Alan Greenspan, wizard or villain?

COMMENTARY

By Christopher Farrell

updated 1:05 p.m. ET June 29, 2005

Remember when Federal Reserve Board Chairman Alan Greenspan held sway over the American economy — and imagination? "By the dawn of the new millennium, it was nearly impossible to find anyone in America who wasn't gaga over Greenspan," writes Justin Martin in Greenspan: The Man Behind Money. "Democrats and Republicans, Wall Street, and Main Street, dogs and cats — all were high on the Fed chairman."

No more. Greenspan-bashing is now a popular sport among the Masters of the Universe. One reason is that the 10-year economic expansion came to an end with the dot-com bust and subsequent recession. Another is that Greenspan's standing as the Monetary Maestro was overhyped during the halcyon days of the 1990s. And the third is that his fallibility as a central banker was overemphasized during the difficult economy of the early 2000s. Indeed, the chairman has never recovered his lost luster.

Still, Greenspan's most vehement critics go a lot further than this. They're convinced he has made a fundamental error as a monetary economist. Call it the hairshirt economists vs. the cheerleaders for growth-is-good. The hairshirts believe that for the health of the economy to be restored, the inevitable bust that follows a boom must be at least as great as the boom. Growth proponents — and there's none greater than Greenspan — believe that it's better to limit the fallout of a bust and get the economy growing again as quickly as possible.

Worst-case scenario
To the hairshirts' way of thinking, the great mistake Greenspan made was not allowing for a vicious economic and financial downturn to purge the speculative excesses built up during the heady '90s. Instead, he convinced his colleagues to drive rates to a 45-year low to limit the damage from the recession. The Fed then nurtured the recovery by keeping money policy loose (until recently, that is).

The result: today's "low saving rates, the housing bubble, high debt loads, and a runaway current account deficit," writes Stephen Roach, chief economist at Morgan Stanley, in his essay "Original Sin." The critics say Greenspan has transformed the economy into a giant bubble, concocting one even greater than the one that already burst. The longer he delays the day of reckoning, the worse the fallout will be when the bubble pops.

That's a severe indictment — but not necessarily a valid one. A problem with the anti-Greenspan mindset is that hairshirt economics was largely discredited during the Great Depression. The most infamous proponent of this point of view was Andrew Mellon, President Herbert Hoover's Treasury Secretary. He called for letting the Depression run its course without government interference: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate," he remarked. Doing so would "purge the rottenness out of the system."

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