Most Austrians are quick to blame Greenspan for the 2008 financial crisis. The criticism stems from Greenspan's perceived mishandling of interest rates in the years after the dot-com bust. Greenspan, it seems, suppressed interest rates and sparked a credit expansion and subsequent purging consistent with a classic Austrian Business Cycle.
In his book "Age of Turbulence" Greenspan expresses the conflicts he had to resolve in being a libertarian AND a regulator. He had to work within the parameters of his remit, otherwise his reign at the FED would have been quite short. Greenspan is of the view that the continuing effects of globalisation are the principal reason for the global downward pressure on interest rates. Competion from Asia is having a disinflationary effect in the developed world. Interest rates therefore had to be low to prevent possible deflation.
Due to the absence of a "free-market in money" the setting of interest rates is largely arbitrary and subject to whim. I feel that Greenspan is being unfairly impugned as of late. Where am I mistaken?
It's much more accurate to say "Having a central bank credit monopoly is a bad idea!" instead of "Greenspan set interest rates too low!"
Interest rates should be determined by the free market and not by a handful of insiders.
Even if Greenspan had good intentions, he's still responsible as Federal Reserve Chairman. He didn't go around saying "The Federal Reserve is immoral!"
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
Your summary in a nutshell of Greenspan's rational for lowering interest rates sounds like nothing but a Keynesian view of the economy. In that case, why is he being "unfairly impugned"?
It is not Keynesian. Greenspan recognised the market forces at work. He knew interest rates had to be at an appropriate level to create equilibrium. Market-set interest rates, as we know, would have solved the problem automatically but Greenspan's principal job is to determine the Fed funds rate. He may object to it philosophically but that what he was paid to do. He couldn't abdicate his responsibilities. (Plus he was largely at the mercy of his fellow Fed board members)
Greenspan was raised to the level of being a symbol of the Fed's "responsible" policies, and the United States' prosperity during his tenure, now that the boom turned to bust, he is still a symbol, yet now he is being torn down rather than raised to a level of an oracle of the economy as before. The harsh vitriol against Greenspan may very well be unfair, but it was innetivable due to the prestige he held during the boom.
Abstract liberty, like other mere abstractions, is not to be found.
- Edmund Burke
IrishLiberal: It is not Keynesian.
It is not Keynesian.
So what is it?
IrishLiberal: Greenspan recognised the market forces at work. He knew interest rates had to be at an appropriate level to create equilibrium. Market-set interest rates, as we know, would have solved the problem automatically but Greenspan's principal job is to determine the Fed funds rate. He may object to it philosophically but that what he was paid to do.
Greenspan recognised the market forces at work. He knew interest rates had to be at an appropriate level to create equilibrium. Market-set interest rates, as we know, would have solved the problem automatically but Greenspan's principal job is to determine the Fed funds rate. He may object to it philosophically but that what he was paid to do.
So he was not really a Keynesian, but he was paid to be one?
IrishLiberal: He couldn't abdicate his responsibilities.
He couldn't abdicate his responsibilities.
..of being a Keynesian?
IrishLiberal: Most Austrians are quick to blame Greenspan for the 2008 financial crisis. The criticism stems from Greenspan's perceived mishandling of interest rates in the years after the dot-com bust. Greenspan, it seems, suppressed interest rates and sparked a credit expansion and subsequent purging consistent with a classic Austrian Business Cycle. In his book "Age of Turbulence" Greenspan expresses the conflicts he had to resolve in being a libertarian AND a regulator. He had to work within the parameters of his remit, otherwise his reign at the FED would have been quite short. Greenspan is of the view that the continuing effects of globalisation are the principal reason for the global downward pressure on interest rates. Competion from Asia is having a disinflationary effect in the developed world. Interest rates therefore had to be low to prevent possible deflation. Due to the absence of a "free-market in money" the setting of interest rates is largely arbitrary and subject to whim. I feel that Greenspan is being unfairly impugned as of late. Where am I mistaken?
Blame Keynesians (to the tune of):
"Look at me, I'm quoting another user to show how wrong I think they are, out of arrogance of my own position. Wait, this is my own quote, oh shi-" ~ Nitroadict
IrishLiberal: Competion from Asia is having a disinflationary effect in the developed world. Interest rates therefore had to be low to prevent possible deflation.
Competion from Asia is having a disinflationary effect in the developed world. Interest rates therefore had to be low to prevent possible deflation.
It's interesting to note that it was Friedman and Schwartz who suggested that deflation and economic growth were not absolute opposites. In fact, much of the 1870s were characterized by periods of price deflation and economic growth (the so-called "long depression", in other words, was not really a depression). Jesús Huerta de Soto uses Friedmand and Schwartz in his book, Money, Bank Credit and Economic Cycles, to provide historical basis to the Austrian theory of capital and investment, and the fact that in a healthy, free market there should be deflation.
What Greenspan didn't believe in, or realize, was that setting interest rates low by increasing the supply of money would distort the market and misallocate resources in accordance with that distortion of time preference. When the bubble popped it seemed as if he finally recognized this relationship, then blaming China on the increase in the money supply (although his defenders go on to claim that M2 did not grow as much as is claimed).
IrishLiberal: It is not Keynesian. Greenspan recognised the market forces at work. He knew interest rates had to be at an appropriate level to create equilibrium. Market-set interest rates, as we know, would have solved the problem automatically but Greenspan's principal job is to determine the Fed funds rate. He may object to it philosophically but that what he was paid to do. He couldn't abdicate his responsibilities. (Plus he was largely at the mercy of his fellow Fed board members)
So, he sold out? He purposefully did something he was morally against for the money?
You don't need to resort to moral grounds to not fix interest rates- economically, it's like being in charge of choosing which major financial center to carpet-bomb.
Interest rates are not set. There are hundreds of interest rates and they're not arbitrarily chosen. The Fed has less power over interest rates than you think. It has a considerable amount of control over certain short term rates but even then its power over investment is very limited. There is some evidence that the Fed pushed these rates too low from 2004-2006 but neither story (the Fed or Asian savings) is very convinving. Low interests rates were at best only a minor contributing factor to the bubble.
In other words: Greenspan may or may not have contributed to the bubble but it doesn't make much of a difference.
And yes, I'm taking ABCT into account here.
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Praetyre: You don't need to resort to moral grounds to not fix interest rates- economically, it's like being in charge of choosing which major financial center to carpet-bomb.
Like I said, I don't know whether or not Greenspan recognized this relationship to be true. He was not an Austrian, he was always a quasi-Monetarist. His moral standpoint was that he believed inflation to be the confiscation of savings (and it is), but decided to embark on this confication of savings anyways. He surrendered his morality.
Jakem: There are hundreds of interest rates and they're not arbitrarily chosen.
There are hundreds of interest rates and they're not arbitrarily chosen.
The Federal Reserve can control key interest rates by controlling the money supply.
There is some evidence that the Fed pushed these rates too low from 2004-2006 but neither story (the Fed or Asian savings) is very convinving.
The Federal Reserve admits to having set interest rates for the past decade, but sees nothing wrong with it.
Low interests rates were at best only a minor contributing factor to the bubble.
Low interest rates, according to the ABCT, were the main reason for the bubble (well, inflation, or an increase in the supply of money was the key factor).
The problem isn't the interest rate per se, it is the expansion in the supply of money, which distorts the interest rate from what it would have been. Usually this means that during the boom, interest rates are lower than they would be without an expansion of the money supply, and during the bust (if one is allowed to take place), interest rates rise above what they would have been without the boom & bust in the first place.
The truth is this: The Federal Reserve has all of the tools necessary to completely stop the expansion of the money supply as traditionally defined, all it would have to do is raise reserve requirements to 100% and keep them there.
Given that Greenspan *clearly* expressed his view that inflation is a hidden tax (in Capitalism: The Unknown Ideal) that hurts those that can least afford it, and never *clearly* expressed why it's okay for the Federal Reserve to do what it does, he is clearly a sell out. No matter if you apply his semi-monetarist semi-Randian standard or an Austrian standard. And ignorance is no excuse for evil, in any case.
Stop focusing on interest rates, and look at the more important issue, inflation, which the Federal Reserve can completely eliminate or strongly influence the course of.
I'm sure everyone has read the article we've been referring to. If not, it is: Gold and Economic Freedom.