The WSJ has an interview with Greenspan in which he defends himself against his critics, many of whom were former acolytes. The WSJ discussion focuses on the views of the critics who only recognized Greenspan's failings in retrospect. Critics who saw Greenspan's errors at the time felt it was a serious problem to allow the stock bubble to grow unchecked to dangerous levels. The "savings glut" that Greenspan complained about in 2002-2004 did not fall from the sky, but rather was a direct outgrowth of the stock crash which both cut into investment and consumption through its destruction of wealth. (The over-valued dollar also contributed to the problem.) It was apparent that a housing bubble was growing in these years. Greenspan fostered the growth of this bubble not only with low interest rates but also with his repeated denials that there was any problem with prices in the housing market. If Greenspan had explicitly warned of the bubble, explaining carefully with charts and graphs how the run-up in house prices was inconsistent with longstanding trends in house prices, and could not be explained by the fundamentals in the housing market, it is likely that it would have taken the air out of the bubble years ago. He also could have warned explicitly of the sort of financial meltdown that we are now seeing, which would lead to hundreds of billions of dollars of debt write-downs by banks and other financial institutions. Such explicit warnings from the nation's central banker likely would have persuaded major actors in financial markets to act differently. This is the course of action that was advocated by some of us who recognized the housing bubble at the time. It is difficult to see any negative consequences that could have resulted from Greenspan providing accurate analysis to the public and financial markets. It is unfortunate that the pages of the WSJ and most of the rest of the business media were not open to this view years ago. It is remarkable that these views are still excluded from the debate.
--Dean Baker
