Greenspan: The Liar, The Fraud
To see why he is hypocritical fraud, just see his denial of his guilt in creating first the tech stock bubble and then the housing bubble.
First he claims that he tried to prevent the tech stock bubble by raising interest rates, but failed to do so. The truth is that the late 1990s stock rally started in 1995 after the Fed signaled that the wave of rate increases in 1994 was over and might be partially reversed. And partially reverse it did, cutting it from 6% in June 1995 to 5.25% in January 1996. While they did raise to 5.5% in April 1997, they then in the autumn of 1998 started a series of rate cuts, from 5.5% to 4.75%.
And more importantly, the Fed's role in fueling stock bubbles doesn't necessarily come through direct rate cuts, but in its direct and indirect role in preventing the increase in interest rates that a free money market would automatically push through in the case of any increase in relative preference for stocks. The double digit growth rates of the MZM and M3 measures of money supply during the late 1990s indicates a strong role of the Fed sponsored monetary system in suppressing interest rates.
He similarly denies his role in the housing bubble by pointing to how long term interest rates did not rise after the rate increases in 2004-2005. This is dishonest for more than one reason. First of all, the housing bubble started already in 2001, when he pushed through rate cuts of an unprecedented magnitude, from 6.5% to 1.75% in a mere year. Secondly, because of the increased popularity of adjustable rate mortgages, short-term interest rates were just as important as long-term interest rates. Thirdly, movements in market interest rates always tend to precede movements in the fed funds rate as market interest rates is really the future average fed funds rate during the duration of the bond.
If really long-term interest rates were determined only by global liquidity, then how come long-term interest rates are only about 1.5% in Japan and 6% in Australia? This is all the more telling given the fact that Japan has a very high budget deficit and a huge public debt, while Australia has a budget surplus and a very small public debt. Clearly, the interest rate differential between Australia and Japan is a result of different expected future central bank interest rates.
And long-term interest rates did in fact rise from 3.3% in June 2003, when the deflation scare made everyone believe interest rates would stay low for long, to 4.7% in June 2004 when the Fed had already signaled the start of a series of rate increases. That long-term interest rates didn't rise further after that merely reflected that the series of rate increases after that was priced in by the markets.
Why doesn't any journalist confront Greenspan with these facts? Are they really all that clueless? And why doesn't anyone confront Greenspan with what he himself wrote about the origin of asset price bubbles back in 1966? Quote from Greenspan's "Gold and Economic Freedom":
"When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom."
[Cross-posted at the Mises blog]