Sunday, May 11, 2008

How Greenspan Went Wrong--and How to Make It Right -

Alan Greenspan allowed the overheating of the housing market. He wanted to help the economy, so he lowered interest rates again and again. This induces inflation and pushed the US dollar lower. Bernake followed the weak dollar push and allowed the price of oil to climb to the stratosphere. Steve Forbes sums it up: Greenspan wasn't satisfied with his powerful job; he played God. How It Went Wrong--and How to Make It Right -
The chief rap against Greenspan is that he loosened money too much after the high-tech bubble burst in 2000--01 and kept it loose even when the economy began to recover vigorously in 2003. The former chairman has also been criticized for the Fed's failure to crack down on growing abuses in the mortgage lending market. ... This is a misbegotten view of what central banking's main mission should be. The Federal Reserve should have two key tasks--and only two: preserving the integrity of the dollar and dealing vigorously with financial panics to limit unnecessary damage. Greenspan's woes came about precisely because he lost sight of the Fed's prime job: ensuring a stable dollar. In the late 1990s Greenspan inadvertently tightened up. The most sensitive barometer of market mistakes is gold. During that time the yellow metal plunged to a low of $250 an ounce. Other commodities crashed, with oil dropping to nearly $10 a barrel. For a time the dollar became too dear, which contributed to the 2000--01 recession. When it became clear--just before George W. Bush was sworn in as President on Jan. 20, 2001--that the economy was skidding, Greenspan realized his mistake and started to reverse gears. But he stayed too easy, even when the economy was back on track. In 2004 gold began to surge well above its 12-year average, and oil began its long, rapid ascent, as did all other commodities. The dollar weakened not only against gold but also against other currencies, such as the yen, the Swiss franc and the pound. With money easy, the already buoyant U.S. housing market began to go berserk as lending standards started to decline precipitously.
See also: Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve, by William A. Fleckenstein with Frederick Sheehan. Other sources: Robert Campbell; Inside Mortgage Finance.

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