The American Spectator

The Public Policy

The Greenspan Gamble

By Alex J. Pollock on 4.10.08 @ 12:05AM

(Page 2 of 2)

A reason frequently given for financial market behavior in recent years is said to be the "Greenspan Put" -- the belief that the Fed will bail out the market's mistakes. I believe instead we should call it the "Greenspan Gamble."

Here's how that went: In the wake of the burst tech stock bubble, an impending recession from industrial overinvestment, and also the shock of the terrorist attacks, the Greenspan Gamble was purposefully to ignite a housing boom to offset industrial weakness and bridge the economy until, with the help of a falling dollar, industrial growth resumed.

It was a reasonable gamble and it almost worked -- but the intended housing boom turned into a bubble, nourished by a great credit overextension. We now focus on the unintended costs: falling prices for houses, most people's principal asset, the severe credit contraction, and illiquidity. But remember a year ago we were being treated to pontifications about the "global liquidity glut" which would insure robust markets for financial assets.

The ultimate failure of the Greenspan Gamble notwithstanding, the Fed will continue to be extremely useful in helping ameliorate busts and financial panics, just as it was intended to do in 1913. Its usefulness to the government insures its continued influence and authority, which may very possibly include acquiring wider jurisdiction as the "Super Fed."

But it is foolish to think that the Fed (or "Super Fed") can foresee all future problems or prevent future bubbles and busts. It is even foolish to think that the Fed will consistently make correct forecasts of the results of its own actions.

After all, everybody, no matter how clever and diligent, no matter how many economists and computers one employs, makes mistakes when it comes to predicting the future.

Letter to the Editor

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Hank Paulson