Luke Eckblad, Principal, Nova Capital Partners: Quoted in the Financial Times
(Please visit the FT Economists’ Forum at http://blogs.ft.com/wolfforum/ and then click on “Luke A. Eckblad on “Why Greenspan does not bear most of the blame.”)
On March 17, Alan Greenspan wrote an article for the Financial Times’ Economists’ Forum entitled “We will never have a perfect model of risk“, in which he argued: “We will never be able to anticipate all discontinuities in financial markets.” He concluded: “It is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation [do] not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.”
The article attracted a number of critical responses from forum contributors, consisting of some of the world’s leading economists, which include two Noble Prize winners, Edmund Phelps and Joseph Stiglitz.
On April 6, Greenspan responded to his critics in a follow-up article entitled, “A response to my critics.”
On April 9, the FT associate editor and chief economics commentator responded with an article entitled, “Why Greenspan does not bear most of the blame.”
Luke A. Eckblad, a Principal with Nova Capital Partners, was invited to comment as a guest contributor. Here are his comments, which were posted today:
Greenspan’s Fed is not to blame for the current US economic situation for several reasons.
First, economics is not an exact (predictive) science. Rather, it is an indeterminate science. A one-size-fits-all fiscal prescription, as we have learned, does not exist. Greenspan made rational decisions based on theory, statistics, and, as a creature of his own experience (like us all), his own personal pre-scientific cognitive vision about how the world works, i.e., his ideology. To say Greenspan should have attempted to “lean against the wind” presupposes a belief that Greenspan knew not in what direction the wind blew and, if given the chance, we would have. Greenspan, in fact, was “leaning against the wind,” just not in the direction his critics with razor sharp clarity now demand.
On page 229 of The Age of Turbulence, Greenspan says:
“At the FOMC meeting in late June [2003], where we voted to reduce
interest rates still further, to 1 percent, deflation was Topic A. We
agreed on the reduction despite our consensus that the economy probably
did not need yet another rate cut. The stock market had finally begun to
revive, and our forecasts called for much stronger GDP growth in the
year’s second half. Yet we went ahead on the basis of balancing of risk.
We wanted to shut down the possibility of corrosive deflation; we were
willing to chance that by cutting rates we might foster a bubble, an
inflationary boom of some sort, which we would subsequently have to
address. I was pleased at the way we’d weighed the contending factors.
Time would tell if it was the right decision, but it was a decision done
right.”
Second, Greenspan faced rational decision-making demands against a backdrop of various irrational distractions and uncertainties: wars (Iraq), calamities (9/11), epidemics (SARS), fraud by the financial community (Enron, WorldCom, etc.), and so forth. These historic events (variables), in effect, disrupted and frustrated Greenspan's scientific forecasting methods encapsulated within his conceptual and policy framework. For instance, how could we possibly expect Greenspan to have made rational economic decisions within his existing long-term policy framework (no matter how strong or resilient) following probably the world's greatest irrational act ever perpetrated against capitalism--9/11? Again, economic forecasting without these variables is more art than science. How much more when faced with 9/11-style volatility? But is that to say Greenspan’s capital markets ideology when applied to his operational framework, which demanded the discipline to make hundreds of day-to-day decisions in the “real” world, and forecasting methods failed and we should thus invite additional government regulation as a consequence, inviting unwieldy governmental control and oversight? Better put, as Greenspan said in his closing remarks to his critics in this forum, “We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?”
Lastly, the modes of capitalism are always changing and will never be perfected. Capitalism, as described by the economist, Joseph Schumpeter, is a continuous evolutionary process without an end-point. The historic (and disastrous) distractions mentioned above disrupted the core of Greenspan’s capitalism in the sense of not allowing his mode of capitalism to operate freely within his rational, operational framework, which demanded the assistance of key partners–bank and government regulators, counterparties, and investors–backed by responsible actions by the financial community. I would argue nothing matters more than working with high-quality (ethical) partners in a capitalist society-especially when faced with excess volatility and inefficient markets. Hence while critics may ask at what point the Fed should have begun tightening monetary policy to push inflation below the normal target or why didn’t Greenspan “lean against the wind” or shouldn’t the US capital markets be more regulated I would suggest asking instead whether Greenspan had quality partners to assist him with improving the probability of fiscal success.
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