17, 2013 [3 favorites]

Neil Irwin: This is how history should judge Ben Bernanke

Dean Baker: Assessing Neil Irwin's Assessment of Ben Bernanke
posted by tonycpsu at 10:32 AM on December 19, 2013