Topic: Finance, Banking & Monetary Policy

Greenspan: The Debate Continues

Jeffrey Rogers Hummel and David Henderson have responded to critics of their defense of Alan Greenspan’s monetary policy. Answering particularly the criticisms of Cato adjunct scholar George Selgin, they provide further evidence for their contention that Greenspan was not pursuing an unduly loose monetary policy in the early years of this decade.

As I noted before, in early November Cato published a paper by Henderson and Hummel with the now-controversial and counterintuitive thesis that “although Greenspan’s policies weren’t perfect, his monetary policy was in fact tight, and his legacy is one of having overseen low and stable inflation and a striking dampening of the business cycle.” A couple of weeks later we published a paper by Lawrence H. White with a very different perspective. White argued that after the dot-com bust, the Greenspan Fed held interest rates extremely low for several years, setting off what Cato senior fellow Steve Hanke called “the mother of all liquidity cycles and yet another massive demand bubble.”

Back in May, Gerald P. O’Driscoll Jr. had also sharply criticized the Greenspan Fed in a Cato Briefing Paper. He wrote that the Fed had been creating asset bubbles and moral hazard by its implicit policy of intervening to keep asset prices high.

Bailouts May Scare U.S. Economy to Death

A Pew Research poll conducted more than a week ago found that 57 percent of Americans are terrified by Bailout Mania 2008. That was several days, and many billions of dollars, before Bloomberg reported that U.S. taxpayers are now on the hook for $7.7 trillion in bailout bucks – half of the nation’s entire GDP for the past year. At this point, not even Carl Sagan could get a handle on the numbers we’re talking about.

What do people do when they’re scared about the state of the economy? They stop spending. With each new government “investment” announced by our new overlord Hank Paulson, Americans are going to clutch ever more fiercely at their wallets. They will eat out even less than they’ve been doing. They will rediscover the true spirit of Christmas and give each other hugs instead of Blue-Ray disc players. They will forgo that new coat or pair of winter boots. And they will bring the U.S. economy to a halt.

Even if all these bailouts could save the economy, other things being equal, other things are NOT equal. The bailouts themselves have an effect on consumer psychology, which has an effect on consumer spending. The Fed had better hire a shrink, quick, to let them know that they are on the brink of scaring the U.S. economy to death.

Pointless, Political, and Pork-filled

Greg Mankiw speculates on the best alliterative description of the stimulus package:

Instead of fiscal stimulus that is temporary, targeted, and timely, John Taylor suggests that it be permanent, pervasive, and predictable.

What the Obama administration is aiming for, it seems, is helpful, hopeful, and humongous.

Critics fear it might end up pointless, political, and pork-filled.

—–

Update: A reader emails me that Larry Summers now calls for stimulus that is speedy, substantial, and sustained.

Other readers think it will be:

big, bloated, and borrowed.
immodest, immoral, and imbecilic.
clumsy, corrupt, and counterproductive.
expansive, extensive, and expensive.
weighty, worrisome, and wayward.
politicized, pandered, and pathetic.
socialized, silly, and sorry.
random, record-setting, and ridiculed.
ultimate utilitarian utopianism.
absolutely abjectly apocalyptic.

The Left Embraces the Shock Doctrine

Last week Rahm Emanuel said to a prestigious audience, “You never want a serious crisis to go to waste. It’s an opportunity to do things you could not do before.”

And that’s just the strategy that bestselling author Naomi Klein accuses right-wingers of employing. Weaving a convoluted yet superficially simple tale of world events, she claims in her book The Shock Doctrine that right-wing ideologues and governments both use and create moments of crisis to implement their nefarious agenda.

“Some people stockpile canned goods and water in preparation for major disasters,” Klein writes. “Friedmanites stockpile free-market ideas.” Which is exactly what American left-liberals have been doing in anticipation of a Democratic administration coming to power at a time when the public might be frightened into accepting more government than it normally would. The Center for American Progress, for instance, run by John Podesta, who was President Bill Clinton’s chief of staff and is now President-elect Obama’s transition director, has just released Change for America: A Progressive Blueprint for the 44th President.

The ideas in that report mesh well with the opportunities that Emanuel identified. After re-emphasizing the opportunities that crisis provides, he told his audience that the Obama administration wanted to use the opportunity to implement central planning of health care and energy, higher taxes, a federal program directed at “training the workforce,” and tighter control of financial institutions and capital flows.

But Emanuel isn’t the only one. As I mentioned previously, Paul Krugman has also endorsed the “don’t let a good crisis go to waste” power grab.

And now Arianna Huffington, the founder of the left-wing bulletin board HuffingtonPost, makes the same point in a public radio appearance. On KCRW’s “Left, Right, and Center,” November 21 (at about 27:20 in the podcast), she declared: “A crisis is a terrible thing to waste. And it might be this particular crisis that will make it possible for the Obama administration to do some really innovative, bold things on health care, on energy independence, on all the areas that have been neglected.” (Hat tip: Thaddeus Russell.) Last year Huffington wrote a rave review of The Shock Doctrine, calling it “prophetic.” So it seems.

So … Emanuel. Krugman. Huffington. They’re all rallying around the theme that, well, that a left-liberal government should use this crisis to implement a more sweeping agenda than it could achieve in the absence of crisis. That’s the Shock Doctrine. Where are Naomi Klein and her legion of fans to expose and denounce it?

Of course, Klein might well decry their corporatist, big government/big business plans as just another example of Friedmanite/neoconservative/Pinochetist right-wing ideology. Anything other than local worker’s collectives smells like capitalism to her. So she can add the Obama administration to Milton Friedman, laissez-faire, the Bush administration, the Iraqi government, the Pinochet government, the Chinese Communist Party, and the ANC government of South Africa on the list of things that seem so many peas in a pod to her.

The San Francisco Chronicle says that Klein “may well have revealed the master narrative of our time.” The reviewer may have been more right than he knew.

Should We Blame Greenspan?

Alan Greenspan, once regarded as a Maestro, and so admired that people actually believed a New Republic article by Stephen Glass and Jonathan Chait claiming that a Wall Street financial firm had a literal shrine to him, is now being blamed for the worst financial crisis since the Great Depression. Is that fair? Did Greenspan’s Fed create the dot-com boom, the dot-com bust, the housing boom, and/or the housing bust and the ensuing financial crisis?

Two weeks ago Cato published a paper by David Henderson and Jeffrey Hummel with the now-controversial and counterintuitive thesis that “although Greenspan’s policies weren’t perfect, his monetary policy was in fact tight, and his legacy is one of having overseen low and stable inflation and a striking dampening of the business cycle.”

This week Cato published a paper by Lawrence H. White with a very different perspective. White argues that after the dot-com bust, the Greenspan Fed held interest rates extremely low for several years, setting off what Cato senior fellow Steve Hanke called “the mother of all liquidity cycles and yet another massive demand bubble.”

Back in May, Gerald P. O’Driscoll Jr. had also sharply criticized the Greenspan Fed in a Cato Briefing Paper. He wrote that the Fed had been creating asset bubbles and moral hazard by its implicit policy of intervening to keep asset prices high.

More perspectives were heard this week at Cato’s Annual Monetary Conference. Video of the conference can be found here, and the papers will eventually be published in the Cato Journal.

Subsidizing Reckless Behavior

Politicians specialize in bad law, but sometimes they go above and beyond ordinary incompetence in their search for foolish policy. The mortgage bailout is a good example. As an article in the San Francisco Chronicle explains, feckless government policy creates an incentive for people to default on their mortgages:

Should you keep paying your mortgage?

If you have significant equity in your home, absolutely.

If you don’t, it’s getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay.

Last week, the government announced a program that will substantially lower payments for many homeowners who have little or no equity, but only if they are at least 90 days delinquent.

Critics say the plan, which applies to loans owned or guaranteed by government wards Fannie Mae and Freddie Mac among others, could encourage people to suspend payments.

…Last year, Congress started removing some financial hazards of default when it passed a bill that temporarily waives the income tax on mortgage debt that is canceled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (a short sale) or gets a loan modification that reduces the principal balance.

…Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit.After the modification, they could try to boost their income again.

“This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.”

The government is offering loan servicers $800 for every homeowner they get into the plan.

Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.”

Lord, Make Me Chaste, But Not Yet

From a WSJ blog:

Former Treasury Secretary Robert Rubin, speaking at the same event, also pushed fiscal stimulus while stressing the importance of signaling concerns about the deficit. “The single most important thing we can do right now is a very large fiscal stimulus married with a commitment, once the economy is healthy again, to put in place a multi-year program to get back to a sound fiscal position,” he said.