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Home Publications Blogs Beat the Press Alan Greenspan Insists That He Knows Nothing About the Economy

Alan Greenspan Insists That He Knows Nothing About the Economy

Tuesday, 23 August 2011 19:31

That's what the Dow Jones effectively told readers today. The article reported that in response to a question at a conference:

"Greenspan also said he believes that the sharp rise in gold prices is due to market concerns about inflation taking off in the long run. He noted how there has never been such a major expansion of credit in U.S. economic history."

Let's look this one up. There is an organization called the "Federal Reserve Board" that puts out really good data on credit. If we look at its most recent Flow of Funds accounts, we see that credit for the economy as a whole expanded at a 3.0 percent annual rate in 2009, a 4.2 percent annual rate in 2010, and a 2.3 percent annual rate in the first quarter of 2011, the most recent quarter for which data is available.

Has there ever been "such a major expansion of credit in U.S. economic history?"

Well, actually credit expanded more rapidly than the 4.2 percent rate in 2010 in every single year that Greenspan chaired the Fed. In fact, it expanded more rapidly in every year in this series (going back to 1976) and probably every year since the Great Depression. In other words, for Alan Greenspan night is day, up is down, he is looking at an extraordinarily slow pace of credit expansion and telling reporters that is the fastest on record.

Of course, Greenspan is probably not familiar with the Flow of Funds data. If he had been, he probably would have noted the historic drop in the ratio of homeowners' equity to market value that occurred even as house prices were soaring to record levels. (Rising house prices translate one to one into equity. Other things equal, rising house prices should have meant a rising ratio of equity to value.) This was a very clear warning sign about the housing bubble to those familiar with the Fed's data.

A serious news service should not be passing along such ill-informed nonsense to its readers uncorrected, except if its purpose is to point out that the person who chaired the Fed for almost two decades doesn't have a clue about the economy.

Comments (10)Add Comment
Those Who Say Don't Know: Those Who Know Don't Say
written by izzatzo, August 23, 2011 9:42
Greenspan earned the right to be vague and incoherent over the years as Chair of the Fed. It was his duty not to tip the Fed's hand while maintaining confidence in markets and getting presidents elected.

Let him be now the maestro he was then in his own way, making profound declarations cloaked in a shroud of mystery designed to impress with Randian Objectivism the mastery of structured form over chaotic substance.

The irredeemable obscurity of free markets cannot be known. It can only be gazed at and admired.

Stupid liberals.
Flow of Funds
written by John, August 23, 2011 10:10
"he probably would have noted the historic drop in the ratio of homeowners' equity to market value"
Is that the R.100 form (PDF)? If yes, which line item(s)? Thank you.
written by Moopheus, August 23, 2011 10:48
The headline is true, so why shouldn't Dow Jones say it?
written by joe, August 24, 2011 12:25
John, it's line 50 on page 1. Line 50 is line 49 divided by line 4.

B.100 Balance Sheet of Households and Nonprofit Organizations
50. "Owners’ equity as percentage of
household real estate"

written by ComradeAnon, August 24, 2011 10:46
Heck uv a job Greenie. Your almost as smart as past NAR economsts.
Misrepresentation by Dean Baker?
written by kent, August 24, 2011 3:21
Is it possible that Greenspan was referring to the expansion of government credit? That is indeed unprecedented during the period 1976-2010 as per the table that Mr. Baker linked to. (2008: 24.2%. 2009: 22.7%. 2010: 20.2%.)

I'm guessing that Mr. Greenspan thinks that government debt is (for some reason) more pernicious and more likely to lead to inflation than other types of debt. I don't know if he's right about that or not. I would love to see Mr. Baker address that question.

Why does anyone pay attention to the WSJ?
written by Kyle Michel Sullivan, August 24, 2011 4:29
It's been consistently wrong about every aspect of the economy for years, and has actually cost people who followed its advice money. Why does anyone trust it, anymore?
written by Bob Forehead, August 24, 2011 7:14
Remember Bob Citron -- the genius who ran Orange County into bankruptcy in the 90s?


He was a financial guru, until it went sideways, when he made it clear that he didn't have enough working grey matter to tie his own shoelaces.

Turns out Alan Greenspan is the national equivalent.

If you prefer to a bit further back for analogies, tough to go wrong with Chance the gardener from the movie "Being There."
written by Walter_R, August 26, 2011 11:38
I suspect by 'credit' Greenspan means 'reserves'. He believes in the multiplier theory of credit creation in a fractional reserve banking system, so he assumes that expanded reserves (something which has indeed happened) has lead to expanded credit. He doesn't need to look at no stinkin' data to 'know' that his assumption is correct, because he's Alan Greenspan.
Montreal Expos
written by Montreal Expos, August 26, 2011 9:19

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.