Greenspan: he's still getting it wrong

Former Fed Chairman Alan Greenspan (formerly known as the Maestro, but probably not any longer) has been sounding off to the Wall Street Journal about the housing crash and related issues. He says the US Government's bailout plan for Fannie and Freddie is "bad": the shareholders should have been wiped out and the companies reconstituted and refloated. He might be right in principle, though the consequences of such a course of action in the febrile state of capital markets might have been difficult to control.

Greenspan also takes the opportunity to dodge any blame for the credit crunch. According to the WSJ, "Mr. Greenspan has been criticized for contributing to today's woes by keeping interest rates too low too long and by regulating too lightly. He has been aggressively defending his record -- in interviews, in op-ed pieces and in a new chapter in his recent book, included in the paperback version to be published next month. Mr. Greenspan attributes the rise in house prices to a historically unusual period in which world markets pushed interest rates down and even sophisticated investors misjudged the risks they were taking".

Only the investors misjudged the risks, eh, Alan? The Fed's behaviour in cutting interest rates every time the equity markets came under threat -- the dotcom collapse, 9/11 -- might just possibly have encouraged that behaviour. They called it the "Greenspan put", and it's probably not something the Maestro wants to see featuring prominently in his obituaries.

As for the idea that "markets pushed interest rates down", those of us who think that interest rates are the price of money might interpret their historically low levels in the first half of this decade as evidence of an excessive amount of money washing around in world markets. That's something Greenspan and pals could have done something about, but they were so busy taking credit for low US inflation (which really originated in China and India) that they took their eye off the ball. You'll have to do a lot better than this if you want to rehabilitate your reputation, Maestro.