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Did Greenspan fail us?

Stephen Beard Jun 20, 2006

Did Greenspan fail us?

Stephen Beard Jun 20, 2006


TESS VIGELAND: As we mentioned, world financial markets have been on Mr. Toad’s Wild Ride recently. Some analysts blame inflation fears. Others argue that fears of recession because of high interest rates are behind the turmoil. But one group of fund managers and commentators is fingering a more surprising culprit: They accuse Alan Greenspan. Yes, that Alan Greenspan, the former Fed chairman. From London, Stephen Beard reports.

STEPHEN BEARD: Alan Greenspan retired earlier this year garlanded with honors and accolades. One economist called him “the greatest central banker who ever lived.” But one London fund manager begs to differ. Tony Dye says Greenspan was a disaster. Dye traces the cause of the current market turmoil back to Greenspan’s watch at the Fed.

TONY DYE:“The reason for it was the mistake about puffing the bubble up and not taking the punchbowl away, because that’s what I think central bankers should be doing, in the mid to late 1990’s.”

Dye argues that Greenspan inflated the stock market bubble of the 1990s by holding interest rates too low. He failed to take the punchbowl away when the party got started. And then when the stock market crashed in 2000 he had to slash rates to rock-bottom levels and keep them there for more than a year.

DYE: Cutting rates to one percent was basically to try and paper over the cracks of all the problems that would have arisen from the stock market bubble bursting. And it’s just created more problems.

The ultra-cheap credit, say Greenspan’s critics, inflated another bubble — in US house prices. And fueled an American consumer boom that sucked in yet more imports and massively inflated the US trade deficit. And by making it cheaper to speculate he also set off a tidal wave of hot money sloshing around the globe. Andrew Hilton of the CSFI think tank:

ANDREW HILTON: There have been grotesque, positively grotesque imbalances in the global economy. And perhaps the US ought to have bitten the bullet earlier.

Greenspan could have exercised more restraint, says Gideon Rachman of the Economist Magazine. He could have pushed up interest rates a bit higher, a bit earlier. But hailed as “the Maestro” at home, popularity may have gone to his head.

GIDEON RACHMAN: Rather than taking tough and unpopular measures, Mr. Greenspan preferred to keep putting more alcohol into the punch to keep the party going, to keep his popularity growing.

Greenspan’s supporters say he was a great central banker because kept the US economy humming and unemployment low, but says author Peter Hartcher, in the process, Greenspan sidestepped a major challenge.

PETER HARTCHER: His challenge was, what do you do when the economy is in the grip of a mania, a bubble? He didn’t deal with it. The historical legacy will record that as his failing.

That legacy, say the critics, is now playing out. As interest rates return to more normal levels, they are puncturing the share prices pumped up by the Greenspan era of easy credit.

In London, this is Stephen Beard for Marketplace.

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