Your March 12 editorial on Alan Greenspan attempted to address a very complicated and esoteric set of issues. Given your allotted space and the level of economic ignorance of the average reader, you did a terrific job. As a long-time observer of Mr. Greenspan (I trade bonds) I would pass along a few other observations or critiques of his logic and actions.
First and foremost, I always thought Mr. Greenspan rightly understood that inflation is “everywhere and always a monetary phenomenon,” to quote Milton Freidman. If the Fed has erred in its monetary policy, why put up the straw man of the “wealth effect”? One gets the disconcerting sense that he is merely rephrasing the Phillips Curve or NAIRU (non-accelerating inflation rate of unemployment).
As you state, “His theory goes like this: Productivity gains increase the likelihood of higher corporate earnings; that drives stock prices up, making all of us feel richer; so we keep spending money in excess of our income levels and–eventually–that will be inflationary.”
First of all, productivity gains do make us all richer, inasmuch as the same number of people make more stuff/services per day. If all farmers switch from horse-drawn plows to tractors, doubling their output per year, are we not all better off? (Granted, this ignores secondary and tertiary effects, such as how this new wealth is ultimately distributed.)
Second, productivity gains are universally deflationary.
Your point about higher rates disproportionately damaging “old economy stocks” is well taken. Why doesn’t Mr. Greenspan simply raise margin requirements, inasmuch as this will predominantly affect the .com sector? His answer that this “disproportionately hurts the small investor” is both questionable and immaterial if true.
As to whether all or part of this market is a “bubble”–markets discount future wealth creation. If they were correct in this, it was a bull market. If they were wrong, it was a bubble. The catch is, no one knows in advance.
Mr. Greenspan needs to address the moral hazard of the implicit “put” that he has sold the stock market. His past words and actions have demonstrated that the Fed is going to step in and ease in the event of monetary crises, including a significant sell-off in the U.S. equity market. Is it no wonder that investors blithely throw money at the market, confident that Mr. Greenspan will limit their loss to 20 percent or 25 percent?
Last, all Mr. Greenspan’s utterings have to be taken in the context of the political milieu in which he necessarily operates. He is questioned by politicians and surrounded by political appointees (as he also is). His deliberately multi-interpretational language is one of his tools of survival.
