Wednesday, March 11, 2009

Greenspan: Don't Blame Me; Blame China

Alan Greenspan takes to the pages of the Wall Street Journal today to defend whatever is left of his tarnished legacy. His message: the housing bubble wasn't my fault; it was China's. Of course, there is a savings glut, and it certainly contributed to the credit and asset bubbles in large part. But doesn't this miss the point? Greenspan could have raised short-term interest rates to higher levels; if the 2004 hikes did not bring down long-term mortgage rates, Greenspan should have continued to raise rates (if he was truly worried about the housing bubble). It strains credulity that there was nothing the Fed could have done to pop the bubble. Doing so obviously would have meant sending a weak economy into recession - likely even a fairly nasty one - but in retrospect, it would have been better. It's easy to fall into hindsight bias, but Greenspan's own understanding of the role of the Fed as designated driver surely prevented him from taking action that at the time seemed reasonable.

Dean Baker does a good job laying out the case for the Fed targeting asset price stability in addition to its historically understood role of managing inflation. Alan Greenspan, are you listening?

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