The Hindu Business Line : The Greenspan debate continues

There are enough supporters for the Greenspan cause. In fact, the recent central bankers' conference at Jackson Hole in the US was largely a eulogy to him. No other recent Chairman of the US Federal Reserve or possibly chiefs of the ECB, Bank of England and the Bank of Japan faced as many major crises as Greenspan did — five in an 18-year stint or one about every three to four years.

On every occasion, the crisis was overcome without an enduring systemic collapse. The damage was limited in extent and, more important, time. Markets may have crashed in the immediate aftermath, but they quickly bounced back. No financial institution went down under. The credit, knowledgeable critics say, goes to Mr Greenspan, for not funking about cutting rates in situations he perceived were fraught with dire risk for the financial system and, by extension, the economy. As always, there are doubting Thomases. (Few of them seem to have been at Jackson Hole). They pronounce him guilty of stimulating the stock market "bubble" of the nineties, which ended in tears in 2000. It is not as if Mr Greenspan was quiet. He did push up interest rates to 6 per cent + levels from the lows of 3 per cent in the early nineties. He also thought the market was irrationally exuberant. Few paid any heed. Stocks continued their dizzy rise and the Dow touched 12,000 while the NASDAQ hit 5000.

Post-crash, Mr Greenspan was forced to cut rates. The process accelerated after 9/11 and saw the Fed slashing rates to the historic low of 1 per cent and keeping it there for an extended period of time. He's done it again, say his detractors. It is a different bubble this time but a bubble all the same, according to many. They attribute the current surge in house prices to the extraordinarily low financing costs for long-term mortgages because the Fed kept rates so low for so long. After pooh-poohing the likely consequences of the property boom, Mr Greenspan seems to be veering to the view that it does pose systemic risk. But he is confident that the extraordinary flexibility and recovery capacity that the US economy has exhibited through the last decade will ensure that if and when house prices start falling, the pain will be accommodated and borne with suitable non-disrupting adjustments in financial markets and the real economy.

Central banking, it seems, will have to go through a learning experience in the brave new world of low goods price inflation, asset bubbles, trade imbalances in the richest country and net capital flows from emerging economies to the First World keeping their long term interest rates low and defeating the intent of the latter's monetary policies.

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