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The Greenspan Counter-Factual

Alan Greenspan on the counter-factual to the Fed’s 2001-2004 easing cycle:

“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Mr. Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”

Mr. Greenspan said that if he had taken steps to prevent the crisis, the outcome would have been painful.

“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”

posted on 13 February 2009 by skirchner in Economics, Monetary Policy

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Yeah, so instead of applying some moderate pressure to restrain the boom, we’ll endure a decade or so of economic stagnation while the politicians decide what to do about the insolvent banking sector.

In Japan’s Stagnant Decade, Cautionary Tales for America

Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

Ideology is preventing the US authorities from doing what needs to be done.

Posted by .(JavaScript must be enabled to view this email address)  on  02/13  at  10:01 AM


Unlike the ideology that seems to be driving the US stimulus bill.

President Obama has commented on possibly following the Swedish path.  It is clear enough that bringing reality to financial markets about what things are, and are not, worth is really the key thing.  But there is a difference between what is likely to work in a relatively small, still basically monocultural society (Sweden) compared to a much larger, much more diverse in every way society (the US).  The “differing traditions” President Obama refers to exist for a reason.

That being said, guarantees without control are not good.  Temporary nationalisation may be a sensible option.  But the stimulus bill is going to blow out the US Federal budget so far, not sure whether the funding will be there to do what might need to be done.  Yet, even on its best Keynesian reading, the stimulus bill is not going to be effective unless the financial system is fixed.  As you say, see Japan on that.

Posted by Lorenzo  on  02/13  at  10:09 PM


See today’s post.

Posted by skirchner  on  02/14  at  02:18 AM


The quote by Alan Greenspan (above) is being used as evidence by American free-market economists to add to their growing literature on the “Myth of Central Bank Independence”.

Posted by Sukrit Sabhlok  on  02/15  at  11:15 AM


Greenspan was being rhetorical.

Posted by skirchner  on  02/15  at  08:20 PM


Another chapter in Greenspan’s auto-hagiography.

Posted by .(JavaScript must be enabled to view this email address)  on  02/16  at  06:36 AM


Given the criticism leveled against him from across the spectrum, he has a right to set the record straight.

Posted by skirchner  on  02/16  at  07:20 AM


Clamping down on the credit markets before the mania really got going with Ninja loans etc.. would unlikely have led to the 10% unemployment he imagines..a typical recession at best. Nice try Greenie.

He may be getting too much of the blame, but this guy never shyed away from taking credit for the boom.  And he certainly hasn’t shyed away from using the Wall St/ Washington revolving door to pick up some very big paychecks from Pimco and John Paulson.  So he remains part of the problem.

Posted by .(JavaScript must be enabled to view this email address)  on  02/16  at  08:35 AM


Oh BTW, you should watch the CNBC documentary from which this Greenspan quote was taken.  Shall we say its not exactly supportive of your view that this crisis was caused by government intervention—quite the opposite—but I doubt that will change your religious convictions.

Posted by .(JavaScript must be enabled to view this email address)  on  02/16  at  01:11 PM



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