Greenspan: A Lifelong Libertarian Republican

Alan Greenspan’s memoir was released the day before his successor as Federal Reserve Chairman presided over a reduction in US interest rates of 0.50 percentage points, the first easing in US monetary policy since 2003.  Many have argued that the current economic problems in the US are attributable to Greenspan’s legacy as Fed Chairman.  Greenspan defends the policy actions of the Federal Open Market Committee (FOMC) during his tenure, but does not fully engage with his critics.  This is unfortunate, because Greenspan’s book could have served as a much needed corrective to those who argue that monetary policy is the principal driver of the business cycle and asset price dynamics.  This view has almost no empirical support, but has popular appeal as a simple, mono-causal explanation for economic developments that are not otherwise well understood.  Under Greenspan and his predecessor, Paul Volcker, US monetary policy focused more successfully on anchoring the long-run price level of the US economy than had been the case in earlier decades.  Greenspan and the other members of the FOMC did not and could not aim to eliminate the business cycle or asset price inflations and deflations, which are a normal part of the functioning of the economy and financial markets.  Those who argue otherwise are effectively calling for a kind of central planning via monetary policy that is likely to be far more destabilising than the current focus on long-run inflation control.

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posted on 16 December 2007 by skirchner in Economics, Financial Markets

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