Nov 27 2008

Paul Volcker laughs last

Published by at 10:48 am under Opinion,Top Stories

The mythos that is Alan Greenspan took another hit with the appointment yesterday of Paul Volcker (81) to US president-elect Obama’s new Economic Recovery Advisory Board. Greenspan took over from Volcker as head of the Fed (US central bank) in 1987.

What an embarrassing moment for Greenspan: Volcker was recalled to clean up after him. On the other hand, this must be a sweet moment for Volcker, who was the more unpopular Fed chairman of the two, due to his policy of high interest rates in the 80s, which (according to Greenspan’s 2007 autobiography The Age of Turbulence) brought “economic misery” and “cost Jimmy Carter the 1980 election”.

Greenspan wasn’t very nice towards Volcker in his book. Greenspan said he “always found Volcker quite introverted and withdrawn”. On page 84 he wrote: “Volcker was a bit of a mystery to me.”

What did Greenspan have to say on the topic of “bubbles building” during his tenure as Fed boss? That was why I bought the book: I wanted to read Greenspan’s views on this problem and the criticism levelled at him (that his consistently over-accommodating monetary policy created huge imbalances). But, very little was said about the big issue of the day and he certainly didn’t accept responsibility for anything of the kind. In fact, he wasn’t sure a property bubble existed. 

We’ll have to wait and see how history treats Greenspan. And whether economic historians single him out as one of the main “causes” of the Big Crash of 2008. Whether they do, or not, the appointment of Volcker to clean up after Greenspan, might well turn out to have been the final nail in the coffin of this mythos.

A clear case of Volcker laughing last…

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One Response to “Paul Volcker laughs last”

  1. adminon 16 Dec 2008 at 9:48 am

    The latest issue of TIME Magazine is devoted to lists – the top ten of this and the top ten biggest of that…

    This list was one of many: “The Top 10 Financial Collapses”.

    At number nine on the list, TIME had this entry:

    9. Greenspan’s Reputation

    The Ayn Rand enthusiast was nearly branded the God of Money. As Fed Chairman, his easy money policy after the dotcom collapse in 2000 seemed like the perfect policy prescription for what ailed us. And it was. Until the chairman refused to do what Fed Chairmen are supposed to: take away the punch bowl just when the party’s getting good. By not raising rates quickly enough in a real estate bubble, Easy Al helped let the money flow to every high-risk, no document loan applicant extant. The former Fed Chairman was forced to admit that he was completely wrong about the risks in the system from subprime mortgages and the bonds sold against them. The man famous for his expository obfuscation was forced to admit: I screwed up.

    And here the other nine items on the list:

    1. Losing Lehman
    2. AIG’s Credit Default Swaps
    3. The Detroit Three
    4. The Citigroup Colossus
    5. Freddie Mac and Fannie Mae Shareholders
    6. Supposedly “Safe” Securities
    7. Rating Agencies’ Credibility
    8. Exploding Hedge Funds
    10. Iceland Goes Belly Up


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