Wolf and Roach: Greenspan’s Legacy

Former Federal Reserve chairman and "maestro" uberbanker Alan Greenspan has become the latest media scapegoat for the financial market crisis. Readers may find these competing views of his legacy interesting; they are by two longtime financial commentators, Morgan Stanley economist Stephen Roach, and Financial Times columnist Martin Wolf:

From Roach’s "Greenspan’s Follies":

What Greenspan missed repeatedly over the years—and still misses today—are the corrosive impacts this bubble had in fostering the imbalances and excesses of an asset-dependent U.S. economy. Unprecedented consumer leverage is only part of the problem. So, too, is the failure of an aging U.S. population to save precisely when it needs to prepare for retirement. Global imbalances are also an outgrowth of this era of excess—underscored by America’s massive external deficit and, by the way, the protectionist fires it stokes. Alas, these fault lines were made all the deeper by the Fed’s regulatory laxity in an era of unprecedented financial innovation—a laxity made all the more dangerous by the cheap borrowing costs of a Fed-induced credit bubble. This dangerous combination undoubtedly played a key role in fueling voracious investor demand for opaque and increasingly toxic financial products.

From Wolf’s "Why Greenspan does not bear most of the blame":

US monetary policy cannot be responsible for all these bubbles. This might not be the case if these other countries had followed US policy slavishly. But they did not (see chart). The Bank of England, for example, followed what seems to be a consistently tighter monetary policy than the Fed. Yet house prices in the UK may be even more overvalued.[...]

Why, then, are so many Americans determined to blame Mr Greenspan for the mess? I can see three reasons. One is that it is far more painful to admit that the US was, in large measure, the victim of circumstances beyond its control. Another is that it is far easier to complain that the Fed made us do things we now bitterly regret than take responsibility for one’s own mistakes. Last, the more one can blame the Fed, the more reasonable become demands for bail- outs now flooding into Washington.