Financial Daily from THE HINDU group of publications
Wednesday, Nov 16, 2005
Financial Daily from THE HINDU group of publications Wednesday, Nov 16, 2005 |
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Money & Banking
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People Columns - Financial Scan Myth of the independent central banker S. Balakrishnan
MR Joseph Stiglitz is not your next door average man. He is among the most respected economists in the world. More important, he has something which Mr Alan Greenspan, the Chairman of the US Federal Reserve doesn't - a Nobel Prize in Economics. So when he says something, we better listen carefully. Mr Stiglitz is hardly overawed by Mr Greenspan's reputation. The Fed chief wins his approval for his handling of the 1987 Wall Street crash, when the central bank offered as much liquidity as necessary to the market. But Mr Stiglitz holds him squarely responsible for the consequences of the rate rises of the early nineties for fear of inflation. It proved to be a false alarm. The economy paid a heavy price for the bogus call, slipping into recession. Father George Bush still blames Mr Greenspan for losing him the 1992 Presidential election. The mid and late-nineties saw the American economy boom. Mr Greenspan was on track increasing interest rates from the low of 3 per cent. These did not deter stocks. By 2000, Dow Jones Industrial Average had shot up to 12,000 and the Nasdaq to 5,000 levels. Then came the crash. The Fed started cutting rates in early 2001 which turned into a spree after 9/11. Much of the criticism of Mr Greenspan centres around his tolerance of asset bubbles. Indeed, some go so far as to accuse him of being insensitive to the phenomenon. Mr Greenspan's response has been that monetary policy is essentially to do with goods and services inflation. Asset prices should not drive interest rates. In an era when "conventional" inflation is disappearing because of productivity and competition, easy money finds its way into stocks and property. How should central banks react? There is no clear cut answer at the moment. Mr Stiglitz thinks Mr Greenspan is a consummate politician. The independent central bank is a myth, at least as far as the US is concerned. As evidence, Mr Stiglitz points to Mr Greenspan's support for Bush's tax cuts which did nothing for the economy and only increased the deficit (for which he advocated spending cuts). He also faults Mr Greenspan for going along with the Administration on Social Security reform and mostly exaggerating the risk of a collapse of the Social Security system. Mr Greenspan knew that tax cuts were no stimulus and would only benefit the rich. So he kept interest rates artificially low as a prop-up. This, in turn, led to the real estate bubble. It is virtually an accusation of intellectual dishonesty. The crafty Fed chief turns out to be craftier than we thought!
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