Former Fed Chair Alan Greenspan discussed the Federal deficit in a WSJ OpEd yesterday. In it, he argued that the budding “urgency to rein in budget deficits” is occurring “none too soon.”
Like most of the former Fed Chair’s analyses, forecasts, and economic beliefs, this one is pure, unmitigated nonsense. A brief look at the Greenspan legacy, along with his track record of forecasts, leads to the obvious conclusion: Greenspan is an economist to blithely ignore, as his commentary contains almost nothing of value other than its status as a contrary indicator.
Before we get into the details of his deficit commentary, I must highlight this sentence: “The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy.”
No, Alan, the financial crisis was not triggered by Lehman’s collapse. You are getting the causation exactly backwards: The crisis is what triggered LEH’s collapse. Further, the fall of Lehman was hardly “unexpected.” Whether you want to look at stock price before the collapse, spreads on its debt, David Einhorn’s forensic accounting (he was short LEH) or our own quantitative analysis (we were short LEH), there were plenty of warnings about Lehman’s collapse. It was only unexpected by those whose ideological beliefs blinded them to reality. (Remind you of anyone?)
Moving onto his discussion about the deficit, the hypocrisy leaps out in nearly every paragraph. Any Greenspan related discussion of current deficits must begin with his specific role in helping to create them.
Not, understand one thing: I pay my share of taxes, and they are not insubstantial. Thus, I am in favor of properly funded tax cuts — meaning, reductions in taxes that are paid for with a matching reduction in spending. But Not Greenie . . . When the Bush White House proposed a trillion dollars in unfunded tax cuts in 2001, and again in 2003, Greenspan publicly endorsed them. (Why a sitting FOMC chair got involved in the politics of tax legislation, as his support of privatizing Social Security, is best saved for another day).
Regardless, Greenspan’s lent the considerable prestige of the FOMC Chair to the debate, and arguably helped tip the scales in favors of these huge, unfunded, deficit creating tax cuts. His present argument now rails against the net results of his prior arguments. Perhaps some sense of guilt is driving him.
Regardless, history has proven him wrong about the costs of the tax cuts in 2001/03, History — namely, the post depression 1937/38 recession — shows how misplaced his current focus on deficit reduction is today.
More Greenspan foolishness:
“Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.”
This is classic Greenspan, demonstrating a lack of knowledge, inconsistency, and disconnected belief system:
1) To say that “remarkably subdued” inflation and long-term interest rates is regrettable reflects 1) a lack of understanding of the current deflationary environment;
2) If inflation and higher interest rates are the “typical symptoms of fiscal excess,” then perhaps the message of the markets is that deficits during the immediate aftermath of a huge recession are not a problem? For a guy who supposedly placed incredible trust in the markets, he sure does cherry pick what he wants, and disregards the rest.
3) The surge was caused by the enormous shortfall in tax revenue due to the recession, and the massive costs of bailing out the banking sector. Treating these costs as if they are ordinary budget items is ridiculous.
I can go on and on, but its the weekend. Before I give it a rest, I must point out that Greenspan’s forecasting inability. After Greenspan announced his retirement in 2005, I discussed some of his greatest hits in Myths of the Greenspan Era:
July 20, 2004: Greenspan testified before Congress saying that rising energy prices “should prove short-lived.” Crude prices tripled form there. Summer 2004: Greenspan’s advice to would-be homeowners: Consider adjustable-rate mortgages. Surprising advice, considering that fixed-rate loans were near half-century lows. He then started raising rates, contributing to the huge foreclosure surge. May 2003: Greenspan made an amazingly bad call on natural gas when he warned of potential shortages; natural gas prices tumbled shortly thereafter. Summer 2003: Fed concern about deflation led Greenspan to suggest the Fed stood ready to make open-market purchases of Treasuries to ensure rates stayed low. He even convinced the Treasury market into believing that rates would stay low for a long, long time. Bond buyers discovered (to the detriment of their holdings) that this statement was false. October 1999: The Fed erroneously anticipates a Y2K-induced run on the banks, and it infuses liquidity. That surge in money supply effectively doubled the Nasdaq Composite from October 1999 to March 2000; I presume you recall how that ended. 1996: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?” Markets proceeded to rally strongly for another four years.
Greenspan is arguably the most incompetent economist of his generation, yet still retains some credibility amongst the uninformed. OpEds such as this one serve as reminders of that . . .
U.S. Debt and the Greece Analogy
WSJ, JUNE 18, 2010
Myths of the Greenspan Era
The Street.com, 01/31/06 – 11:08 AM EST