Greenspan fiddled while the economy burned

Nobel prize-winning economist Milton Friedman has taken the position that the Fed is "always wrong: "one-hundred and eighty degrees wrong." As Massachusetts Institute of Technology economist Rudy Dombusch once commented, "None of the postwar expansions died of old age, they were all murdered by the Fed." Or, as CNBC host Larry Kudlow stated, "The Fed ... completely lost their mind."

In December, 2002, a few months after being knighted by Queen Elizabeth, Greenspan, in a speech to the Economic Club of New York, reported that the economy was going through a "soft spot."

None of this was necessary. First of all, one of the beauties of the U.S. economy is that it is self-correcting. Given time, the markets would have wrong out the excesses in the system. The economy did not have to be bludgeoned. The Fed had other more subtle tools at its disposal, if they were needed at all. Greenspan seems to have conceded these points. In a speech given Jan. 3, 2004, to the American Economic Association in San Diego, he took pains to justify Fed policies over his tenure. Practicing uncharacteristic humility, he said that making monetary policy is an "especially humbling activity," that "uncertainty characterized virtually every meeting" of the FOMC, and the committee made decisions "we came to regret." He mentioned that "forecasting was elevated to an even more prominent place in policy deliberations." Russian apparatchiks tried to run their economy from data points and failed. Greenspan relied on historic economic data for his roadmap, and put faith in models he now concedes cannot capture the complexity of that economy and probably never will. These comments are eerily reminiscent of those of former Secretary of Defense Robert McNamara in The Fog of War. When speaking of America's Vietnam experience, he conceded, "We made some mistakes."

In spite of his many costly gaffes, Greenspan consistently has survived presidents who did not want him. George W. Bush held his renomination hostage until it became an embarrassment, although the President remarked that Greenspan had done a "superb" job. Of course, this was the same appellation that he had applied to Secretary of Defense Donald Rumsfeld after the Iraqi prison scandal, and CIA Director George Tenet as he was being pressured to resign. Reenergized by his renomination, Greenspan came out speaking aggressively about the need for interest rate increases. Of course, any rate increases at this late date will not have an effect until after the election. The reader can speculate on what deal was struck between two of the most powerful men in America.

Now that Greenspan has been reappointed, it is time to begin the analysis of the his legacy. Is he an icon? Is he to be revered, as the Senate Finance Committee did at his renomination hearing? Or is it time to see if the emperor is wearing any clothes? I submit that when we look to see who shot the Goldilocks Economy, we do not have to look far. He is hiding in plain sight.