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Mix-Ansicht- Greenspan: The Mind of God? / interess. Artikel, mises.org, engl. - --- ELLI ---, 24.09.2002, 17:54
Greenspan: The Mind of God? / interess. Artikel, mises.org, engl.
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<font face="Verdana" size="1" color="#002864">http://www.mises.org/fullstory.asp?control=1044</font>
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<font face="Arial" size="2"><font face="Verdana" color="#002864" size="5"><strong>Greenspan: The Mind of God, or Merely Omniscient?</strong></font>
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<font size="4">By Robert Blumen</font>
[Posted September 09, 2002]
[img][/img] Once
lauded in congressional love-fests and accorded rock-star-like status by
legions of stock market investors, Federal Reserve Chief Alan Greenspan is
increasingly being attacked by critics.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn1" name="_ftnref1">[1]</a>
A previous generation of promoters blamed Greenspan for raising interest rates
in 2000 and causing the bear market.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn2" name="_ftnref2">[2]</a>
A new set of critics now claims that Greenspan failed to take sufficient
action to pop the emerging stock market bubble before it got out of hand. His
famous “irrational exuberance” speech in 1996, and recently released FOMC
minutes from the same year, indicates that Greenspan, in spite of his public
agnosticism about asset valuations,<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn3" name="_ftnref3">[3]</a> was
aware of a bubble several years before it peaked.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn4" name="_ftnref4">[4]</a>
Greenspan himself recently weighed in on the matter, claiming that there
was no way for the Fed to have deflated the stock market bubble without
risking an unnecessary recession, and, moreover, that they weren’t even
really sure that there was a bubble until after it burst.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn5" name="_ftnref5">[5]</a>
The current debate over Greenspan’s alleged policy failures misses the
crucial question: Could anyone, no matter how capable and well-informed,
successfully perform the job that he is supposed to do? Were his alleged
errors sins of incompetence? Could a better man than Greenspan have done a
better job?
The issue is whether there is any economic rationality in the way that a
central banker sets interest rates at a particular level. Mainstream economic
doctrine holds that central bankers are necessary in order to prevent the
economy from lapsing into recession or overheating into inflation. Can a
central banker also save the economy from a stock market bubble? Greenspan is
certainly right to ask how he should identify when a bubble is present.
Greenspan is a central banker. The term “central banker” was adopted to
deliberately obfuscate the nature of the job, because it sounds better than
“price controller.” A central bank can select from an array of economic
interventions collectively known as monetary policy. The Fed can raise or
lower key interest rates for interbank borrowing and for commercial bank
borrowing from the Fed. The Fed can also engage in “open market
operations”--the purchase and sale of debt securities from the U.S.
Treasury, or in securities markets (and maybe other securities in other
markets, as well as some ominous news leaks portend).<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn6" name="_ftnref6">[6]</a>
The Fed can also raise or lower margin requirements for the purchase of stocks,
thereby controlling the amount of leverage that equity investors can use.
These interventions are aimed at setting (generally increasing) the
quantity of money and the terms of credit transactions in the economy.
Contrary to mainstream economic doctrine, the Austrian School maintains that
the process of central banking is what produced the stock market bubble.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn7" name="_ftnref7">[7]</a>
During the euphoric peak of the bubble, Greenspan’s supporters attributed
a god-like omniscience to the Messiah of Monetary Policy. But
surprisingly, his detractors don’t question the need for a central banker to
possess the mind of God, as some of the imagery used in the debate will show.
A laudatory book acclaimed him as <em>Maestro,</em><a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn8" name="_ftnref8">[8]</a>
an honorific term for the conductor of an orchestra. A conductor’s job is to
envision in detail the performance of a work of music, then to coach and train
the orchestra to bring this realization about. The conductor uses his powers
of insight, analysis, persuasion, communication, and baton technique to
communicate his views about the work and coordinate the actions of the players.
When the performance takes place, the maestro coordinates the actions of
dozens of players via hand motions and his baton to produce a technically
correct and artistically satisfying performance.
Maestro Greenspan is depicted as a talented central economic planner, one
who can conceptualize the output of the economy, then coordinate the
activities of millions of economic actors to keep the economy functioning at
peak levels. In his role as a coach, he can “talk the economy up” and
“talk the economy down” as needed. The Maestro must determine the correct
rates of interest, the optimal quantity of money. He must fight inflation and
keeps the economy out of a recession, and be on guard for asset price bubbles.
Another metaphor is provided by Morgan Stanley’s bearish strategist
Stephen Roach, who has been nearly alone among Wall Street analysts in calling
attention to the negative consequences of the bubble. Roach argues that the
Fed could have “surgically” popped the bubble by raising margin
requirements on stock brokerage accounts.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn9" name="_ftnref9">[9]</a>
A surgeon is a highly skilled medical doctor who performs complex
operations on live patients to remove or repair damaged or infected body
tissue without permanent injury to the patient. Surgery requires an incredible
degree of manual skill as well as a detailed knowledge of anatomy, physiology,
and pathology. Surgeons must make a diagnosis of the problem, and then take
into account the balance between the risk of the operation itself and the risk
of allowing their medical problem to deteriorate.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn10" name="_ftnref10">[10]</a>
They operate on the patient, maintaining a life-support system while cutting
into body tissue.
Greenspan, as the Master Surgeon of the Economy, must use his diagnostic
skills to identify inflation, deflation, or asset price bubbles before the
economy suffers a terminal illness. He must then burst them with such skill
that they pop harmlessly before they damage the economy. In the same manner
that a surgeon must balance the risk of the further spread of disease should
he not operate, Greenspan must delicately balance the social costs of an
unskillfully burst bubble against those of an increased risk of an unnecessary
recession should he raise interest rates too quickly.
The problem with the metaphors discussed above is that they wrongly
conceptualize the problem Greenspan faces. The job description that
Greenspan's critics have blasted him for failing to perform is impossible.
In a market economy, there will be exchanges between those who wish to
consume in the present and those who are willing to forego present consumption
for future consumption. When exchanges of present for future occur in a money
economy, the ratio between present and future quantities is called the rate of
interest. The interest rate is a price that balances the supply and demand for
the exchange of future goods for present goods.
One of the most important reasons for borrowing in an economy with division
of labor and a supply of accumulated capital is to fund the creation of
capital goods. The rate of interest is a very important in this process
because it organizes the entire capital structure of the economy.
In searching for profit opportunities, investors must perform economic
calculation. This is a prospective estimation of profit and loss based on
anticipated prices that will be paid and received by a business venture. At
any given time in a complex economy, many production possibilities are
technologically feasible. Entrepreneurs allocating capital are essentially
looking for the most profitable opportunities, a task that requires
economically meaningful prices.
The interest rate is a very important price in economic calculation because
it is a means by which present and future uses of resources can be balanced
against each other. In addition to anticipated prices of inputs and
outputs, the investor must balance present and future uses of investment funds
against one another. This calculation requires an estimation of the price of
borrowing, or cost of funds, over the life of an investment project.
One of Mises's many important contributions to economic thought was to show
that production decisions must be made by private property owners putting
their own savings at risk, using market prices if there is to be any economic
rationality to the way that prices are formed and production is organized.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn11" name="_ftnref11">[11]</a> If
not, production will result in losses that consume the accumulated store of
capital rather than profits, which add to it.
This is true because in the market economy, prices are formed by the
judgment of many entrepreneurs risking their own wealth. These many
decision makers cannot be replaced by a single central planner. Market prices
are determined by the buyer who anticipates the greatest economic value for a
given resource and the seller who has the least use for it. Decentralized
decision making by multiple owners of assets is necessary to discover profit
opportunities within the economy.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn12" name="_ftnref12">[12]</a>
A central planner would have control over the production plan of the
economy but not ownership. Without putting their own funds at risk of loss,
there is no incentive for the central planner to seek out profit opportunities,
so the resulting prices (if there are any) will not reflect the best known use
of each form of capital. There is no economically rational way for a
central planner to set the correct price of anything.
For a central planner to arrive at the correct price would require him to
have the ability to foresee the outcome of a market process involving millions
of individual actors. Without the ability to see into the future, there is no
way for the central planner to substitute his own judgment for the results
produced by the market. The recent demise of the Soviet planned economy has
since converted many skeptics to the truth of Mises's argument.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn13" name="_ftnref13">[13]</a>
We can apply Mises's critique of central planning to the credit markets. Mises
would argue that the rate of interest in credit markets should be determined
by savers who supply funds and borrowers who demand them.
The metaphors used to describe Greenspan--even by his critics--embody the
assumption of omniscience. There is no basis to believe that Alan Greenspan or
anyone else knows what the right rate of interest is at any time, or has any
means at his disposal to figure it out, any more than a price controller could
set the right price for shoes, cars, or trombones.
By setting interest rates at a fixed level between FOMC meetings (surprise
inter-meeting rate cuts aside), the Fed must be willing to supply any amount
of fiat money that borrowers want to borrow at its fixed rate. The interest
rate is not allowed to rise to reflect the increase in borrowing.
Ultimately, consumption is limited by production, and economic growth is
limited by available savings. If entrepreneurs borrow more to invest in
production processes without increasing savings, interest rates will naturally
rise until it is no longer profitable for business investors to increase their
borrowing. There is no need for a controlled price, nor is there any way
for the price controller to arrive at the natural balance between loaning and
borrowing that would occur by activity of savers and borrowers in credit
markets.<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftn14" name="_ftnref14">[14]</a>
"Monetary policy" must be seen for what it is: a
destructive form of central planning that distorts resource allocation and
makes it more difficult for individuals to plan. The demise of Al.com is
entirely just.
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Robert Blumen is an independent enterprise software consultant based in San
Francisco. Send him MAIL, and see
his Mises.org Daily
Articles Archive.
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<div id="ftn1">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref1" name="_ftn1">[1]</a>
See for example"Fed Chief Now Blamed for Inflating Stock Bubble,"
<em>Los Angeles Times</em>, Peter Gosselin, July 21 2002, p A.1.;"Give
Gree<span class="166560313-09092002">n</span>span’s Fed Its Share of the
Blame," William Greider, <em>The Washington Post</em>, August 13,
2002;"The
Case Against Alan Greenspan,<em>"</em> Mark Gongloff, CNN/Money.
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<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref2" name="_ftn2">[2]</a>
See for example: Paul Sperry, Greenspan
derailed the New Economy: Fed chief makes up for missteps costing high-tech
jobs, trillions, who states, “But data show that he is merely
trying to return the punch bowl to a party he ended--for no good reason,”
and goes on to blame Greenspan for killing the economic expansion.
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<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref3" name="_ftn3">[3]</a>
Exemplified by his
statement"To anticipate a bubble about to burst requires the
forecast of a plunge in the prices of assets previously set by the judgments
of millions of investors, many of whom are highly knowledgeable about the
prospects for the specific investments that make up our broad price indexes
of stocks and other assets."
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<div id="ftn4">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref4" name="_ftn4">[4]</a>
FOMC
Transcript.
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<div id="ftn5">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref5" name="_ftn5">[5]</a>
"Greenspan
Says Fed Could Not Prevent Market Bubble"
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<div id="ftn6">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref6" name="_ftn6">[6]</a>
"Fed
Considered Emergency Measures to Save Economy," <em>The Financial
Times</em>, March 24, 2002. This article states, “The official, who
asked not to be named, would not elaborate but mentioned ‘buying US
equities’ as an example of such possible measures, and later said the Fed
‘could theoretically buy anything to pump money into the system’,
including ‘state and local debt, real estate and gold mines - any asset’.”
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<div id="ftn7">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref7" name="_ftn7">[7]</a>
The
Stock Market, Profits, and Credit Expansion, George Reisman.
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<div id="ftn8">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref8" name="_ftn8">[8]</a>
<em>Maestro:
Greenspan’s Fed and the American Boom</em>, Bob Woodward, Simon and
Schuster, 2000.
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<div id="ftn9">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref9" name="_ftn9">[9]</a>
"Global:
Smoking Gun," Stephen Roach.
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<div id="ftn10">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref10" name="_ftn10">[10]</a>
Roach’s suggestion to “surgically” pop the bubble in the stock market
suggests that stock prices can be separated from the rest of the economy. But
this is not so. Stocks are a proxy for the price of capital goods. As
the price of stocks rise, more investment is drawn into sectors experiencing
the greatest growth. The physical capital structure and business
organization of the economy is changed. This is why bubbles do so much
damage, and why their unwinding is so painful.
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<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref11" name="_ftn11">[11]</a>
"Economic
Calculation in the Socialist Commonwealth," Ludwig von Mises.
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<div id="ftn12">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref12" name="_ftn12">[12]</a>
<em>Man,
Economy, and State</em>, Murr<span class="166560313-09092002">a</span>y
N. Rothbard, Ludwig von Mises Institute, 1993. pp. 333-356 and
360-364.
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<div id="ftn13">
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref13" name="_ftn13">[13]</a>
Heilbroner,
for example.
<a title href="http://www.mises.org/fullstory.asp?control=1044#_ftnref14" name="_ftn14">[14]</a><font size="2">
Assuming a sound monetary system without fractional reserve banking.
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