The new issue of The Freeman came today, and I was disappointed to see that the issue headlines a piece I had hoped would slip into the background, namely a piece by two monetarists, David Henderson and Jeffrey Rogers Humel, arguing that Greenspan “stands out as the most competent — arguably the only competent — helmsman of US monetary policy since creation of the Federal Reserve System.”
As part of the proof, the authors run this chart:
Which stops at December 2008, instead of this one, which takes us to the present:
Using the money base as proof of the absence of the loose money is one way but it tells you little about what is happening in the real markets. It’s a bit like assessing the activities of a bakery by looking in the cupboard rather than what comes out of the oven. The money base shows what banks might do but not what they actually did. Given how much our authors place on the money base, are they now predicting a German-style hyperinflation? And whose fault would that be?
So then our authors turn to the money aggregates, and claim that they actually fell. How? They are careful in selecting the series they choose to report, namely percent change from year to year from 2002 to 2006.
That’s interesting but let’s look at the actual aggregates while broadening our dates by one year in both directions.
We can see here that the picture changes rather dramatically. In particular, after 9-11, Greenspan embarked on a mass inflationary policy, one that he and the Bush administration crowed about to the world. It was their way of showing that the terrorists won’t win, as if destroying our money constitutes retaliation for destroying a money center.
I’m not going into a detailed discussion here about this piece, but I would like to express disappointment that though this piece mentions George Selgin’s critic in passing, it doesn’t actually cite it so that readers can see what he has to say.
Moreover, this issue runs an article by Robert Murphy but doesn’t anywhere mention his detailed refutation of Henderson and Hummel and here too.
Finally, I question the purpose in using this venue to exculpate Greenspan’s Fed from blame in the boom-bust cycle. Is it really the time to provide a twisted rationale for the propitiation of central banking sins or is it the time to pin blame precisely where it belongs?
On the other hand, it is great to see The Freeman advertising Larry Reed’s fantastic monograph on the Great Depression, which nails the Fed solidly.
{ 23 comments }
I think that the most Austrian way of analysing these issues would be trying to get rid of macro aggregates data. For two main reasons: it is ONLY a quantitative measure of monetary policy and the money issue. But, as Bagus and Schiml showed, there also important matters in the QUALITATIVE side.
And second, it may be misleading and not being an accurate image of how the economy and economic agents are REALLY behaving. For that, it might be better to look at balance sheets of banks and firms. Paying to attention to accounting ratios, and so on.
I forgot the link, sorry: http://mises.org/daily/3281
I believe that Robert Murphy addresses the Henderson and Hummel claim in the Mises.org articles linked below:
http://mises.org/daily/3203
http://mises.org/daily/3252
http://blog.mises.org/archives/009109.asp
If Greenspan left the Fed in 2006, why does it matter that H&H’s graph didn’t show 2009? What am I missing?
Here is a report from Paul Kasriel, Director of Economic Research at Northern Trust. It is a 2008 report that is primarily a reproduction of a report he first issued in 2005. Kasriel paints a less attractive portrait of Greenspan than does H & H.
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0803/document/ec032508.pdf
Farming out economic analysis sometimes yields an eroded, exhausted farm that failed because the farmer was incompetent and negligent. Sometimes it yields a bunch of manure and blood from a stockyard.
Other times good articles appear.
Such is the plight of journals not firmly and uncompromisingly grounded in classical liberalism!
I think the first graph is enough to prove Greenspans guilt. According to the graph, during his reign 1987-2006 the monetary base was roughly increased from 250Billion to 850Billion. This is a 340% increase. Now any good monetarist should realize that this is far in excess of the good monetarist rule of 3% per year. Instead Greenspan on average increased the money supply 17.9% per year. WOW! And we are supposed to beleive that Greenspan’s policies have had a benign effect on the economy and has nothing to do with the massive bubbles that developed during his reign? Double WOW!!
Ajax, your arithmetic is incorrect. An increase from 250 to 850 over twenty years represents a compound annual rate of 6.25 percent. That roughly corresponds to the annual average CPI increase for the same period.
This is a great epoch to test the Austrian analysis. I think the reason that we haven’t massive price inflation is twofold:
One, despite massive injections of money into the banking system; US borrowers are not taking the money. They are focused instead on rebuilding their own balance sheets.
Two, because the principal holders of US Treasuries, in order: The Social Security Adm., the PRC, the Arab states, the Euro Zone are either unwilling or too scared to sell. The minute they start selling, US bond prices will plunge, interest rates will rise and the dollar will plummet in value.
Addenda:
I believe that when the bond selloff actually occurs, we will finally begin to see massive price inflation. However, another thought occurred to me. Instead of massive price inflation, the dollar might suffer a sudden, massive crisis of confidence and instantaneously collapse out of existence. What would you do if you were the Central Bank of China or anywhere else and your US Bond portfolio, after a sudden selloff, dropped in value from 100 cents on the dollar to 20 or 30 cents on the dollar? Are you even going to accept dollars anymore?
The thing to keep in mind and that Mises himself emphasized is that if the newly printed money is not used (a failure going by the government’s intentions) that his theory will not apply as the conditions it specifies do not (as of yet) obtain.
Even using H&H’s own data (the third graph above), throughout all of 2002 and close to four-fifths of 2003, MZM money stock growth, measured as a percent change from a year ago, was at least roughly 7.5%, and at times considerably higher. This time frame corresponds well to the period when the housing boom was going in earnest. I do not understand how H&H can argue that this represents ‘tight” or responsible monetary policy.
Jardinero1, my bad. You are correct. I was too quick and flimsy. The end result is the same: a tripling of the monetary base in 20 years, which of course is at the root of our economic woes.
(thanks for the correction)
Henderson and Hummel, huh? Looks like someone’s been trash digging. =) I’d imagine that’s where those graphs and “statistics” belong.
Garoad,
You put statistics in quotations, because why?
Please, talk about partisanship. Anything that doesn’t tip-toe across the line set forth by Murray Rothbard is all of a sudden bad economics?
This site is beginning to irritate me; it’s degrading some of the scholarship of Ludwig von Mises, the author of one of the best books on monetary theory I’ve ever read – being The Theory of Money and Credit.
Niccolo, we are just starting to irritate you? You have been trolling around Mises.org for years! You are completely obsessed with Mises.org! You live and breath to post here in whatever way you can. It must consume you completely. Whenever you are banned you come back again under a new name and get banned again, and then you come back again with a new personality until you are re-discovered and are banned only to reemerged with the eventual same posture of debunking the great doctrine you somehow think we all hold as a religious postulate.
Your whole life consists in being irritated by Mises.org! surely there are other places to go, other things to do!
Niccolo,
It is an internet commentary. Please rebuttal or at least not complain.
Don’t know what you’re talking about, Jeffrey.
I was banned from the forum for not agreeing with your ideology that Rothbard=Alpha and Omega by 110%
I haven’t been to that forum in months, however. I don’t know what you’re talking about with “other places to go,” especially if you’re calling me a troll out the other side of your mouth – considering a troll
You’re right though, your website has been besmirching the scholarship of Mises for years with silly little talking points about gold dollars and anti-anything-not-Rothbard. This is why I only rarely visit the site to see articles published by Robert Murphy, Frank Shostak, and Jesus Huerta de Soto – among a few rare other economists that I find at least somewhat intellectually honest like Joseph Salerno.
Really, if you want to start to be taken seriously in academia, start opening your eyes to other points of view and statistical evidence first. Stop quoting only – well, almost – Mises or Rothbard as if they were Moses and Jesus.
Justin DuBois,
OK. Well, then let’s just look at the facts shall we:
Fact: The Fed under Greenspan HAS been more effective and predictable than at any other time in history – with few and only minor recessions, other than this one, during his tenure.
Fact: The volatility of Real GDP went down under Greenspan, making the economy more stable.
Fact: Greenspan screwed up many times, but he is not Satan and in retrospect, he did a pretty good job. That is not to say that the Fed is ideal or that a free market in banking wouldn’t do better, it’s just that Greenspan was really the next best thing to it under all considerations.
All of those numbers look like Greenspan not only grew the hell out of the money supply on a year over year basis, but even worse produced spurts of +20% growth.
I guess money growth is truly in the eye of the beholder.
Well I think I 30 min video (even in power point) could easily be put together showing the following (even using the 1st chart):
Given) 850 Billion in 2009 – 650 Billion in 2000 = 250 Billion in 9 years time * 10 (reserve ratio) = 2.5 Trillion new dollars in 9 years.
1) IF this new money was to actually represent REAL goods PRODUCED in the economy, then it should be easy to see that we are producing more in the US. IE businesses coming here that produce things.
2) Then go ahead and show slides of all of the producers leaving the country to set up shops in other nations. Do this for many industries.
3) Then ask the question, “So if we haven’t been actually PRODUCING more, what does all of this money actually represent? – Answer: Nothing. You have been fooled. You are poorer than you think.
to niccolo:
fact – yes, greenspan was predictable, consistently intervening directly (as in sept 11), or indirectly (ltcm), to support collapsing equity markets.
fact – yes, the economic cycle was dampened, but moral hazard risk was created. localized crisis was avoided and swapped for later systemic crisis occurring under bernanke’s watch.
opinion – greenspan is doctor faust, having traded “gold and economic freedom” for the devilish stretch-limousine. when he was being toasted as the saviour of the american economy, he must have known the damage that his repeated intervention would eventually have. that he forged on regardless qualifies his actions as wicked.
The fact that the rate of money supply growth is equal to the increase in the CPI, for the same time interval, would suggest that growing the money supply, at the very least, is self defeating and contributes little, if anything, to real growth.
@Inquisitor:
“The thing to keep in mind and that Mises himself emphasized is that if the newly printed money is not used (a failure going by the government’s intentions) that his theory will not apply as the conditions it specifies do not (as of yet) obtain.”
That’s a great observation. Do you have the reference to the specific work by Mises? Theory of Money & Credit? which chapter, maybe?
thx.
It’s from his debate with fellow Austrian Lachmann. Long has a good book summarizing the key ideas behind praxeology, and an important thing to realize is if the conditions the theory requires to apply do not obtain, the theory simply doesn’t apply, rather than being “falsified”.
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