New Column: Myths of the Greenspan Era

RealMoneyMy new column is posted at, titled Myths of the Greenspan Era. Its a modest look at some of the economic urban legends that have
sprung up around Easy Al.

Based on yesterday’s Free Lunch discussion, it includes additional charts and data. Its also much less critical than our analysis back in 2004.

Here’s an excerpt: 

"Myth 1: Greenspan Whipped Inflation: This is by far the most pervasive fallacy of the era. It has added to the
Maestro’s legend — undeservedly so, in my opinion. This is probably the myth
that’s easiest to disprove.

Numerous factors have led to low inflation over the past few decades; none of
them have much to do with Greenspan.

To understand where you are, you must consider how you got here. And when it
comes to whipping inflation, it all begins with Chairman Paul Volcker.

As the chart of long-term interest rates reveals, inflation was spiking in
the late 1970s. The oil embargo of the early ’70s started an inflationary spiral
that threatened the entire economy. Growth was anemic, and Japan was a growing
threat to the industrial heartland. A post-Watergate and post-Vietnam malaise
hung over everything. It was not a particularly joyous period in the U.S. When
Volcker was appointed Fed chairman, inflation was in the double digits, and
growth was stagnant. That combination came to be known as "stagflation."

Fed Chair Volcker aggressively changed the way the Fed attacked inflation. He
forced some unpleasant but necessary monetary medicine down the gullet of the
American economy.

No helicopter drops for Volcker: The first thing he did was idle the Treasury
Department’s printing press. By limiting the growth of money supply — and
abandoning interest rate targeting — he made it clear that no matter how
painful in the short term, he was going to get runaway prices under control.
Inflation, which had peaked at 13.5% in 1981, was down to 3.2% by 1983. The U.S.
has been enjoying the fruits of his labor ever since."

Its on the free site. Go forth and read!.


Myths of the Greenspan Era, 1/31/2006 11:08 AM EST

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What's been said:

Discussions found on the web:
  1. John commented on Jan 31

    Let’s not forget these two things:

    Greenspan gave political cover for the most irresponsible fiscal policy in history, the Bush Tax Cuts.

    Greenspan didn’t just endorse the idea of a substantial tax cut. He offered a potent new thesis for why one is necessary. Without a tax cut, the chairman said, the federal government would pay down the entire $3 trillion of national debt before the end of this decade. Please.

    And lets not forget his participation in the 1983 plan to “Save Social Security”

    The plan was to raise payroll taxes on the middle class to create a surplus. Conveniently he then supported the Bush tax cuts on the rich which wipes out the surplus and creates a deficit.

    Then of course they announce that the resulting deficits mean that the Social Security benefits already paid for by the middle class need to be cut.

    Maestro or Hack?

  2. SmashBoy commented on Jan 31

    Interesting that Volcker was appointed by Carter. Volcker’s actions probably contributed a lot to Reagan winning in 1980 (I know, not the only thing what with the Iran hostages and all).

    But Volcker did what was right and necessary, which caused oil prices to come down and effectively propped up the Reagan economy. Unfortunately, it caused a bunch of Repubs to believe that deficits don’t matter, so here we are today.

  3. alan commented on Jan 31

    Can’t we be friends? The elder Bush says that he and Clinton “are like brothers”, while Hilary says the younger Bush is the worst president ever! Who would have thunk it?

  4. Michael commented on Jan 31

    Thanks for remembering PV. Most traders/investors either aren’t old enough or have forgotten the key role Volcker played as Fed Chair. And he’s doing the same thing with the audit of the UN oil for food.

    Someone on NPR noted PV did more to reduce the misery index (inflation rate+unemployment rate) than AG.

  5. calmo commented on Jan 31

    John hacks Greenspan pretty well with those 2 morsels, but I wonder if we aren’t missing his real contribution: the Greenspeak. Especially with the Bushmumbo which sent you scurrying for the ear muffs (ok, the complete frog mask with entertainment goggles). Greenspan managed to collect a devoted audience who tried to discern exactly what he was saying. The Fed under his tutelage/chairmanship made it to the Big Leagues –up there with say Entertainment and, on occasion, even the Sports Page. [I think people needed to know what Big Al said before they bought the house –such was his influence, such was/is the environment for buying the house.]
    Will Bernanke be able to parlay the pronouncements of the Fed in his own style or will he, too, be forced to work in the measured shadows of his predecessor? I believe the Spirit of Greenspan (not just the scent) will linger at those meetings and it will be quite some time before we hear the buzz of, say, helicopters.

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