Later On

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Harsh judgment of Alan Greenspan

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“An arsonist and a fireman combined” — harsh words. The story:

Alan Greenspan, who led the U.S. Federal Reserve for 18 years and was revered in the financial markets, was a “very bad” Fed chairman.

That’s the blunt verdict of Patrick Artus, chief economist of Natixis SA and one of France’s most listened-to pundits: He is an economic adviser to the French government.

In his latest book (Les incendiaires: Les banques centrales depassees par la globalisation; or The Arsonists: Central Banks Overtaken By Globalization), Artus, 56, blames Greenspan and other central bankers for being so focused on inflation that they failed to prevent real-estate and stock-market bubbles which, in turn, burst and caused pain.

Artus joined me for a candid telephone conversation.

Nayeri: Do you really mean what you say in this book, or is this just a provocative pamphlet?

Artus: Oh no, this is a serious book. It’s not provocation.

What I’m saying is that there’s no point setting central-bank targets in stone, until the end of time.

It was perfectly legitimate for central banks in the 1980s and 1990s to have price stability as their target. Inflation was the problem back then.

Maybe in the future, say by 2010, with the rise in commodity prices, inflation will become our main problem again. But since the mid-1990s, inflation in the classical sense is not the problem. The problem now is asset-price inflation, and indebtedness, the reason being that globalization has wiped out inflation risk.

Nayeri: Joseph Stiglitz went on the record on Nov. 16 as saying that Greenspan had “made a mess” and that the U.S. now faced a recession. Do you agree?

Artus: Yes. Greenspan was an arsonist and a fireman combined. He derived all his glory from his reaction to the savings-and- loans crisis, to the collapse of Long-Term Capital Management LP, and to Sept. 11, 2001. But LTCM and the savings-and-loans crisis were his doing. He absolutely failed to see where the malfunctions in the U.S. economy were.

Greenspan came up with a phrase, “irrational exuberance,” in 1997, but he didn’t do anything about it.

Nayeri: How would you sum up his track record, then?

Artus: He was a very bad Federal Reserve chairman. He created four major crises: savings and loans, LTCM, new-technology shares, and subprime mortgages.

Nayeri: But surely you will acknowledge that Greenspan saved the planet at crucial turning points?

Artus: Yes, but after the fact. He’s congratulated for his role as fireman, but he’s the one who started the fire.

He had no vision of what was dangerous. Today, we’re destroying the world banking system with this subprime crisis. Outstanding subprime loans add up to $1.2 trillion. That’s the equivalent of Italy’s gross domestic product.

Nayeri: But the world has enjoyed economic prosperity in the meantime.

Artus: The problem is that you pay for it later.

You can always manufacture growth by having extremely low rates and producing asset-price bubbles. But that’s not a way to generate growth. You can’t do that in the long run.

Nayeri: What about Trichet and the European Central Bank?

Artus: It’s the same thing, only there’s no subprime crisis in Europe.

(French President Nicolas) Sarkozy’s criticism of the ECB is the opposite of mine. There is no evidence of any kind that European interest rates have slowed growth.

In fact, monetary policy saved growth, which is usually weak, by producing a real-estate boom. But we’re paying the price today. People are too deep in debt.

Nayeri: So which central bank has done well by your reckoning?

Artus: The most modern central banks are the Bank of England and the Bank of Sweden.

The Bank of England is the only central bank that has factored real-estate prices into its policy making, and that also looks at exchange rates. It has a global vision of the economy, and that’s what we like. They completely slipped up when it came to the banks, but that was the Financial Services Authority, it wasn’t them.

Les incendiaires is published by Perrin (175 pages, 14.80 euros.)

Written by Leisureguy

1 December 2007 at 8:48 am

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