“The Fed is blameless on the property bubble.”
That was the headline Monday on the Financial Times op-ed page, as Alan Greenspan launched an exculpatory tour of the media last week. Reiterating arguments he first made a month ago in the FT, Greenspan blamed a dramatic fall in long-term interest rates for the run-up in house prices and said that the bubble was no worse in the
On Tuesday, The Wall Street Journal led the paper with “His Legacy Tarnished, Greenspan Goes on Defensive/Future of US Financial Reform is at Stake/‘I Am Right,’” a long and thoughtful three-session interview of the former central banker by chief economics correspondent Greg Ip. “I was praised for things I didn’t do,” Greenspan said, “Now I am now being blamed for things that I didn’t do.” Later that day, Greenspan stopped by CNBC. The Washington Post covered the WSJ story the same day with a short Reuters dispatch datelined
On Wednesday, The New York Times weighed in, taking note of Greenspan’s counter-offensive – but only by folding some details from the WSJ story into a prominent story on the front of its business section about a speech his predecessor, Paul Volcker, had given the day before at the Economic Club of New York.
“Ex-Fed Chairman Chides Current One,” said the Times headline, quoting a passage in which Volcker observed that, especially lending through the Fed’s discount window to investment banks, the Fed’s emergency measures under chairman Ben Bernanke had “extended to the very edge of its lawful and implied power, transcending certain long embedded central banking principles and practices….”
Thursday, however, according to Business Week, Volcker complained to reporters that the Times had misinterpreted his remarks. “I thought that [the headline] was ridiculous,” he said. “It’s the opposite of what I think.” To criticize Bernanke’s leadership was not what he intended in his speech – the first he had made to the Economic Club in thirty years.
Instead, Volcker dwelt on the origins of the current crisis, which he said resembled a much larger and more complicated version of the one endured by New York City in the mid-1970s, according to Bill Carlino, who wrote up the speech for WebCPA. Then,
A similar wave of financial innovation, especially complex derivatives and hedge funds, little hampered by lax oversight and deeply rooted in a national addiction to spending and consuming, was the cause of today’s troubled markets, Volcker said (according to Carlino).“It all became so comfortable, there was no pressure to change – not on
The real significance of the speech was underscored Thursday in the New York Sun by reporter Julie Satow, who wrote that Volcker’s entry into the public debate “may provide an opening into the monetary policy that would be followed during an Obama presidency.” In January Volcker endorsed Barack Obama. The candidate quickly returned the favor and indicated that he would prize Volcker’s counsel.
The former Fed chairman stepped down and into the background in 1987, after eight years during which he conducted a spectacularly successful policy against inflation in general and the Organization of Petroleum Exporting Countries in particular. At 80, he remains actively concerned with financial market regulation, through participation on advisory boards and appointive panels. He represents a very different approach to international economics from that of, say, former Treasury Secretary Robert Rubin, who is closely identified with Bill and Hillary Clinton.
(WSJ readers learned about the Volcker speech mainly from their alert editorial page – Volcker’s Demarche – though his remarks were mentioned in a short news story, too.)
Meanwhile, back at the FT, the debate over Greenspan raged. Columnist Martin Wolf, who for several years has been the dominant voice in international economic journalism (at least until last year, when anthropologist-turned-journalist Gillian Tett her full-time attention to the crisis in capital markets), wrote under the headline “Why Greenspan does not bear most of the blame.” Wolf, too, reiterated Greenspan’s argument that house prices soared around the world, not just the
The problem with Greenspan’s defense of his final years as Fed chairman, he wrote, is that “he is arguing that there is no middle way between repressed financial markets, on the one hand, and almost completely free ones, on the other. This is a counsel of despair.”
In a more incendiary vein, the investment strategist Andrew Smithers wrote the FT to say that the argument of Greenspan’s article “resembles an errant fire brigade excusing itself for failing to attend, let alone extinguish a fire, on the grounds that it did not start it, and, despite being the monopoly supplier of paraffin [kerosene] to the neighborhood, was in no way responsible.”
And Stephen Roach, chairman of Morgan Stanley Asia, long a vocal critic of
The Greenspan defense completely misses the trees from the forest. His place in history will not be defined by a cross-country comparison of housing bubbles. What he missed repeatedly over the years – and still misses today – are the corrosive impacts this bubble had in fostering the imbalances and excesses of an asset-dependent
Unprecedented consumer leverage is only part of the problem. So, too, is the failure of an aging
population to save at precisely the phase in its life-cycle when it needs to prepare for retirement. Global imbalances are also an outgrowth of this era of excess – underscored by US ’s massive external deficit and, by the way, the protectionist fires it stokes. America
Alas, these fault lines were made all the deeper by the Fed’s regulatory laxity in an era of unprecedented financial innovation – a laxity that, unfortunately, was accompanied by the cheap money that only a narrow CPI inflation targeter could justify. In retrospect, this was the most dangerous tactical blunder of all – a combination that created voracious investor demand for opaque and increasingly toxic financial products.
It didn’t have to be this way….Alan Greenspan simply couldn’t bring himself to follow the sage advice of one of his predecessors, William McChesney Martin, and “take away the punch bowl just when the party was getting good.”
So what’s the conclusion? EP’s view is that, indeed, Greenspan probably ought not bear most of the blame for what has happened to the economy these last few years. The lion’s share belongs to George W. Bush and Dick Cheney, who saw to it that the Treasury Department remained passive and leaned on Greenspan at every turn to validate their policies. The standard view of central bank independence is still somewhat romantic. Those dimensions of the conduct of government these last seven years have barely begun to be explored.
The differential play that the Greenspan story received last week in each of four major newspapers in the
Those who care most deeply about monetary policy read the FT first. That’s why Greenspan began his defense in the paper a month ago, and continued it there last week. The FT as a genuinely international paper, with a global circulation of around 450,000 (about a third of it in the
(The FT may not seem to have a very good handle on the US presidential campaign, but does anyone doubt that the paper consistently beats everyone else on international economics? Check out its coverage these last few weeks of the attempt to stage a run on
(Had the probe succeeded in triggering a panic, a rescue operation would have been immensely costly to Scandinavian central banks and perhaps the European Central Bank itself, and fantastically profitable for the perpetrators, never mind the risk to the rest of the global system. The
Nor is there any doubt why the WSJ was the second-day stop on Greenspan’s tour last week. With
The Washington Post could afford to take a pass on the Greenspan tour – its specialty is politics and government, not finance. More than any of its three rivals, the paper has a strong geographic base, which permits it to sell for less than half as much and still field a competitive editorial product. Kaplan Inc., its highly profitable venture into the education business, provides an additional margin of comfort. And last week it won six Pulitzer Prizes, a fair measure of its general excellence.
The events of last week demonstrated why The New York Times remains, in many ways, the indispensable
Newspapers are suffering a lot of woe these days. Jon Fine, who writes a consistently interesting weekly column about media for Business Week, last week began, “This could go down as the year the newspaper broke – the year that the melting icebergs finally fragmented; the year that the old ways were definitely unmasked as unsustainable, amid steepening revenue declines and a steady procession of buyouts and layoffs.”
The exception, he wrote, is Pearson’s FT, which after a couple of years of horrifying losses in 2003 and 2004 is today glistening with financial success.
And what did FT do achieve this happy result? It simply tightened up, improved its online performance (revenues up 40 percent last year), paid attention to its readers and waited for the panic among advertisers to subside.
The same success probably awaits many other big papers. Once the vertigo accompanying the rise of the Internet gives way to cool appraisal, their advertisers, too, will return. If they have carefully gauged their costs and attended their readers’ tastes, they, too, will prosper.