Friedman on the Two Greenspans

Benjamin M. Friedman, reviewing the new memoir by former Fed Chairman Alan Greenspan, notes a remarkable disconnection—rather, two remarkable disconnections, one in policy, one in practice. First, Friedman marvels over how much Greenspan’s conduct as chair belies his own philosophy:

Greenspan continually reiterated his belief in the power of private economic activity organized in free, competitive markets. Government interference, therefore, is for him mostly a bad idea. It was, he writes, “the embrace of free-market capitalism,” not monetary policy, that “helped bring inflation to quiescence.” Further, in his view, free markets are not only efficient but robust. In the face of disturbances—higher oil prices, say, or a decline in either consumer or business confidence—they tend to correct themselves. “If the story of the past quarter of a century has a one-line plot summary,” he writes, “it is the rediscovery of the power of market capitalism.”

And yet, as Friedman comments:

This mantra is strikingly at odds with Greenspan’s account of what he and his colleagues did during his years at the Federal Reserve. They took corrective action, gave advice and even instructions, and took the initiative in anticipating the difficulties markets might face. They did so not just in the immediate aftermath of the September 11 atrocities, which anyone would recognize as out of the ordinary, but in one episode after another throughout his years at the Federal Reserve. Familiar examples include the 1987 sock market crash; the wave of financial problems in many Asian and Latin American countries beginning in 1997; the near collapse of the LTCM hedge fund in 1998; the passage of the millennium from 1999 to 2000 (which many people feared would trigger widespread "Y2K” computer glitches); and many others.

In dealing with such events Greenspan and his colleagues treated financial markets more as delicate flowers requiring careful attention and nursing. Similarly, although he frequently makes clear in what he writes that he rejects Keynesian economics, both at the Federal Reserve and during his time in the Ford White House he consistently advocated Keynesian stimulus (through tax rebates or lower tax rtes) whenever he thought the economy needed a boost.

But Friedman goes on to demonstrate that there was one province to which Greenspan’s interventionist writ did not run: subprime loans. He contrasts Greenspan’s own attitude to the attitude of his fellow governor, the late Edward Gramlich. It was Gramlich who worked tirelessly to highlight the risks in subprime lending, and to lobby for reform. Greenspan wasn’t buying. His “opposition to such proposals,” Friedman declares

Was consistent with the admiration that he expresses for unfettered markets ane the sanctity with which he regards property rights … For Greenspan, recognition that the workings of such markets sometimes destroy asset values, jobs, or even entire industries is still not ground for interference in the economy in the aggregate, or with individual transactions to which two or more private parties voluntarily agree.

“In hindsight,” Friedman concludes:

One wishes that Alan Greenspan, as Federal Reserve chairman, had clung to his economic philosophy in regulatory matters no more closely than he did in his hands-on conduct of monetary policy.

Indeed.

Source: Friedman, “Chairman Greenspan’s Legacy,” New York Review of Books March 20, 2008, 25-28.