From: Dr. John K. Pollard Jr.
Sent: Sunday, September 18, 2005 12:18 AM PT
To: gary s gevisser
Subject: This how you say it in an “understanable” [sic] fashion. Hyperlink free

 

An Open Letter to Mr. G

By GENE EPSTEIN

DEAR CHAIRMAN GREENSPAN:

I doubt the decision you and your colleagues on the Federal Open Market Committee face Tuesday will be a very agonizing one. Having hiked the federal-funds target rate over 14 months in quarter-point steps from 1% to 3½%, you should keep the momentum going. Hike to 3¾%, as originally planned.

The argument for standing pat is that Hurricane Katrina may have slowed the economy more than is immediately apparent. But in practical terms, the issue is more symbolic than real. If you don't go the quarter-point next week, you'll do it six weeks from now at the next FOMC meeting, on Nov. 1. Meanwhile, the Fed has a far more potent symbolic asset that it might as well exploit while it still can.

I mean, of course, you.

When you finally step down from your post the first of February, you will have served nearly 18½ years as Fed chairman, or more than twice as long as your charismatic predecessor, Paul Volcker. By now, your own charisma may be commensurately about twice as great.

So in terms of symbolism, hiking according to plan will only symbolize the departing Fed chairman's confidence that the economy is resilient enough to stay the course.

Once you do depart, we might start asking a few hard questions about this image you've created. First, were you really the philosopher-king you were made out to be? And even if you were, might there be something wrong with an institution whose effectiveness depends on finding geniuses of your caliber?

Of course, how effective the Federal Reserve has been on your watch is a matter of opinion. The idolatry you've enjoyed, which I believe you've subtly encouraged, comes very close to portraying you as only capable of fixing problems, never creating them. That is as absurd as the 99% performance-rating that your fix-it skills normally get.

"Greenspan's Record: An Activist Unafraid to Depart from the Rules," read the headline in the recent Financial Times retrospective on your career. "Few would argue," the article declared, "that Mr. Greenspan's discretionary approach has been anything but successful."

For example, the article accepts your contention -- as does a similar evaluation in The Wall Street Journal -- that your central bank can't prevent bubbles. Thus, the stock-market bubble of the late 'Nineties, and the housing bubble of the past couple of years, were not even sins of omission on your part. What you do so successfully is resort to a "mopping-up" strategy once the bust occurs.

By framing this issue in this way, you evade the real question: To what extent, if any, can the Federal Reserve avoid creating boom and bust? You argued nearly 40 years ago, in an article called "Gold and Economic Freedom," that the central bank can't help destabilizing the economy. Isn't that why the booms on your watch were punctuated by two recessions? If you no longer agree with what you wrote (essentially the Austrian theory of the business cycle), you ought to explain why. Otherwise, the only question is whether the boom-and-bust cycle the central bank inevitably does cause can be mitigated in some way.

That concern is very different from the one you frequently express about avoiding price inflation. There, I'm willing to accept your professional bona fides. Volcker did the "very heavy lifting against inflation," as you recently put it, and you carry on his good work.

But when you recently told Rep. Ron Paul, the libertarian congressman from Texas, that the anti-inflation discipline of a gold standard is no longer needed because "central banking...has learned the dangers of fiat money," you sounded naive, at best. You, yourself, recently expressed concern that the government might eventually inflate to finance the retirement of the baby boomers. Indeed, it could be much worse than that. If governments around the world are running up debts to support their retirees, the pressure on their central banks to underwrite that debt ("monetize" it) by printing money could be impossible to resist. Not to do so could risk global recession.

"I assume," you observed, "that these imbalances will be resolved before stark choices again confront us."

That assumption is probably your most tragic legacy.