Alan Greenspan Goes All Rumsfeldian

Former long-term Federal Reserve Chairman Alan Greenspan, all of 81 years, is still around, and you can be sure that he has some interesting things to say about the sub-prime-inspired financial troubles making all the headlines these days. The leading German opinion-weekly Die Zeit recently caught up with him for a brief interview published as Die große Ironie des Erfolgs – whose English version is also accessible as The great irony of success. (The “English version,” if you think about it, is properly the “original,” since I’m not aware that Greenspan speaks German.)

But let’s do treat briefly the sidebar in that German version that you won’t find over in the English, the one headed “Portrait” and then, underneath that, “Der »Maestro«”. That means what you think it means, and is quickly followed by further descriptions of Greenspan as “the grand old man of monetary policy,” and “the magician.” You could hardly be blamed for dreading that the interview is about to turn into a hagiography. But luckily that is not the case, for in the final paragraph of that German side-bar the Die Zeit editors add that “These days Greenspan is accused of being to blame for the [current] financial crisis, that his cheap-money policies after 2001 fanned the speculative fever.” But he takes this occasion, i.e. in the accompanying interview, to reject such criticism, so we are informed.

Getting Waffly on Us

So let’s get to back that interview and cut to the chase: At about the 30%-mark into the piece, the challenge from interviewer Matthias Nass (whose last name means “wet,” if you want to read anything into that) comes as follows: “When the dot-com bubble burst at the turn of the century, you as Chairman of the Federal Reserve answered by lowering interest rates dramatically. Now you are critizised [sic] for having created the bubble in the real-estate market. How do you respond to this criticism?”

How Greenspan responds is that he gets all waffly. Hey, there have been real estate bubbles going on all over the place, not just in America where the Fed runs the monetary policy. (He is polite enough to concede that this phenomenon did seem to skip Germany, for one.) So it can’t be anything we did at the Fed, the cause must lie in “the decline in global long-term real interest rates,” which apparently is something akin to a force of nature, out of reach of any human intervention. In fact, he says, don’t tell me my cheap-money policies had anything to do with the subsequent rise in American real estate prices; “there is no evidence” of that.

“So your policy was right?” Nass follows up.

Japanese Threat

Well, I’m not saying that either, Greenspan responds; that’s another question entirely. He goes on to apparently make the point that while, yes, it’s true that the Fed lowered short-term interest rates “for a full year starting in mid-2003,” they had to do that out of fear for a long-term situation of depressed demand such as had occurred in Japan from the late 1980s throughout the 1990s. Whether that choice was correct or not depends on your assessment of how serious that threat of a Japanese-style long-term slump really was.

The discussion immediately goes on to the prospect of further financial bubbles occurring, and it’s here where Greenspan makes you do a double-take. Of course there will be more speculative bubbles – they’re a side-effect of prosperity, “one the consequences of successful financial and monetary policies”! It’s just human nature. So hell yeah, if you want to accuse me of stoking these speculative bubbles, I’m fine with that!

Somehow I hear an echo here of Donald Rumsfeld’s famously laconic observation in connection with the widespread looting following the capture of Baghdad, with which Coalition troops were instructed not to interfere: “Stuff happens.”

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