The recent cratering of stocks caused a lot of panic amongst the chattering classes. Fueling this panic was not just “Black Tuesday in Shanghai” but also everyone’s favorite former Federal Reserve chairman, Alan Greenspan. He reportedly claimed that a recession was “possible,” and investors, who treat Greenspan as some kind of mystic oracle, panicked.
Leaving aside the weird messiah-seeking tendencies of investors (if it ain’t a CEO or Mad Money, it’s Greenspan), the whole question is why Greenspan continues to meddle with the economic matters that aren’t his job to do.
Obviously Greenspan has a right to voice his opinion. But the duties of the Fed are to be fastidiously non-partisan and to avoid meddling with the economy as much as possible aside from interest rates. Much as I hate to cite John Roberts, to paraphrase him, the Fed Reserve chief is like an umpire, and “nobody ever went to the ball game to see the umpire.”
I freely admit that this would be a bit of an overreaction on its own, but Greenspan has shown an unfortunate pattern of moving from monetary policy to fiscal policy. There are two relevant examples, with Bill Clinton and with George W. Bush.
In David Halberstam’s War in a Time of Peace, Halberstam relates how, when Clinton was first elected, he wanted to invest in infrastructure. But the deficit was perceived to be too large, and the question was whether interest rates would be kept low. Enter Alan Greenspan, who promised to lower interest rates if Clinton went deficit hawk. In fact, the opposite was true also; Greenspan promised to keep interest rates in line if Clinton didn’t attack the deficit. Leaving aside whether or not it was the right way to go—there’s a pretty vigorous debate, especially from Robert Reich—it nevertheless is a seminal moment when the Federal Reserve chairman forces his ideology on the President.
Or, consider Greenspan’s role in helping Bush pass through those disastrous tax cuts. Again, Greenspan traded in on his celebrity for personal ideological ends.
Now, independent of Greenspan’s actual ideology—which I disagree with—the means are terrible. The Federal Reserve has wisely been enshrined as non-partisan; central banks in other countries that aren’t non-partisan have poor records. When monetary policy is used as a political tool to dominate fiscal policy, bad stuff usually happens—we think too much about short-term, rather than long-term economic strategy. There’s no doubt that Greenspan is political—where are the complaints about the deficit today? Aren’t the deficits the least bit worrying to him? No. Who happens to have created this fiscal mess? Oh, right. Never mind.
Greenspan has definitely proven himself wrong through his works, but his position is entirely one of commentary. After all, he could be a Cassandra. But so many poor shmucks continue to believe him. Why?
Well, there are two reasons. The first is the dogged lack of a response from the media. After all, his critics are tax-and-spend liberals, and who trusts them? Dirty hippies. Nevertheless, I think the second reason, that I mentioned earlier, is more interesting: that is, the messiah instinct.
We still are trusting Greenspan’s reputation from the 90’s as competent monetary operator, and so we imbue his words with otherworldly significance. It’s the savior instinct, that if we can find the one true hero, and follow his or her dictates exactly, we will succeed in the end. We can see the same attitude in football (things will change if we fire the coach) or business (things will change if we get a ‘visionary’ CEO) or wherever. But this is the antithesis of democracy. Choosing to follow these dictates blindly, taking our critical faculties out of the picture, is extremely dangerous