Former Fed chairman Greenspan seems finally to have grasped the historically demonstrable truth that an over-expanded economy will rebound more swiftly and on sounder footing when the government stays out of the picture.
Alan Greenspan’s tenure as chairman of the Federal Reserve was marked repeatedly, after the 1987 stock market crash, by his flooding the financial system with fiat money to offset declines in the stock market. Famously he chastised excessive financial market exuberance, while, in effect, pouring gasoline on a raging financial fire.
That is exactly the monetary policy, in spades, that current Fed chairman Ben Bernanke is pursuing. Coupling it with an excessive and misdirected barrel of congressional pork, the so-called stimulus program, has dug a deeper hole for the economy to climb out of and has made economic recovery unnecessarily difficult.
A Wall Street Journal article in the September 15, 2010, edition reports:
The former head of the Federal Reserve said fiscal stimulus efforts have fallen far short of expectations, and the government now needs to get out of the way and allow businesses and markets to power the recovery.
“We have to find a way to simmer down the extent of activism that is going on” with government stimulus spending “and allow the economy to heal” itself, former Fed Chairman Alan Greenspan told a gathering held at the Council on Foreign Relations in New York on Wednesday.
At this point, “we’d probably be better off doing less than more” because “you’d be far better off to allow the normal market forces to operate here,” Greenspan said. That’s largely because stimulus spending is not proving as effective as many had hoped. “To the extent the evidence suggests very large deficits concurrently crowd out capital investment, there is a debit to the stimulus program that is somewhere between a third and a half of what the gross stimulus is,” he said.
When things began to go south after the 2008 crash, Mr. Greenspan lamented that it is nearly impossible to detect burgeoning speculative bubbles. He also admitted that no group of economic seers, at the Federal Reserve or elsewhere, can possess the knowledge and skill to manage the entire economy, as the Fed is charged by Congress to do.
Mr. Greenspan still fails to acknowledge that the entire cycle of financial bubbles, from 1987 through the dot.comm boom and the housing and subprime mortgage collapse, resulted from an excessively easy monetary policy. If the Fed, in addition to its role as lender of last resort to member banks, were to concentrate upon maintaining a stable dollar value, there would be no massive, system-wide financial bubbles.
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