If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.
Now, Alan Greenspan has issued an epilogue to his memoir, "Time of Turbulence," and it's about what's going on in the credit market. And he says, "Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated."
[Greenspan] absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage.
I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom.
Tuesday, October 21, 2008
Anna Schwartz criticizes Greenspan & Bernanke
Anna Schwartz, who along with Milton Friedman, wrote the classic economics book A Monetary History of the United States, is harshly critical of Bernanke, Paulson, and Greenspan.