Greenspan: Worst economy I've seen; you're welcome

Alan Greenspan said that this is the worst economy he's seen, and that things are going to get worse before they get better, with more major financial firms failing. This is from the guy who shut his mouth after uttering a few words about "irrational exuberance" in 1996, lending tacit support to the tech stocks bubble that burst in 2000; then did everything he could to replace that bubble with the housing bubble whose bursting has caused the current mess.

In fact Greenspan's entire tenure coincides with the giant credit bubble that's been building since the '80s. While some could argue that the economy needed a credit-aided boost in 1982, by 1987 when Greenspan took over (and the stock market crashed for no reason other than worries over the sustainability of a credit-driven economy) steps should have been taken to ease us off the credit-crack. But politicians wanted none of that; let the good times roll! they said. And Greenspan followed in lock-step, appeasing Reagan (trade deficit with Japan? no worries), Bush I (we're not in a recession), Clinton (appearing at state of the nation address with Hilary), and Bush II (just say yes to monster tax cuts based on projected rather than real surplusses).

The last point needs repeating. Greenspan now claims he's never been "in favor of financing tax cuts with borrowed money," his support for Bush's tax cuts belies this. In that case, there was a projection of a 1.6 trillion dollar surplus over the next 10 years. Without qualifying his support, he gave the green light. The rest is history: no real surplus emerged, only continued giant deficits.

Greenspan's worst moment, and the one that gives him away as a shill for big money, was his call for more ARMs at a time when interest rates were so low they could only go up. There was no plausible reason to bring up a "historical reading" of the benefit of ARMs at the time he did. It played into the hands of those who wanted to make money on rate adjustments to the detriment of those buying homes. Rates were so low that banks needes some help making money, and Greenspan provided that help. He later said he was misquoted or taken out of context. But he did nothing to correct his view on ARMs in the press at the time. He could easily have said "what I just said about ARMs absolutely does NOT apply to the current situation; do NOT get an adjustable rate mortgage in this environment!" But he didn't.

In fairness Greenspan did an often amazing job tweaking the interest rates to avoid inflation while supporting economic growth. After the 1987 crash he managed to reassure the markets by making liquidity available; two years later it was as if Black Monday had never happened. In 1994 he may have avoided an inflationary upturn, then avoided a recession by increasing then cutting rates. He clearly let the stock bubble grow too much in hindsight, but political pressures of the time made him "experiment" with allowing faster growth, and from a purely economic standpoint—ignoring the tech stock boom—there was no reason to curtail growth, as inflation was not a problem. But by late 1997, the Asian currency crisis made it all but impossible to raise rates, and the Russian default crisis (and Long-Term Capital Management implosion) made it necessary to lower rates. When he finally began to pump rates up in 1999, he had to temporarily abandon this policy (unofficially), lowering rates to a de facto 1%, to avoid bank runs due to the Y2K problem (or rather, to the insane reaction to the Y2K problem). So even as rates were rising, too much liquidity was still in the stock market, and pumped it up for a few more months before the bubble burst. If Greenspan was to avoid that bubble, he should have started slowly raising rates in 1996...around the exact time he first uttered the words "irrational exuberance." Instead, he decided—or was told—to keep his mouth shut from then on.

His handling of the housing bubble was fully inexcusable, however. He basically denied that it was happening, even that it possibly could be happening, and left rates at a ridiculous low for far too long. During the stock boom rates were moderately low, not the 1% we saw during the acceleration of the housing bubble. He also did nothing about subprime credit problems, or the growth of derivatives that should have been a priority post-LTCM. His ARMs pronouncement was the final disgrace.

In short, Greenspan's observations about the current bad economy should be suffixed with a "you're welcome" because he helped bring it on to us. Although he did a good job in many respects, he's like a park ranger who does well saving individual trees but misses the growth of the blight on the entire forest. In the first part of his tenure, he established the credit-economy as business as usual; in the middle part he allowed the tech stock bubble to expand unabated; and in the latter part, his worst sin, he gave us the housing crises part and parcel. So thank you, Alan Greenspan; you were the best of Fed chairmen, and at the same time the worst. How the current crises pans out will determine how history remembers you.