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Alan Greenspan's Bad Memory

Sunday, 20 October 2013 07:41

Steven Pearlstein reviewed Alan Greenspan's new book in the Washington Post today. He is far too generous to the former Maestro.

Pearlstein tells readers:

"Like Fred Astaire on the dance floor, Greenspan glides through the list without the slightest sign he might have had something to do with those developments. What he does remember is that during his watch, the markets and the economy quickly recovered after asset bubbles burst — in 1987 (junk bonds) and again in 2001 (dot-com). Based on those happy outcomes, Greenspan confidently reprises his now widely discredited view that, in the long run, the economy is better off if the government restricts itself to cleaning up after bubbles rather than trying to prevent them from growing too large."

It is more than a bit silly to compare the bursting of the stock bubble (not dot-com, the market in general was hugely over-valued) and the housing bubble to the 1987 crash. The market had gained a great deal of value in the year of 1987. After the crash in October it quickly began to make back lost ground and by the end of the year the market was at virtually the same level as the beginning of the year. No one thinks that the economy is affected in any significant way by short-terms movements in the market, so there was really nothing to clean up in this story.

The picture was very different following the 2001 crash which resulted in the elimination of roughly $10 trillion in stock bubble wealth, an amount approximately to the economy's GDP. The economy did not recovery quickly following this crash. While the recession was officially short and mild, ending in 2001, the economy did not begin to create jobs again until the fall of 2003, almost two years after the recession was over. It did not get back the jobs lost in the recession until January of 2005. At the time, this was the longest period without job growth since the Great Depression.

The Fed seemed to take notice of the weakness of the economy keeping the federal funds rate at just 1.0 percent until the summer of 2004. This can be seen as effectively the zero lower bound. No one thinks that there is any great stimulatory effect from dropping the rate from 1.0 percent to zero, which is why people routinely talked about the European Central Bank as being at its zero lower bound even when its overnight interest rate was 1.0 percent.


Of course even when the economy did finally bounce back it was on the back of the housing bubble, which was not a very stable course. In other words, if Greenspan thinks he can point to evidence that the economy recovers quickly from the collapse of asset bubbles it is only because he is very confused about basic economic facts.  

Comments (7)Add Comment
How a Maestro Balances the Budget and Destroys the Economy at the Same Time
written by Last Mover, October 20, 2013 8:27

When the rationally exhuberant engage in irrational exhuberance it is no longer possible to separate the rational from the irrational.

However, separating pride from prejudice emanating from such irrational rationalizers is easy, as in:

When there is a deficit rather than a surplus, it must be reduced to avoid the drag of debt, risk of inflation and spending that crowds out the private sector.

When there is a surplus, it must be reduced to avoid the drag of the government spending it rather than refunding it.

Such balanced budgets are essential when running an economy of boom and bust cycles driven by asset bubbles.
written by JSeydl, October 20, 2013 8:54
I think it gets back to the question of whether a bubble is driving real variables. In 1987, I don't think the stock market was -- or at least not to the extent that the NASDAQ was driving consumption and E&S spending in the late-1990s, or the extent that the housing bubble drove construction and consumption in the 2000s.
written by watermelonpunch, October 20, 2013 9:31
Alan Greenspan's Bad Memory

This comment is far too generous to that ego mad human being.
It implies that maybe he's just gotten dotty in his old age or something, and perhaps deserving of pity, or just geriatric care.
But this would be an insult to all the elderly afflicted with dementia, because he was probably just as incapable of learning from mistakes, his own or anyone else's, 50 years ago, as he would appear to be today.
written by Robert Waldmann, October 20, 2013 12:25
I don't recall a junk bond bubble bursting in 87. There was a stock market crash as you describe. The commercial real estate/junk bond gambling S&L heads I win tails the FSLIC loses bubble burst later. Then too there was a mild recession (ending March 1991) followed by a sluggish "jobless" recovery. Has Greenspan forgotten the effect of displeasure with economic outcomes on an election in 1992 ?

Greenspan ignores two out of two Recoveries in the Greenspan era. He has an extraordinary memory and I don't mean that in a good way. Of course I trust his memory works fine and he is just trying to snow gullible readers.

written by JDM, October 20, 2013 1:32
What Greenspan is really saying is "Before, during, and after all these events I was still rich and all my friends were still rich, so where's the problem?"
written by dax, October 21, 2013 7:15
Wait a minute. The Fed reacted the very day after the 1987 crash (Black Monday) and flooded the financial system with money, causing interest rates to fall. Surely that had something to do with the recovery of stock prices by year's end.
written by jamzo, October 21, 2013 10:28
greenspan is in full book tour mode ....heard a lengthy bbc interview overnight

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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.