You may remember that Alan Greenspan was awarded a KBE a few years ago, for something like "services to the world economy". I celebrated the occasion by sticking a header at the top of my Bloomberg messages: "Alan Greenspan KBE? Must stand for King of the Bubble Economy". I sat next to the "maestro" at a couple of lunches many years ago, but was never a fan. For the last year of his term at the Fed I found myself perversely hoping that the wheels would fall off the US economy before he left office, so that he wouldn't be able to blame his successor.
That wish wasn't granted, but this week's falls in global stock markets have triggered fears that the long, credit-fuelled global economic expansion may be coming to a sticky end. And here's Greenspan, pushing the lid off his coffin, pulling the stake from his heart and telling anyone willing to shell out $100,000 (his speaking fee) that the US economy could be heading into a recession later in the year. Try to imagine how pleased current Fed Chairman Ben Bernanke is -- or better, try to imagine how Greenspan himself would have reacted if one of his predecessors had made a similar intervention when the tech bubble burst or after the 9/11 attacks. Mind you, Greenspan has form: he gave his first post-Fed public speech, involving several injudicious comments, within hours of leaving the job.
There's no doubt that Greenspan was a decisive and comforting man in a crisis -- at least, in any crisis, like the tech crash or 9/11, that could be treated by easing monetary policy. The problem with easy money is that it is a scattershot weapon -- cutting rates prevents the economy from being derailed by something sector-specific like the tech crash, but at the cost of providing unnecessary stimulus to parts of the economy that don't really need it. Similarly, while cutting rates was obviously the right thing to do after 9/11, it quickly became clear that the damage to the overall economy was very short-lived, yet Greenspan kept rates at historically low levels for much too long.
A prolonged spell of super-easy monetary policy is always going to lead to inflationary pressures. It was Greenspan's good luck that it coincided with the flood of low-cost Asian imports into the US, which kept a cap on all of the main price indices, especially the CPI and something called the private consumption expenditure deflator, which Greenspan adopted as his favourite price measure, mainly because he liked the story it was telling. Instead of showing up in prices for goods, as it did in the inflation spike of the 1970s, the flood of liquidity created a boom in asset prices, both in equity markets and in housing. The combination of rising house prices and easy credit allowed US consumers to mortgage up the old homestead and keep consuming beyond their means for several years.
The US housing boom began to deflate last year (and there are now plenty of signs of distress there -- just ask HSBC, now counting the cost of an ill-judged foray into the high-risk mortgage market). Coupled with the surge in energy prices, something that not even I can find a way to blame Greenspan for, this has put a crimp on US consumer spending. Lower US spending in turn reduces demand for imports from China, putting that country's expansion at risk. Given that the vaunted expansion of the past decade has relied on China consuming much less than it produces and the US producing much less than it consumes (and paying for it with IOUs), it's no surprise that financial markets are jittery.
Today we have a large investment bank (Dresdner) telling people to sell stocks "aggressively" and newspapers all around the world warning of a market crash. It would have been nice to hear some of this caution before doo-doo hit the fan. Far from it, however: even last week some of the remaining apologists for cheap money (notably the ludicrous Anatole Kaletsky in the Times) were urging the same tired recipe on the Eurozone, which has not discovered the joys of home equity withdrawal. It's too soon to tell whether this week's events are the start of a "healthy correction" or a pant-soiling crash. But if it turns out to be the latter, expect Greenspan to be quick to cash in by pointing the finger of blame -- in the wrong direction.
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