Questions over St Alan's legacy

By ANTHONY HILTON FOR MAILONLINE
Updated:

 

ASKED in the 1960s for his view on whether or not the French Revolution had been a good thing, the then Chinese leader Zhou Enlai is reputed to have replied that it was far too early to say. A similar verdict should surely be visited on the term of office of Alan Greenspan, the chairman of the US Federal Reserve whose 18-year reign at the central bank is drawing to a close.

Most commentators have been unstinting in their praise but he will shortly leave office with the US economy on a course so beset with imbalances that it cannot possibly be sustained and a world so awash with liquidity that there are bubbles all over the place.

Never has the global economy been so distorted and the link between financial and economic realities so stretched as it is today. At least in part, this has to be because Greenspan's policies have been geared to deferring the day of reckoning in the hope something will turn up.

Some economists, notably Andrew Smithers of Smithers & Co, have argued for a while that Greenspan's willingness to pump money into the economy whenever it flagged stored up trouble for the future and has contributed directly to a perhaps 60% overvaluation of Wall Street share prices and an unprecedented global bubble in property prices.

Why blame Greenspan? Well, as Bedlam Asset Management pointed out in a recent note, the price of housing is wrong because the price of bonds is wrong. This is because on Greenspan's watch the supply of money and debt has exploded in America and the US trade deficit has exported this liquidity round the world.

Greenspan's policies meant we have not had to suffer the pain of recessions brought on by financial crises. But they have concealed rather than cured the problems, and corrections that could have been achieved with small adjustments early on can now only be made with much bigger and more painful dislocation some time in the future.

Bedlam's view is that China, oil prices and terrorism are all sideshows, and the global property bubble and the timing of its meltdown is the dominant economic story. Others think the US budget and trade deficits are pretty frightening too. So perhaps we should wait to see how these legacy issues are resolved before conferring sainthood on Greenspan. Unlike the French Revolution, we probably won't have to wait 200 years to form a view.

On the subject of central bankers, news that Bank of England Governor Mervyn King was on the losing side in the monetary policy committee's vote to cut interest rates this month has been greeted with astonishment in America. In this country, the view is that the split is a good, healthy thing because it underlines the independence of thought of MPC members and the self-assurance of King in that he does not feel obliged always to be on the winning side.

They do things differently in America. Greenspan is noted for speaking last at Fed meetings and using the summing-up to rubbish any arguments with which he disagrees. He then lays out what he thinks is the correct position and policy and calls

for a vote. One long-time, respected Fed member says that in all his years on the Fed he never thought he exerted the minutest influence on policy formation. The most he felt able to claim was that on a few rare occasions he planted seeds of ideas Greenspan later claimed as his own.

But Greenspan's tactics are the way the Fed does things. Indeed, his predecessor, Paul Volcker, was even more robust. He used to speak first at meetings, tell the committee what he proposed to do and challenge anyone to disagree. When on one occasion two members voted against him, he immediately went to the US Treasury and resigned.

Alarmed at the impact this would have on the markets, the then Treasury Secretary phoned the two dissenting members and told them to think again. He then told Volcker to call another meeting and have another vote. That afternoon, the reconvened committee backed Volcker unanimously. Soon afterwards, the two dissenters, not Volcker, resigned.

I prefer the British system.

Most watched Money videos