Chapter 20 of his “The Age of Turbulence” opens with Greenspan in 2004 perturbed by the fact that he had started increasing interest rates and long term rates were not budging. This was named the “conundrum” and it has haunted Greenspan ever since. His recent self defense in the WSJ (March 11) was mostly a rehash of his arguments in chapter 20 of his book adding to it a criticism to John Taylor´s accusation that the house bubble was his fault for keeping the Fed Funds rate too low for too long.
A few days ago there was a heated debate involving, on one side Greg Mankiw and, on the other, Krugman and Brad DeLong. The spat revolved around the CEA deficit projection based on the prediction of relatively fast growth down the road. According to the CEA: “A key fact is that recessions are followed by rebounds. Indeed, if periods of lower-than-normal growth were not followed by periods of higher-than-normal growth, the unemployment rate would never return to normal”.
An economy awash, almost drowned, in liquidity and tripping over stimuli being thrown all over the place. Government interference everywhere. As if the problems the US and world economy are going through had nothing to do with previous government meddling.
Over the last eight or nine years, the “Great Moderation”, which dates to about 1984, was “discovered” and ascertained. It´s worth reminding that Walter Heller, Kennedy´s head of the CEA, thought in the early sixties that economists had learned to control the business cycle. According to his group of friends and advisors, which included future Nobel winners such as James Tobin, Paul Samuelson and Robert Solow, the business cycle was “dead”. Soon after, the “Great Inflation” took off! From the “Great Inflation” to the “Great Moderation”; what´s next? According to President Obama, if a series of drastic interventionist measures are not undertaken, the recession will turn into a “catastrophe”. More likely a “catastrophe” will happen if he and his advisors don´t “stop to think things through”.
According to Mandelbrot,
“pictures are undervalued in science, they are not trusted…” but “…nowadays the picture can aid, not mislead (or replace!) the scientist. It permits instant comparison, instant comprehension…” 1
Greenspan is not having an easy time in his retirement after almost 20 years at the helm of the Fed. The WSJ described his recent (October 23) testimony before Congress as “a painful spectacle to watch” (i.e. pathetic). Expressions like “the mess that Greenspan made” or “Greenspan´s folly” are frequently heard. To Jeffrey Sachs, among many others, “this crisis is mostly the Fed´s doing during the period of easy money…”
In the old English crime novels, the butler was always the prime suspect. In the present crisis, the “butler” is deregulation, assisted by other sleazy characters such as “cheap money”, “Asian savings”, “excessive liberalism and laissez-faire” and, according to presidential candidate John McCain, “wild greed” manifested in rampant speculative activities that created the house price bubble.
If you´re on the lookout for Inflation, in Brazil or anywhere else, follow the Money; not Exchange Rates (or, for that matter, energy prices). After crossing the barriers put up by nominal, or real, stickiness’s, inflation remains a monetary (from whatever source) phenomenon! But many doubt that simple “truth”. In 1986 the late Rudi Dornbusch, […]
This has been the monotonous story for more than two years. Just to mention two very recent posts: Christian Menegatti (Aug 29) asks “where is this recession already”, while David Wyss (Aug 29) sees “recession returning in the third quarter”. All this reminds me of the popular Looking for Wally game from seven or eight […]
In moments of crisis, the advantages derived from economic stability can be better appreciated. The behavior of inflation is a case in point. A representative comment goes: “when the headline CPI is higher than the CPI-core for many months, you can bet that inflation in the CPI-core is around the corner”. In “A turning point […]
Recently (July 24) Antonio Carlos Lemgruber argued that the “overvaluation problem” of the Brazilian currency was somewhat overblown, albeit he concluded that some “overvaluation” (about 30% with respect to the major currencies) could be identified. Depending on the base period used for comparison of the appreciation of a set of currencies against the US Dollar […]