Greenspan Rebukes Taylor's Housing Bubble Blame

By The Greek - Economy & Markets:

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It seems like Alan Greenspan is spending far too much of his retirement defending the actions of his gainful employment as the Federal Reserve Chairman. Today he published an Op Ed piece in the Wall Street Journal as a counter to recent claims by Professor John Taylor. Greenspan employed the page to rebuke all accusations of responsibility for the housing bubble. The once-genius but now often-bitten Greenspan introduced his article as a work geared for the better good of financial system reconfiguration... and not for the purpose of self-defense and legacy preservation. However, it soon became evident the man was clearing his name, and effectively mind you.

The famed Fed man presented a case of "decoupling" of the fed funds rate from long-term mortgage rates, thereby absolving himself and his short-rate fame of all blame. As I read along, I was not sure if I was interpreting a viable enough economic case or a pathetic effort at self-reassurance. I include the word "viable" in that last sentence, because I found it difficult to completely remove short rates from long rate determination, as it seemed Alan wanted me to do. You would expect Greenspan's expansionary work would have weighed on long rates, though other factors discussed herein muted the trend of those historical actions and reactions. In any event, before I was finished, I was well-schooled once again by the still genius Greenspan.

What Changed

Back in the good old days when tech stocks were worshiped and Silicon Valley was considered sacred ground, we thought it was productivity gains that kept inflation at bay and long-rates low. Greenspan, however, paints the new landscape of increased global savings that he says drove long-rates into the nothingness. He states that this factor dislocated mortgage rates from their normal levers, and thereby spawned the global real estate bubble, within which the United States ranked only near the middle of.

Mr. Greenspan first complimented his wise pal, Taylor, and then proceeded to tear his claim to fame, "The Taylor Rule" a new one, so to speak... Greenspan kept it gentleman-like though through his use of words like "unable" and "counterfactual," but make no mistake about it, there's a duel in process. For the affluent or economist crowd, this is better than a Youtube.com dance-off or rap-off, or whatever the kids call it this month. Over the years, Greenspan took a great deal of criticism dished by media and traders with humility and grace, but this shot by his academic counterpart more effectively struck at his intellect. However, while Alan is getting up there in age, he clearly demonstrated today that he still has his mind.

Greenspan even called on his boys for some back up, quoting a compliment of the highest by Milton Friedman that spoke of Alan's tenure. The since passed away, Friedman, was quoted offering the kind words, "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

After properly restoring himself to his platform of admiration, Greenspan returned to his noble message. He wrote that we should not relive the mistakes of the past by acting in reactionary manner and resorting to manic regulation and government operation of private sector matters. God bless him. Hold on, here comes Paul Volcker with a crowbar!

This blog post offers a constructive review of Alan Greenspan's article for the Wall Street Journal, "The Fed Didn't Cause the Housing Bubble." Please read it for yourself. We would love to hear your opinion as well.


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