Former Fed Chair Alan Greenspan discussed the Federal deficit in a WSJ OpEd yesterday. In it, he argued that the budding “urgency to rein in budget deficits” is occurring “none too soon.”
Like most of the former Fed Chair’s analyses, forecasts, and economic beliefs, this one is pure, unmitigated nonsense. A brief look at the Greenspan legacy, along with his track record of forecasts, leads to the obvious conclusion: Greenspan is an economist to blithely ignore, as his commentary contains almost nothing of value other than its status as a contrary indicator.
Before we get into the details of his deficit commentary, I must highlight this sentence: “The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy.”
No, Alan, the financial crisis was not triggered by Lehman’s collapse. You are getting the causation exactly backwards: The crisis is what triggered LEH’s collapse. Further, the fall of Lehman was hardly “unexpected.” Whether you want to look at stock price before the collapse, spreads on its debt, David Einhorn’s forensic accounting (he was short LEH) or our own quantitative analysis (we were short LEH), there were plenty of warnings about Lehman’s collapse. It was only unexpected by those whose ideological beliefs blinded them to reality. (Remind you of anyone?)
Moving onto his discussion about the deficit, the hypocrisy leaps out in nearly every paragraph. Any Greenspan related discussion of current deficits must begin with his specific role in helping to create them.
Not, understand one thing: I pay my share of taxes, and they are not insubstantial. Thus, I am in favor of properly funded tax cuts – meaning, reductions in taxes that are paid for with a matching reduction in spending. But Not Greenie . . . When the Bush White House proposed a trillion dollars in unfunded tax cuts in 2001, and again in 2003, Greenspan publicly endorsed them. (Why a sitting FOMC chair got involved in the politics of tax legislation, as his support of privatizing Social Security, is best saved for another day).
Regardless, Greenspan’s lent the considerable prestige of the FOMC Chair to the debate, and arguably helped tip the scales in favors of these huge, unfunded, deficit creating tax cuts. His present argument now rails against the net results of his prior arguments. Perhaps some sense of guilt is driving him.
Regardless, history has proven him wrong about the costs of the tax cuts in 2001/03, History — namely, the post depression 1937/38 recession — shows how misplaced his current focus on deficit reduction is today.
More Greenspan foolishness:
“Despite the surge in federal debt to the public during the past 18 months"”to $8.6 trillion from $5.5 trillion"”inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.”
This is classic Greenspan, demonstrating a lack of knowledge, inconsistency, and disconnected belief system:
1) To say that “remarkably subdued” inflation and long-term interest rates is regrettable reflects 1) a lack of understanding of the current deflationary environment;
2) If inflation and higher interest rates are the “typical symptoms of fiscal excess,” then perhaps the message of the markets is that deficits during the immediate aftermath of a huge recession are not a problem? For a guy who supposedly placed incredible trust in the markets, he sure does cherry pick what he wants, and disregards the rest.
3) The surge was caused by the enormous shortfall in tax revenue due to the recession, and the massive costs of bailing out the banking sector. Treating these costs as if they are ordinary budget items is ridiculous.
I can go on and on, but its the weekend. Before I give it a rest, I must point out that Greenspan’s forecasting inability. After Greenspan announced his retirement in 2005, I discussed some of his greatest hits in Myths of the Greenspan Era:
Greenspan is arguably the most incompetent economist of his generation, yet still retains some credibility amongst the uninformed. OpEds such as this one serve as reminders of that . . .
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Sources: U.S. Debt and the Greece Analogy ALAN GREENSPAN WSJ, JUNE 18, 2010 http://online.wsj.com/article/SB10001424052748704198004575310962247772540.html
Myths of the Greenspan Era Barry Ritholtz The Street.com, 01/31/06 – 11:08 AM ESThttp://www.thestreet.com/story/10265345/myths-of-the-greenspan-era.html
Amen.
I think John Mauldin aptly describes the consequences of deficit reduction in the current global economic environment.
Be Careful What You Wish For
I agree. Hard to believe the guy could be so blind. He still can’t admit his mistakes. I’m with you on every point, Barry.
Greenspan makes as much sense as Kudlow.
I think this is a brilliant commentary on this bamboozling ideologue. I vividly recall how blithely unconcerned he was about deficits when he came out and supported the George W tax cuts. He had the unmitigated audacity to say to Congress, when he was told that his statement would tip the scales in favor of the tax cut, that he couldn’t help it if his words were misinterpreted!!! (I think this is in Ron Suskind’s book about Treas Sec Paul O’Neill, “The Price of Loyalty”.) This from a man who had spent his whole career developing Greenspeak so he could hide his meanings in public statements! This guy is such a huge hypocrite that I don’t see how he can fail to go down in history as one of the worst Fed Chairs ever. If you would like to see a remarkable contrast to Easy Al read “Chairman of the Fed: William McChesney Martin Jr., and the Creation of the Modern American Financial System” by Robert P. Bremner.
Seems to me he is appeasing the very same ideologues that flip flop on deficits for political reasons. The king dollar crowd is now wondering if a strong dollar (relative to other fiats) is hurting. Last year they were berating a weak dollar and praising the merits of a strong dollar. It is all about winning some seats in the upcoming election. Go team go!
Right wing neo-con total idiot is about the nicest thing you can say about that old fool. The truth is probably worse. They want to slam the economy into a 1937-38 style dip in order to be able to blame Obama and the democrats, and gain back control.
this is a beautiful paragraph, BR:
“No, Alan, the financial crisis was not triggered by Lehman's collapse. You are getting the causation exactly backwards: The crisis is what triggered LEH's collapse. Further, the fall of Lehman was hardly "unexpected." Whether you want to look at stock price before the collapse, spreads on its debt, David Einhorn's forensic accounting (he was short LEH) or our own quantitative analysis (we were short LEH), there were plenty of warnings about Lehman's collapse. It was only unexpected by those whose ideological beliefs blinded them to reality. (Remind you of anyone?)”
Do you think Alan Greenspan & Ben Stein are in some sort of idiocy contest?
>> “The financial crisis, triggered by the unexpected default of Lehman Brothers…”
Un-believable. Greenspan can’t even articulate *that* causality correctly? C’mon… Yes, ACS is right: Greenspan must be competing for this year’s Ben Steinery Award.
“…yet still retains some credibility amongst the uninformed.” And to think of all the Maria Bartiromo ‘exclusives’ CNBC has trumpted since his departure from the Fed…
I doubt Greenspan is a fool or an idiot. He is a self serving, social climbing, power mad, evil man. He knew full well he was wrecking the economy as much as Clinton and Bush I- Bush II did, and as much as Angelo Mozillo et al, and the GS/JPM/wrecking crew did. As long as they control wealth and power, they do not care who suffers as a result, or if they bring their own country to ruin. Take Hitler, Goering, and Goebbels out of their uniforms, and dress them in Brooks Brothers suits. Then imagine they decide to use stealth, the financial markets, and the political process instead of the Wehrmacht and Luftwaffe to destroy the world. No War Crimes trials and you get to enjoy your loot in an (for you) intact society. That sums it up for me.
Thanks for the great piece today! To quote Charlie Munger: “I have nothing to add”
Keynes is dead!
kmckellop 916, remember been there done that? It’s over Keynes is dead!
Is it better now with Bernanke? Maybe Obama should make Brooksley Born head of the Fed.
[...] "But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy.” Or, how Alan Greenspan reaffirms his position as the most incompetent economist of his generation: The Big Picture [...]
I know no Greanspeak, but in plain English want to say : Please, Greenspan DIE now and leave us alone.
Great post, Barry.
I’m a retired community college political science instructor.
My biggest regret as a teacher? Drum roll, please…
Telling students in the early years that Greenie was a great fed chairman.
I worry more about Bernanke, who has the gall to discuss the deficit, knowing full well that it is not the primary concern of the country.
Republicans are united by a pathological fear of being deemed weak. The war mongers of the bunch like to invade countries and kill people to prove their mettle; the economists on the other hand gravitate to Ayn Rand, and get off on a perfect world populated only by super men. Currently the litmus test for whose got the biggest sack is, who can shout the loudest for fiscal austerity. Given this criterion, Paul Ryan apparently has balls the size of grapefruits (and a brain the size of a pea). Is it any wonder David Brooks has such a crush on him? Brooks has always loved boys who have brains and brawns that are inversely proportional. Just look at Brooks’ recent foray into economics if you want to see evidence of pathology invading a person’s perspective.
I am deadly serious when I say that I think many Republicans are literally out of their minds, driven entirely by feelings of inferiority. The sad truth is that the war mongers stir up chaos thousands of miles away. The economists, however, wreak havoc at home.
Yeah, Greenspan was/is bad. Bernanke is worse. But just as when Greenie held the reigns, we wish so much to still believe that economic wizardry can lead us to the promised land. For Americans, that means world hegemony so soccer moms can drive hulking SUV’s with one kid in them and Dad can watch the US Open on his gigantic TV after mowing with a John Deere tractor the few tufts of grass left over after construction of his five bedroom McMansion.
Greenspan (and now Bernanke) get to be so ridiculously stupid because they reinforce our delusions about things we don’t wish to understand or acknowledge. They are the modern equivalent of Medieval priests.
Greenspan was wrong about a lot of things.
But the question remains as to whether we are better off with more federal spending (and higher taxes), or less.
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