“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 US than elsewhere. “The core of the problem lies with the investment community,” he summarized. “It is not credible that regulators could have prevented it.”

 

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 Singapore: “Greenspan says unfairly blamed, has no regrets: report.”

 

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, New York had spent beyond its means for many years, the central banker explained, and, “aided and abetted by local banks, a profitable but rickety financial structure was built. It was dependent on the rollover of short-term financing and rested on the presumption that major cities don’t go broke.”

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 Washington, on Wall Street or Main Street,” said Volcker. “The sheer complexity, opaqueness and systemic risks embedded in the new markets have enormously complicated both official and private responses [to the crises.]”

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 United States (“If there is little US-specific to explain, a US policy maker cannot be responsible”) — before all but retracting his support for the former chairman with a tart judgment.

 

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 US economic policy, chimed in,

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 US economy.

 

Unprecedented consumer leverage is only part of the problem. So, too, is the failure of an aging US 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 America’s massive external deficit and, by the way, the protectionist fires it stokes.

 

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.

 

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The differential play that the Greenspan story received last week in each of four major newspapers in the US was also interesting for what it reveals about the relationship of each with its audience – that is to say, about its politics.

 

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 US), concentrated at the very high end of the market – and that’s why its weekend magazine carries ads for $30,000 wristwatches and 300-foot yachts.

 

(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 Iceland’s financial system – a “bear raid” by a number of hedge funds on the country’s currency, banking system and stock market, apparently formulated in London and abetted by Bear Stearns in the weeks before its recent demise. Iceland has grown rapidly in recent years, thanks to aggressive lending by its few big banks, especially to companies building aluminum smelters designed to take advantage of its cheap hydro- and geothermal electricity. A trade deficit of 16 percent of GNP (and inflation running at nearly 7 percent) rendered the krona vulnerable to speculation.

 

(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 United Kingdom’s Financial Services Authority is searching for the source of malign rumors about bank liquidity. “[T]he image of tiny Iceland, with a population of just 313,000, battling to protect its economy against the sharpest minds in global capitalism has captivated the local population and global market practitioners alike,” wrote David Ibison last week.)

 

Nor is there any doubt why the WSJ was the second-day stop on Greenspan’s tour last week. With US print circulation of 1.7 million and the most profitable online operation in the industry, the newspaper has a solid hold on America’s investor class. Subtle changes are taking place under Rupert Murdoch’s new management, none yet pronounced enough to constitute new strategic behavior.

 

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 US newspaper, for, in the shadowy sphere of political economics, the Volcker story was the most interesting development of the week, and the Times was the only paper to have the story in its news pages. It is not clear that the business section completely understood it. And everybody needed a little help from the Sun. But the Times’ instincts were good, they had the story, the paper as a whole probably never has been better. By the end of the week, the FT had been forced to follow the Times account with its own (still somewhat uncomprehending) profile of Volcker as Saturday’s “man in the news.”

 

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.