I'm sure this factoid is nowhere near as much fun as watching the former Maestro come unglued, but Australia's central bank under Ian Macfarlane did a good job of taking a lot of air out of their overheated property market (and it was a doozy, in 2005 the Economist deemed it to be twice as overvalued as America's).

How did Macfarlane do it? He regularly said property was overpriced, that the bank was concerned about speculative activity, etc. The TV and press faithfully picked it up. Cocktail conversation, which was as real estate focused as in most US cities in recent years, took a worried turn. All it required was a rate increase or two (I forget how many, but they were only 25 basis point increments) and things changed a great deal. Yes, Oz had a couple of soft quarters as a result too, and property was still overpriced, but no longer catastrophically so.

Well Greenspan is right that if the bubble was caused by ignorance about the size of the risk, raising interest rates would do very little for the bubble. It would slow the market as a whole but the inflated sector would still be inflated compared to the rest of the economy. At most, lowering rates might provide a little more wiggle room to lower interests when the bubble bursts. To bust the bubble you have to make investors aware that they are taking more risk than they think. Sometimes it seems like a market crash is the only thing that can open their eyes.

Yes, he is a liar. It is true that he lost control of long term interest rates, but his cheap money financed the MBS, CDOs, etc which provided money in turn to predator mortgage brokers.

I can't even read soundbites of this idiot anymore. It makes me nauseous.

Would it be fair to trace the start of the destruction of his once golden reputation to his endorsement of Bush's tax cuts in 2001?

While I also think Greenspan is over rated, when he finally did raise rates, 30 year mortgage rates stayed relatively flat to down. Just like now even with Bernake dropping rates 300 bp rates are essentially flat. His real flaw, is the Fed looked the other way when all these new real estate products were underwritten. Ayn Rand is great, but in an ecomomy with extremese of greed and fear, some small amount of regulation is required.

As Canadian finance minister for over a decade, Paul Martin eliminated their annual fiscal deficit, and defused a problem with the pension plan.

I'm comfortable in concluding that Greenspan simply lied about the loss of control by other central banks.. one can only wish it would have simply been a great amount of graft that enabled him to be so stupid for so long.

Alas - he's just that incompetent.

This doesn't add up

>nothing would have happened, because the Fed lost control of long-term rates

Ever heard of 5/1 ARMs Alan? I think we have > $1t of those guys, whose rates are directly impacted by short-terms rates.

I think this is a perfect example of people wanting to give one person all the credit or blame, as the case may be, so they can somehow personify something as vast and complex as a market economy. Greenspan was lauded during the 90s boom, as though he was somehow responsible for the decades of technological innovation that crested with the dot.com boom. Now, he's savaged for the real estate bubble, as he though he personally convinced mortgage underwriters to systematically underprice risk. The same happens with Clinton, with idiots who believe the 90's boom was because of him and who now vote for his wife as a consequence, and the people who believe Bush was responsible for the recent boom or his dad for that bust. While rates no doubt have a small part to play, people who pin everything on Greenspan, whether good or bad, just show their economic ignorance.

Ajay - are you showing your economic ignorance?

Have you read anything about how the Fed works? How interest rates works?

The Fed has a lot of power to prevent these kinds of things. Read "Secrets of the Temple".

A lot of astute economists had been predicting this outcome for years. But Greenspan was a tool of the bankers, and so his decisions were not based on rational analysis or the long-term interests of the economy.

"Maestro" my ass.

Ajay -- Not sure I buy your argument. Many people pilloried Greenspan during the dot-com boom for his refusal to prick the Nasdaq asset bubble, so I have a hard time with the idea that Alan went, in a decade, from hero to bum on all scorecards. Granted, the credit crisis is far more complex than one man, but that's an entirely different point.

J, I'm not an economist but I suspect I know far more about economics than you do, as your citing of a muck-racking and irrelevant book like Secrets of the Temple would validate.

Paul, I question the delusion that there is any one man who can run around pricking bubbles or that any man would even know when it is his place to do so. I don't see how it's beside the point to point out that these bubbles were exercises in mass delusion, in which one man like Greenspan or one institution like the Fed can only play a small role.

Just "Ben Stein" his butt, Paul. I.e. proclaim that you won't read his shtick anymore.

Of course after you "benstein" him, you are allowed at least two valedictory posts until you really stop mentioning him.

I thought it strange when an obvious trend developed in real estate lending to not only put people in adjustable mortgages when rates were at historic lows, but to also have no documentation requirements for buyers. That should have been a clue that something fishy was going on. Obviously, no one was watching, or either that, didn't want to stop the gravey train before the train wreck.

Ajay, if bubbles are a mass delusion then what do you call negative real interest rates? A mirage of profits?

Greenspan personally promoted 2/28 ARM's. He stated that Wall Street doesn't need regulation because they'll naturally "do what's in their best interest" -- channeling his inner Ayn Rand.

One institution like the Fed? The central bank of the largest economy in the world.. plays a small role? That's a solid effort at obfuscation, but snark won't put lipstick on that pig.

" any man would even know when it is his place " -- Central bankers DO know when it's time to crank the rate to break inflation. You may have heard of a man named Volcker. Go read the transcript of his interview last Sunday with Charlie Rose if you want to experience a conversation with a competent central bank chairman.

There are very clear ways to run a central bank. Greenspan failed miserably on all counts.

Hey Ajay -- Agreed, but that's not entirely my point. I think Greenspan's responses to the WashPost were, frankly, delusional, and I have no problem saying so. Is that the same thing as saying he is the economy's Supernanny, tasked with keeping us all safe and well-behaved? No, but I also refuse to give him a pass when he descends to internally contradictory sophistry.

I think the truly damning knock on Greenspan is that he was a tool of the politicized de-regulation that took place in the 90's and 00's. Not that he was responsible for dumping Glass-Stegall or that it was a bad decision, but that we instituted no structural changes to ameliorate risks that were especially likely to emerge as hot money rushed into the new opportunities.

As a result, we have a massive surge of unexamined debt in the past few years, mimicking the conditions of the 20's. Idiosyncratic risks escalate to become systemic. His successor is making ad hoc decisions in a crisis environment, and we have inexcusable disinformation from the Executive (both WH and Treasury) about letting the markets reach these wonderful solutions that they always will, but then, a little shotgun wedding is called for because "Bear's role is too important" to be managed under the ordinary Laws of contracts in our country.

We've become inured to a culture of incompetence from the White House, but the Fed was meant to be above that.

We often read criticisms of impossible assumptions built into academics' financial theories, but the de-reg movement was made with the empirically false implicit belief that markets will naturally self-correct without shutting down the economy. Even if you demure, it is NOT an experiment that we should be making. Greenspan was not just charged with monitoring the pool of liquidity and adjusting the spigot; he should have been identifying Policy approaches that _could_ be used to prevent meltdowns, contain their costs, etc.

Instead, he allowed the "Maestro" cult to let us believe All Was Well.

We still have maybe another trillion of various losses that'll pop up from time to time, taking important intermediaries out of business, very illiquid markets because nobody knows what an asset is worth, let alone whether the counterparty will be able to pay for it, and huge funds that depend on high-speed turnover, which could rapidly domino our seemingly sound markets.

We are now faced with the prospect of the Fed stopgapping things up to its current budgeted limits, and still seeing no end in sight. Yes, a small probability, but real. The Greenspan legacy looks to me as an ever-widening spiral of debt - leverage - bubble - instability.

A remarkable failing on the part of the interviewer.

A huge component of the fed chairman's power is "soft power;" i.e., the ability to influence outcomes, events and perceptions with the power of verbal statements.

There was a cartoon from many years ago that sums it up perfectly. Greenspan is in a restaurant ordering breakfast. As he says "I'll have the..." with the waiter leaning over him, every other table in the place is cocking their ear to hear what he orders. At the height of his shamanic powers, Greenspan's soft power was perhaps greater than any other politican's in modern history. He didn't use a single jot of it -- instead choosing to marshal his political capital like a greedy miser, thinking only of what would make the easiest path for himself.

For Greenspan to argue that rising interest rates can't prick bubbles is such a gigantic sin of omission, it might as well be a bald-faced lie. He was likely relying on the fact that his interviewer was too blind or too power-blinkered to bring up the soft power component.

The Maestro's failing is ultimately one of vanity. He was a small-minded, self-serving little man -- little in the character defining sense of the word -- who chose to screw over his country, and the world, in an effort to walk the most politically expedient path for himself.

Ironically, Ben Bernanke seems to be the opposite in that regard -- a genuinely earnest political servant who is willing to put his own reputation and political standing at risk in pursuit of the greater good. Unfortunately for Ben, running the Fed is more of a dissembler's job. He will probably drown in The Maestro's cesspool.

p.s. for the record, Ajay seems to be a knee-jerk contrarian who 1) likes to disagree for the sake of being disagreeable, and 2) tends to rely on false dichotomies and drastically oversimplified arguments.

edit: Likes to Disagree, not agree. Emotional motivation coloring the perspective -- maxing out snark opportunities as priority one, coherence of argument second place.

Great post, Franklin. Wish I had seen that Greenspan cartoon that you mention.

While Walt believes that the Fed should behave like some kind of omniscient plumber, constantly running around and coming up with fixes for leaks or latent gushers in the markets, and Franklin believes that he should behave as a market whisperer, constantly whispering sweet somethings into market participants' ears, I don't see the Fed as being that powerful in a vast, distributed network like the US economy, particularly after that economy has become much more tightly interlinked with global financial networks over the last couple of decades (Mike Mandel at Businessweek has suggested a global central bank for this reason). Rather, I see a lot of dimwits who would blame someone, anyone, cargo-cult style, rather than own up to widespread and systematic problems in the way financial markets value emerging technology or overuse crude statistical models to price risk. My druthers? I'd abolish the Fed and get rid of this totem pole for morons to fling rocks at when the market inevitably trips and skins its knee.

As for Franklin's assertions about me, if I seem a contrarian, it's because I don't chime in as often as he does, only when I have an alternative perspective to add. I don't know how pointing out that these are widespread market problems rather than the fault of some totemic godhead is a false dichotomy or oversimplified, rather I claim it's the Greenspan-bashers who fit those criteria. As for disagreeing for the sake of being disagreeable, I would posit instead that Franklin has no counter-arguments to make so rather than think about it more and stew in his ignorance, he goes for the classic ad hominem attack employed by dimwits everywhere.

As on onlooker, I have to agree with the remark that A.J. does like to depend on false dichotomies and oversimplified statements. To wit, he seems to think the argument is only whether 1) Greenspan is completely to blame or 2) he is not "that powerful in a vast, distributed network like the U.S. economy." This is pretty dichotomous, even if not perfectly so. In reality, it is very reasonable to argue that Greenspan and the fed weren't everything, but that he was in a position of very great proportionate power (compared to most other people), and from that very non-equal and significant position, could have made a large difference, and very possibly a pivotal one, among the balance of forces.
It certainly seems this way to me.

Ajay:

You suggest that you "do not chime in as often as I do." I'm not sure about that. I haven't posted on this board in many weeks, and my comments are far from regular.

Re counterarguments, it is ironic you would say that immediately after I submitted a strong counter argument to your binary view: namely, that Greenspan was deeply cognizant of his soft power and chose to use none of it. (A failing that Greenspan's critics have been loudly calling him on for well over a decade.)

As for ad hominem etcetera, I normally try to avoid singling out fellow thread posters for criticism.

I did it in your case because I recall your contribution style fairly vividly -- blame it on semi-photographic memory -- going back over multiple comments and threads over a significant space of time. There is a bitterness.

I made the comments as a service to other regular readers here, and potentially also as a service to you, if you ever choose to reflect on the value of subtlety and social perceptions. Cheers

Ajay,

Sorry man, I didn't realize you were such a genius.

Love you buddy.

J