Greenspanism Is Good?

Right now, its popular to blame Greenspan and the Fed for what ails the economy. Just read the screeds coming out of the editorial page of the Wall Street Journal. I think history will come to a different judgment.

Economist Brad Delong at the University of California, Berkeley, certainly thinks so. He writes in defense of Greenspan's tenure as Fed chairman when it comes to booms and busts. He's spot on. This is something I've written about and talked about in a number of different forums, both Marketplace and Business Week. So has Mike Mandel, chief economist at BW.

In essence, the booms are how capitalism is transformed quickly, and the busts clean up the excess. Booms and busts are part of creative destruction. Greenspan deeply understood this. The job of the Fed isn't to stop booms, but to prevent the inevitable bust from taking down the entire economy.

The unwinding of the dot-com bubble in 2000-2002 went remarkably well: no significant macroeconomic distress, and less financial panic and distress than I believed possible. The unwinding of the real estate bubble in 2007-2009 is so far not going well. There is, by contrast, more financial distress than I believed possible.... But so far--look: In the dot-com boom of the 1990s we were the winners. The rich investors of America built out a huge amount of fiber-optic cables and conducted an enormous amount of experimentation in business models from which we all benefit. In the real-estate boom of 2000s the rich investors of America and the world built an extra four million houses and loaned the rest of us money at remarkably low interest rates for five years. Those who moved into newly-built houses with teaser-rate mortgages wish those teaser rates would continue--but they won't, and in the meantime they got to live in a nice house for quite a low rent. Those of us who took out big home equity loans wish the low interest rates would continue--but they won't. And those of us who felt rich because our house values have appreciated wish we still could think of ourselves as sleeping on a pile of gold--but we can't.

The dot-com bubble and the real-estate bubble were bad news for the investors in Webvan, WorldCom, Countrywide, FNMA, and securitized subprime mortgages. But they were, by and large, good news for the rest of us. And investors are supposed to take care of themselves.....

He goes on to say that we're not out of the woods yet, of course. And if unemployment and inflation breach 10% he'll change his mind.

But so far the real economy in which people make stuff and other people buy it has been remarkably well insulated from panic at 57th and Park and on Canary Wharf.

By this metric, Greenspan did a good job. It's also why I think Bernanke-bashing is misplaced.