The Maestro speaks out

Alan Greenspan gives an interview at Democracy Now! There is both a link to the audio and a transcript at the link. Brave. The interview is given by Amy Goodman, who generally I find insipid. Her guest interviewer however is the the frankly ignorant Naomi Klein. I don’t mean she is merely wrong in her beliefs about policy, though that is true as well. I mean ignorant in the plain meaning of the term. She demonstrates in the interview that she knows nothing of the real history of Latin America, or the role of the fed. She repeatedly acts as if Greenspan personally presided over policies which have nothing to do with the powers of the Federal Reserve. Greenspan is admirably patient in dealing with her misconceptions, but I frankly am not. The woman is embarrassing. Here is a taste:

I’m aware of that, Mr. Greenspan, but there are many developmentalist policies that were trying to address those colonial disparities. They were called it import substitutions. And those leaders were systematically eliminated in a series of coups.

Uh, is she under the impression that import substitution (a disastrous policy in any case) was ended by coups? That the military and other coups were run by a bunch of free marketeers? That those same coups didn’t result in populist and nationalist economic policies including import substitution? Ignorance run rampant.

Oh well, he does give a nice response to questions about his role in the “subprime crisis.”

Well, the sub-prime crisis did occur as a result of lower interest rates. The lower interest rates, however, are, if one takes a look at the whole context of rising home prices throughout the world, is clearly a global issue. It is the result of fundamental changes that occurred as a consequence of the end of the Cold War, and that housing bubbles appear in more than two dozen countries around the world, which screams for an explanation that is global, not individual. So we in the United States –

[…]

We in the United States basically try to get mortgage interest rates up and slow the bubble. And remember, it’s the bubble which created a goodly part of the problem which we have had in the sub-prime market. And we failed. And that tells us, basically, that it’s the global forces that are at play here.

What is being pointed out here is something I have said before, the Fed has far less control over interest rates than most people, including economists, believe. The Fed is given far more credence than it deserves as an economic actor. Of course this calls into question the whole “Maestro” meme. The Fed deserves far less credit for the good times as well. Interest rates are set by the market for the most part, the Fed generally follows that market. We have the relationship on interest rates, at least since the early 1990’s when reserve requirements were removed for all bank deposits except checking accounts, backward. Yes, I am saying the recent interest rate cuts are pretty much irrelevant even in what happens next.

Hat tip: Megan

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5 Responses to “The Maestro speaks out”

  1. on 30 Sep 2007 at 11:43 pm glasnost

    Yeah, import controls are such a devastatingly bad policy that the US’s constant reliance on them in the 19′th century led to our permanent economic laughingstock status.

  2. on 01 Oct 2007 at 2:08 pm MichaelW

    Yeah, import controls are such a devastatingly bad policy that the US’s constant reliance on them in the 19?th century led to our permanent economic laughingstock status.

    Uh huh. And the Smoot-Hawley Tariff Act did wonders for the U.S. and world economies.

  3. on 01 Oct 2007 at 2:19 pm Lance

    Countries where import substitution (as opposed to the vague word controls) have been the dominant aspect of their policy have had miserable economic performance over the last 100 years relative to those who haven’t. The US in the 19th century will take a more lengthy response which I do not have the time for at the moment. I’ll just say that that wasn’t the dominant factor in economic policy in the 19th century.

  4. on 03 Oct 2007 at 3:46 am glasnost

    Countries where import substitution (as opposed to the vague word controls) have been the dominant aspect of their policy have had miserable economic performance over the last 100 years relative to those who haven’t.

    Not sure I agree with the basic premise. Of course, you knew that. There are examples of export-led growth working well and there are examples of it failing badly. There are also examples of import substitution coexisting with high growth (Soviet Union 1930 through 1960? The European agricultural industry, 1945- present?).

    I’m not universally against free trade. Sometimes it’s worked. The empirical record, however, is mixed. Rare is the libertarian who will admit that.

  5. on 03 Oct 2007 at 2:31 pm Lance

    There are examples of export-led growth working well and there are examples of it failing badly.

    Export led growth is a far more broad category than import substitution.

    There are also examples of import substitution coexisting with high growth (Soviet Union 1930 through 1960?

    Certainly that was one of the examples used back when people bought that the Soviet Union had achieved a rapid rise in standards of living during that time. That not only has been disputed in the years since, it has been thoroughly discredited.

    The European agricultural industry, 1945- present?).

    Once again, not an example of what I am talking about. That policy was not an attempt at import substitution but merely protecting an existing industry, and the economies of Europe certainly were not examples of large scale import substitution strategies. Every nation has examples of such strategies which is different than saying it is the driving force for economic development. Nevertheless, your example is pretty bad anyway. While it can be argued it has helped farmers, few people believe it has helped Europeans in aggregate in strictly economic terms. Of course the enormous costs of the policy can be justified on other grounds, such as preserving certain ways of life, etc. I am not sympathetic to such reactionary arguments, but as a tourist the French farms are aesthetically a treat. So they can pay higher prices along with massive amounts of taxes to help preserve some of them if they want.

    I’m not universally against free trade. Sometimes it’s worked. The empirical record, however, is mixed. Rare is the libertarian who will admit that.

    Everything is mixed, so you now have someone who will admit that. However, the mix is decidedly one sided. If I take countries and rank them according to openness to trade the correlation is extremely high. No country which has or does not largely practice free trade is anywhere near the top of the list in terms of GDP per capita. Not one. No country which has, or presently, largely practiced free trade is not near the top of that list. Within that list of the wealthiest countries the correlation between free trade and GDP per capita is startlingly high as well. You might be able to find a successful industry within any of those countries for which protectionism might be argued has been a benefit, though generally the record there is bad. But for economies as a whole the record is awful. Go ahead, find me a single study which compares the countries of the world as a whole where that doesn’t hold true.

    Also, it is pretty weak to claim that the correlation is due to other factors. Because if we do that the other factors tend to be rather free market oriented themselves. Those policies are quite difficult to put in place in an economy that isn’t open to trade. To put it another way, find me a country which has those other factors but doesn’t practice relatively free trade. I can’t think of one, but it may exist. While undoubtedly it would do better than the other non free trade countries, no such country is particularly wealthy. So go ahead, find me an example of a wealthy country that isn’t, or hasn’t for much of the past fifty years, high on the scale of freely trading with the rest of the world. If you think of one that escapes me at the moment, give me some evidence which shows that it isn’t an outlier. I have never had someone come through on that bet by the way, so if you do I’ll make you a celebrity.

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