Alan Greenspan failed to reign in the stock bubble and then he failed to reign in the housing bubble. The latest jobs report suggests that we are about to pay a very big price for Mr. Greenspan's failures. Interestingly, Mr. Greenspan accepts no blame for his failure, having told a group of economists yesterday that "the human race has never found a way to confront bubbles." Most people would not want their kids to hear that. Just imagine, they will come home with an "F' on their report card and tell their parents "the human race has never found a way to do homework." Just imagine if we had custodians who could tell their boss "the human race has never found a way to clean toilets." Mr. Greenspan had plenty of tools in his toolkit at the Fed to confront the stock and housing bubble. First and foremost he could use his enormous megaphone as Fed chair to warn investors and individuals about the stock bubble. That doesn't mean mumbling "irrational exuberance." It means using numbers and charts to carefully explain that stock prices are inconsistent with virtually any projections of future stock growth, unless we believe people no longer expect to get any significant preimum for holding stock rather than government bonds. If Mr. Greenspan had made this point in enough public presentations, then some of the brainless fund managers invested in the 5000 Nasdaq might have begun to fear personal negligence suits for being incredibly irresponsible with other people's money. The first question in any liability suit would be "what was your response to Chairman Greenspan's analysis?" Similarly, if Greenspan had pointed out that house prices had diverged in an unprecdented way from long-term trends and from rent back in 2002, as some of us urged, it may have helped stem the growth of the housing bubble. This result is especially likely if he pointed out that many actors in the secondary mortgage market were likely going to face large losses when house prices revert to trend and large numbers of loans went bad. In both cases, publicly making the arguments that Mr. Greenspan apprently held in private could have had a very large impact on financial markets. In any case, it is hard to see what possible negative effects could have resulted from giving markets more information. We need someone at the Fed who can deal with asset bubbles. By his own admission, Greenspan was not up to the job, but that doesn't put it is beyond human capabilities. This point should be made clear in reporting on this topic.
--Dean Baker
