Thursday, April 08, 2010

Greenspan The Delusional

For the umpteenth (I lost count) time, Greenspan tries to deny that he was at fault for the U.S. housing bubble. Since he doesn't advance any new arguments, and since I've already refuted the old arguments he now repeats, I'll simply link to that refutation. See also Caroline Baum's recent column on the subject. Most embarrasing to Greenspan is arguably his failure to understand (or his claim to not understand it) the link between short-term and long-term rates. As Baum puts it:

"Surely one of the hundreds of economists on the Fed staff could have explained to him that the long rate is the sum of the current and expected future short-term rates. If long-term rates are too low, jack up short-term rates more aggressively rather than in quarter-point increments. He can’t plead not-guilty."

This point should have been obvious to even casual observers. Why else would long-term Australian interest rates have been around 6% and Japanese interest rates around 1%, despite much bigger deficits and government debts in Japan? Clearly none of the global factors that Greenspan harps about can explain this, since both Australia and Japan are on this planet and both have free capital movements.