Some people have asked me for reactions to a piece by Alan Greenspan in the latest edition of International Finance on how President Obama’s activism is preventing economic recovery.
I could go through the weak reasoning, the shoddy econometrics that ignores a large literature on business investment and ignores simultaneity problems. But never mind; just consider the tone.
“A basic premise of competitive markets, especially in finance, is that company management can effectively manage almost any set of complex risks. The recent crisis has cast doubt on this premise,” Mr. Greenspan writes. “But the presumption that intervention can substitute for market flaws, engendered by the foibles of human nature, is itself highly doubtful. Much intervention turns out to hobble markets rather than enhancing them.”
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Mr. Greenspan, who was chairman of the Federal Reserve from 1987 to 2006, writes in characteristic form: Other people may have their models, but he’s the wise oracle who knows the deep mysteries of human behavior, who can discern patterns based on his ineffable knowledge of economic psychology and history.
Sorry, but he doesn’t get to do that anymore. 2011 is not 2006. Mr. Greenspan is an ex-maestro. His reputation is pushing up the daisies, it has gone to meet its maker, it has joined the choir invisible. He’s no longer the Man Who Knows; he’s the man who presided over an economy careening to the worst economic crisis since the Great Depression — and who saw no evil, heard no evil, refused to do anything about subprime, insisted that derivatives made the financial system more stable, and denied not only that there was a national housing bubble, but that such a bubble was even possible.
If Mr. Greenspan wants to redeem himself through hard and serious reflection about how he got it so wrong, fine — and I’d be interested in listening. If he thinks he can still lecture us from his pedestal of wisdom, he’s wasting our time.
If you want a bit more economic analysis, read the economist Brad DeLong’s blog post on this topic. As he says, to accept Mr. Greenspan’s thesis you have to believe, simultaneously, that businesses are terrified of future confiscatory government action, and that investors are so bullish on business prospects that they’ve bid stock prices up hugely since Mr. Obama took office. Mr. Greenspan is just making stuff up — out of his deep wisdom, which he still believes in despite his failures — to support a political agenda.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007). Copyright 2011 The New York Times.