2008 Woodie Awards
Any frequent reader of Princeton’s own New York Times columnist Paul Krugman knows he doesn’t much like Alan Greenspan. So it was no surprise that Krugman came out shooting and slashing at the Chairman today right after a weekend of celebration in honor of Greenspan’s legacy as, perhaps, the best Fed Chairman and central banker in history. Krugman has previously called Greenspan a political hack, and today he likened the chairman to “a man who suggests leaving the barn door ajar, and then - after the horse is gone - delivers a lecture on the importance of keeping your animals properly locked up.” But there are a number of points in Krugman’s op-ed where he sullies reality.
-Krugman writes that Greenspan “gave decisive support to the Bush administration’s irresponsible tax cuts.” But Greenspan never supported the Bush tax cut specifically. Rather he supported tax cuts with “triggers” that would automatically kill the cuts if certain conditions were met (like projected deficits). Greenspan’s thoughts are never simple or unqualified, and it is purely the media’s fought that Greenspan is indicted by Krugman as such. Headlines appearing in major newspapers after he testified before Congress about the cuts tout that the Fed Chairman “Supports Bush’s Tax Cuts.” The problem is the media errs (and often does when reporting about Greenspan) on the side of simplicity in characterizing the very complex positions the Chairman takes.
Greenspan’s triggers were ignored by Bush and the consequences of the big tax cuts, long-term deficits, thus are strictly the fault of our President, not the Fed Chairman.
-Krugman also accuses Greenspan of changing positions by first supporting risky interest-only loans and exotic forms of adjustable-rate mortgages, but then going against them in the span of a year. I don’t see this as a valid point of criticism, given how financial markets tend to overdo things and go to extremes (like huge up and down swings in the stock market, for example). A year ago, interest rates were still very low and the existence of other options besides the traditional fixed-rate mortgage (such as the adjustible-rate where the rate swings with the interest rate) were limited. Greenspan made the observation that in other countries fixed-rate mortgages were not prevalent because such mortgages charged too high of a fee to maintain the fixed rate (so getting an adjustible-rate mortgage may be cheaper). A year ago, we also saw a wave of mortgage refinancing as people took advantage of lower interest rates. Greenspan’s point was that had adjustible rate mortgages existed in further abundance earlier, then people would have saved considerably if they chose that type to start out with since no refinancing would then be needed, thus eliminating extra costs.
People in the finance world saw the housing boom as an opportunity to sell more interest-only and other exotic forms of mortgages: they took advantage of the situation and ordinary folks persuing a house. Like financial derivatives which have grown in complexity and foolishness, mortgages got riskier and more complex. This was an overdoing of Greenspan’s relatively innocent and uncorrupt call for wider mortgage variety, thus his call for caution about them now. Times change, and it’s fortunate that we have a chairman who changes his opinions when reality presents new facts. Krugman was right that Greenspan was inconsistent, but it was a completely rational move on his part.
As Greenspan heads toward his retirement date of January 31, 2006 (he’s not out yet yet), we should appreciate his efforts and accomplishments as Fed Chairman. Whoever is out to replace him, be it Ben Bernanke, Glenn Hubbard, Martin Feldstein or someone else, the Greenspan record over the past eighteen years will be tought to match.
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