naked capitalism

One of the salient differences between Greenspan’s and Bernanke’s tenure as Fed chairman (at least so far) was Greenspan’s skill at playing to his audience, which was the financial press, Congress, and market participants.

With the publication of his memoirs next week, Greenspan will be performing for a larger crowd, although it will be dominated by his core constituency. And while it is a bit unfair to judge a book by a quickie preview on the first page of the Wall Street Journal, I thought I’d hazard a couple of initial reactions.

The first is that the book offers from a new theory for why houses got pricey:

He attributes the housing boom to the end of communism, which he says unleashed hundreds of millions of workers on global markets, putting downward pressure on wages and prices, and thus on long-term interest rates…..

Mr. Greenspan returns repeatedly to the far-reaching importance of communism’s collapse. He says it discredited central planning throughout the world and inspired China and later India to throw off socialist policies. He recalls meeting a former manager of a produce distribution center in China who says he once had to labor to allocate produce according to government edict; now the allocations are made by auction. “Now I don’t have to get up at four a.m.,” he quotes the manager as saying. “I can sleep in and let the market do my job for me.” Mr. Greenspan recalls his amazement when an adviser to Russian President Vladimir Putin asks him to discuss Ayn Rand, the libertarian philosopher with whom Mr. Greenspan had been friends.

In coming years, as the globalization process winds down, he predicts inflation will become harder to contain. Recent increases in the price of imports from China and a rise in long-term interest rates suggest “the turn may be upon us sooner rather than later.”

Now I must confess I don’t follow the academic literature closely, but I can’t recall high housing prices linked to “the fall of communism.” And if that is what the book actually says, Greenspan is also guilty of sloppy writing.

Communism didn’t end with the fall of the Berlin Wall. China, North Korea, Laos, Cuba, and Vietnam are still communist. What ended with the collapse of the USSR was the faith in central planning.

Moreover, if the so-called fall of communism was so instrumental, why haven’t Eastern Germany or Russia played a bigger (any) role in the cheap US housing story? Eastern German workers, who had just about no useful skills, were a huge burden on West Germany. Similarly, the only outsourcing to Russia I know of is high end software development, and that is limited in scale because it requires top talent.

Greenspan’s version of history is ideological, his faith in Ayn Rand writ large. And of course, this telling also absolves him and other regulators of responsibility. In fairness, Bloomberg, which also has an article on the book, gives a much less barmy and ideological version of the theory:

U.S. wage earners have suffered and consumers have benefited from a one-time shift of millions of workers into the world labor force. The former chairman once defined globalization as the elimination of borders in the production of goods and services.

“The continuing acceleration of the flow of workers to competitive markets during the past decade has been a potent disinflationary force,” Greenspan writes. “That acceleration has held down inflation virtually uniformly across the globe.”

The difference between the Bloomberg and WSj reading is noteworthy. I’m not about to read the book, so I’ll have to endure a few more reviews to see which account appears to have been more representative.

Now one an argue that cheap labor played a role in the US housing boom. But “played a role” and “caused” are two very different statements. Even if you believe deflationary pressures led to a savings glut, blogger knzn points out that that is separate from the US overconsuming. These countries simply could have contended with the effects of a savings overhang.

In recounting his impressions of past presidents, Greenspan falls in with widespread disenchantment with Bush and the Republican Party:

In a withering critique of his fellow Republicans, former Federal Reserve Chairman Alan Greenspan says in his memoir that the party to which he has belonged all his life deserved to lose power last year for forsaking its small-government principles….

Mr. Greenspan criticizes both congressional Republicans and President George W. Bush for abandoning fiscal discipline.

Greenspan’s savaging of Bush reads like revisionist history. Yes, he did fail to serve as a salesman of Bush’s Social Security reform plan, and took issue with the use of the word “crisis” to highlight the problem. But for Greenspan to attack Bush for his budget deficits and fail to criticize Reagan for similar practices (tax cuts, a defense buildup, and resulting deficits) is disingenuous. And him minimal comments on Bernanke come off as damning with faint praise:

Mr. Greenspan makes no mention of his successor as Fed chairman, Mr. Bernanke, other than in a caption accompanying a picture: “I was very comfortable leaving the post in the hands of such an experienced successor.”

Better to have ditched the picture and said nothing at all.