Alan Greenspan on Trial

The release of Alan Greenspan’s ghostwritten memoirs The Age of Turbulence has elicited charges that he was not such a great central banker after all. Stan Collender of National Journal sees the fingerprints of the White House on these attacks: Greenspan is harshly critical of George W. Bush’s administration, after all, and to attack the credibility of Republican ex-policymakers who are critical of Bush is standard counterpunching for it. But what is one to make of the criticisms of Greenspan’s tenure at the Federal Reserve?

The indictment contains four counts: that Greenspan wrongly cheered the growth of non-standard adjustable-rate mortgages, which fueled the housing bubble; that he wrongly endorsed Bush’s tax cuts; that he should have reined in the stock market bubble of the 1990’s; and that he should have done the same with the real estate bubble of the 2000’s.

To the first two counts, Greenspan now pleads guilty. He says that he did not understand how the growth of non-standard mortgages had lured borrowers and investors into bearing dangerous risks. He was, he now says, focusing on how fixed-rate mortgages are relatively bad deals for borrowers in times of low inflation, which was a mistake.

Greenspan also pleads guilty to a mistake in early 2001. He thought that he was giving balanced testimony to Congress on government budget issues. He testified that it is important to run surpluses to pay down the debt, but that surpluses must not be so large that the government winds up owning American industry. He also testified that tax cuts are better than spending increases to keep surpluses from growing too large, but that uncertainty is enormous, so that any tax cuts should be canceled if they threatened to bring us back to an age of deficits.