Economist's View: Joseph Stiglitz Questions Greenspan's Record and the Independence of the Fed
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Joseph Stiglitz Questions Greenspan's Record and the Independence of the Fed
Joseph E. Stiglitz is a Nobel laureate in economics, a Professor of Economics at Columbia University, and he was Chairman of the Council of Economic Advisers for President Clinton and Chief Economist and Senior Vice President at the World Bank. He has some harsh words for Alan Greenspan, particularly his role in promoting tax cuts, and he wonders if central bank independence is an illusion:
Is central bank independence all it’s cracked up to be?, by Joseph Stiglitz, Daily Times, Pakistan: Alan Greenspan attained an almost iconic status as Governor of the Federal Reserve Board. ... Few central bank governors have the kind of hagiography lavished upon them, especially in their lifetime... But what makes for a great central bank governor ... great institutions or great individuals? ...[T]here is little doubt that those “managing” the economy receive more credit than they deserve, if sometimes less blame. ... So ... while no central bank governor can ensure economic prosperity, mismanagement can cause enormous harm. Many of America’s post-World War II recessions were caused by the Fed hiking interest rates too fast and too far. There is little doubt that Greenspan had great moments... These successes ... reinforced Greenspan’s exalted status. But they also led many to forget less successful moments. ...
[T]he real problem for Greenspan’s legacy concerns what happened to the American economy in the last five years, for which he bears heavy responsibility. Greenspan supported the tax cuts of 2001 with the most specious of arguments – that unless something was done ... the national debt would be totally paid off within, say, ten to fifteen years. According to Greenspan, immediate action needed to be taken to avert this looming disaster, which would impede the Fed’s ability to conduct monetary policy! It says a great deal about the gullibility of financial markets that they took this argument seriously. More accurately, tax cuts were what Wall Street wanted, and financial professionals were willing to accept any argument that served that purpose... Greenspan’s irresponsible support of that tax cut was critical to its passage. ...
But soaring deficits did not return the economy to full employment, so the Fed did what it had to do – cut interest rates. Lower interest rates worked, but not so much because they boosted investment, but because they led households to refinance their mortgages, and fueled a bubble in housing... [A]s Greenspan departs, he leaves behind an American economy burdened with high household and government debt and fragile balance sheets – a legacy that is already contributing to global financial instability. It is still not clear what led Greenspan to support the tax cut. Was it a massive economic misjudgment, or was he currying favor with the Bush administration? The most likely explanation is a combination of the two, for he and Bush were pursuing the same “starve the beast” political strategy...
The traditional argument for an independent central bank is that politicians can’t be trusted to conduct monetary and macroeconomic policy. Neither, evidently, can central bank governors, at least when they opine in areas outside their immediate responsibility. Greenspan was as enthusiastic for a policy that led to soaring deficits as any politician ... engendering support from some who otherwise would have questioned its economic wisdom. This, then, is Greenspan’s second legacy: growing doubt about central bank independence. Macroeconomic policy can never be devoid of politics: it involves fundamental trade-offs ... Unemployment harms workers, while the lower interest rates needed to generate more jobs may lead to higher inflation, which especially harms those with nominal assets whose value is eroded. Such fundamental issues cannot be relegated to technocrats, particularly when those technocrats place the interests of one segment of society above others. Indeed, Greenspan’s political stances were so thinly disguised as professional wisdom that his tenure exposed the dubiousness of the very notion of an independent central bank and a non-partisan central banker. Unfortunately, many countries have committed themselves to precisely this illusion, and it may be a long time before they take heed of Greenspan’s most important lesson. Stressing the new Fed chief’s “professionalism” may only delay the moment when this lesson is learned again.
I share these views, but my own take is more tempered. The chair is designed to bring political influence to the FOMC, the four year appointment and the ability to be reappointed make political considerations important. But on the FOMC, the chair has become a dominant voice leading to questions about how well other interests are represented in the deliberations and outcome of monetary policy decisions. To me, that is where the problem begins. To the extent that FOMC decisions will be driven less by the wishes of a single person under Bernanke, that will be a welcome change.
Posted by Mark Thoma on November 12, 2005 at 12:12 AM in Budget Deficit, Economics, Monetary Policy | Permalink
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Last May 2004, we detailed the research of Kenneth H. Thomas (Wharton Finance Lecturer), titled Fed Chief's Calendar Includes More White House Face Time. Thomas' analysis was somewhat critical about the decreasing independence of the Fed, as its Chair ... [Read More]Tracked on Nov 12, 2005 4:03:54 PM
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I agree with Joseph Stiglitz on these points:
"Greenspan supported the tax cuts of 2001 with the most specious of arguments – that unless something was done about America’s soaring fiscal surpluses, the national debt would be totally paid off within, say, ten to fifteen years. According to Greenspan, immediate action needed to be taken to avert this looming disaster, which would impede the Fed’s ability to conduct monetary policy!"
"It says a great deal about the gullibility of financial markets that they took this argument seriously. More accurately, tax cuts were what Wall Street wanted, and financial professionals were willing to accept any argument that served that purpose. Of course, if, say, by 2008 the disappearing national debt really did appear to pose an imminent danger, Congress would have happily obliged in cutting taxes or increasing expenditures."
Anyone researching future federal program needs knew that Greenspan was ignoring the outyear federal funding obligations for programs such as medicare, medicaid, and social security. It was clear that he was being less than forthright in his remarks, however narrowly expressed. It was one of the most disappointing presentations I ever heard. But Greenspan went on to top that one with his 'sword in the back' speech of August 27, 2004:
"As a nation, we owe it to our retirees to promise only the benefits that can be delivered. If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels. If we delay, the adjustments could be abrupt and painful. Because curbing benefits once bestowed has proved so difficult in the past, fiscal policymakers must be especially vigilant to create new benefits only when their sustainability under the most adverse projections is virtually ensured."
http://www.federalreserve.gov/boarddocs/speeches/2004/20040827/default.htm
Before the August 27, 2004 'sword' speech, Greenspan set the hook for changing the mortgage purchasing pattern, only to reverse his position in 2005.
The Fed Should Take More Responsibility for the Housing "Bubble"
http://economistsview.typepad.com/economistsview/2005/07/the_fed_should_.htmlA Tale of Two Greenspans
http://economistsview.typepad.com/economistsview/2005/07/a_tale_of_two_g.htmlGreenspan showed his true colors too many times.
Posted by: Movie Guy | Nov 11, 2005 10:24:17 PM
Andrew Card said "There's no need for a trigger if you have responsible budgeting, and this tax relief plan is responsible in a responsible budget. You know, there's $5.6 trillion of surplus, and that's a very conservative estimate." April 2001 Meet the Press - This issue was the first of many deceptions by this administration with the consent of Greenspan and O'Neill despite the fact each by their own account knew better. Lie to the American people on television, sound reasonable and then force the centrist senators into the cattle pen by saying they are blockading a good idea that Americans want. THE PRICE OF LOYALTY had it all and still half the American public would not believe that the political cabal inside the WH would destroy the middle class if it would keep them in power for a few more years. And Greenspan's fingerprints are on the trigger.
Posted by: 11 dogs | Nov 12, 2005 2:58:46 AM
Joseph Stiglitz is arguing that central bank independence is a myth, as much so here as in Britain where agency independence of any sort is questionable. The most independent central bank may be the Euro bank because there is a distance between the bank of any single country and especially so between the bank and any electorate. Central bankers are not directly elected, but a central banker who is not responsive to political needs will find there is a replacement readying.
Alan Greenspan, who is especially sensitive to the direction of the economy, was unforgivably irresponsible in creating a sense that the surplus we had in 2000 was eternal and about to swallow us. What a disgrace. Suddenly, a short while later, Greenspan would find deficit deficit deficit and Social Security and Medicare became the dire threat. Disgraceful.
Posted by: anne | Nov 12, 2005 3:54:15 AM
There is a significant potential problem in Brazil that should be attended. Brazil's stock market is up 22,2% in domestic currency, but 51.4% in dollars. As strong as the dollar has been this year, Brazil's currency is far stronger. Brazil's currency is the strongest of all currencies; there is no comparison. This remarkable strength has to eventually work significantly against the balance of trade, raising imports and cutting exports and limiting economic activity in Brazil at a time when interest rates are high and further limiting economic activity. Such an imbalance has caused problem after problem from Mexico to Argentina in the past, and I am worried.
Posted by: anne | Nov 12, 2005 4:59:53 AM
Also, there is a fine bull stock market in Europe and Asia. the Europe index is up 20.4%, while the Pacific is up 26.7% in domestic currencies. I am most impressed by how international stock market have compensated for currency weakness from Germany to Japan. The international bull makret is deep and very broad.
Posted by: anne | Nov 12, 2005 5:06:28 AM
http://www.nytimes.com/2005/11/12/business/worldbusiness/12retail.html
November 12, 2005
Low-Cost Credit for Low-Cost Items
By PAULO PRADARIO DE JANEIRO - Márcia Regina da Cruz, a 40-year-old janitor and mother of three, decided to splurge.
Ms. da Cruz, who lives in São Vicente, a coastal town an hour's bus ride from São Paulo, made a purchase in September equal to one-fifth of her monthly salary. She bought three irons - one for herself and two as gifts for her mother and sister - for 72 reais, or just over $32.
"It was a big purchase," she said. "I normally couldn't pay for it."
She could, though, because of a new policy at CompreBem, a supermarket chain owned by Grupo Pão de Açúcar, Brazil's biggest retailer. The plan allows her to pay for the purchase in 10 interest-free monthly installments of about $3.20 a month.
Big retailers in Brazil are lowering the bar for what they will sell on credit. Though the country's shops and department stores have long sold big-ticket items on installment plans, Brazilian and multinational retailers, like Wal-Mart Stores and Carrefour of France, have begun offering purchase plans with monthly payments that come to no more than one or two reais - about 45 to 90 cents.
The shift is an effort by retailers here to squeeze more spending from the big, but cash-short, bottom of the consumer base in Brazil, South America's biggest economy. Amid a tepid recovery that has yet to blossom into strong, sustained growth in retail demand, vendors are going to new lengths to help low-income Brazilians pay for everything from their weekly rice and beans to inexpensive items like clothes, radios, blenders and other goods. The installments are interest-free until a payment is missed, and then interest of at least 3 percent a month is charged.
"Retailers are trying to wring the very last bit of disposable income from consumers who would like to buy more, but often can't," says Paulo Francini, an economist at the Federation of Industries of the State of São Paulo, an influential business organization....
Posted by: anne | Nov 12, 2005 5:59:18 AM
'Appreciate that view of the position, Chairman, as one that comes up for review every 4yrs.
So the independence of the Fed body might have some legitimacy but that position, Chairman, is probationary. (Have there been chairmans in the past who have been replaced for political reasons?)
Has there ever been a more devoted chairman that Greenspan to his current political bosses?
Clinton could have? replaced Greenspan, a Republican with someone less combative (compare Greenspan on Bush w Greenspan on Clinton for a taste of what an independent Fed feels like) but declined, giving the man some room to enlarge his place in history.Posted by: calmo | Nov 12, 2005 6:25:36 AM
Notice that the chief executive of Amtrak was quietly replaced a few days ago, despite having an excellent record, over an Administration wish to limit Amtrak in future. Politics is everything to the Administration in appointments. But, agency directors do not have to be replaced at once. Enough usually to let political displeasure be known. Bill Clinton seldom used appointments in the way George Bush increasingly has, as political weapons.
Posted by: anne | Nov 12, 2005 6:51:32 AM
The history of the Fed in my lifetime (I was born in 1957) has been protecting the real yield of the long bond. There is a lot of talk about inflation and wages and the immediate impacts of Fed decisions but the eye has always been on the ball of the rich people who can afford investments that come in $100,000 increments.
For a certain segment of the investing community current account deficits are not a problem but an opportunity to demand a higher yield on their loans to the government. And Greenspan has been their lackey for decades. When the overall debt spirals into the heavens and interest rates soar some people are collecting big dollars. Their chief enemy is inflation and to the extent that inflation is fueled by an increase in wages they are against increasing wages.
Greenspan doesn't and didn't care about the interests of workers. He practically panicked when they took away the thirty year bond, because that but some billionaire at risk of just becoming a multi-millionaire.
Posted by: Bruce Webb | Nov 12, 2005 10:39:07 AM
