Here is an excerpt of an essay from Jeremy Grantham on the last three Fed chairmen that is worth reading.
The information about Alan Greenspan is entirely consistent with information we had received in a long correspondence with Pierre Rinfret before he passed away. Pierre was an economist who knew alan Greenspan from his time at NYU to their positions as colleagues in the Nixon Administration and afterwards.
The complete eight page essay requires a free registration here and can be downloaded here.
Immoral Hazard
Jeremy Grantham
Greenspan, Bernanke, and Volcker: A Study in Contrasts
It’s not that the former Fed boss Greenspan was incompetent
that is remarkable. Incompetence is common enough after
all, even in important jobs. What’s remarkable is that so
many people don’t seem, even now, to get it. Do people
just believe high-quality self-justifying blarney? Or is
it just that they apparently want to believe that critical
jobs in a great country attract great talent by divine right.
Sometimes, of course, they do, but sometimes the most
important jobs – even that of a presidency or a Fed boss
– end up with mediocrities. Let us pause here to regret
the absence of Mr. Volcker and wonder what a parallel
Volcker universe would have been like. Just as we can
wonder how much a few votes in Florida or a vote in the
Supreme Court would have changed our world from what
it is today.
Paul Volcker inherited about as big a mess as we have
today. He worked out what he had to do and did it with
unusual lack of concern about what Congress thought of
the necessary pain involved and the number of enemies
he might make. He paid the price for forthright behavior
by being replaced, despite a record for correct and tough
behavior that makes for the most invidious comparison
today. When Volcker was replaced, by the way, he did not
moan and groan but like an old soldier quietly disappeared.
There were no high-profi le announcements about the
economy or any $300,000-an-evening appearances paid
for by financial firms.
Greenspan came onto my radar screen in the late sixties as
a seller of economic and fi nancial advice to the investment
industry. To be brutally honest, he was considered run of
the mill by anyone I knew then or have met later who
knew his service then.
His high point in most memories,
certainly mine, was a famous call in January 1973 that, “it
is rare that you can be as unqualifiedly bullish as you now
can,” a few days before a market decline of over 60% in
real terms, second only to the Great Crash in a century,
accompanied also by a bitter recession.This was one of the first of a long line of terrible prognostications for
which he has remarkably not been remembered, except
by a handful of us amateur historians. Then in the mid
seventies he disappeared into some government job, of
which I was barely aware, until he re-emerged with a bang
in 1987, without as far as I can find having done anything
documentably very well. And we can agree that at least
occasionally people can indeed prove their effectiveness
beyond doubt. This was obviously not the first or last
time such appointments were made where a job crying
for proof of character and achievement under pressure is
awarded more for what you might call political skills.
This has indeed not been our finest hour in the U.S. Times
are bad enough, in fact, to make us mourn the American
leadership skills of WWII and the generosity and foresight
of the Marshall Plan. We can all wonder at the incredible
vision, drive, organizational skill, and willingness to
sacrifi ce resources that were required by the Manhattan
Project and compare it to the rudderless or even deliberate
avoidance of leadership of the greatest issues today:
climate change and energy security. We can only wonder
what a Manhattan Project aimed at alternative energy
might have accomplished by now, had it been started 15
years ago.
What we have had in lieu of vision, leadership,
and backbone is a series of easy paths taken.
At the time that Paul Volcker broke the back of inflation in
the early 1980s, the recognition that risk and leverage had
consequences was baked into the pie: if you were to take
excessive risk you had better win the bet. If you missed
the target, the expected result would be more or less total
failure, and that seemed then and for decades earlier a
reasonable law of nature.
Now in contrast we get ready to celebrate the 20th
anniversary of the era of the Great Moral Hazard.
Slowly at first, but with steadily growing
traction, the idea was planted that asset bubbles would
be tolerated, but consequences of their bursting would be
moderated or avoided entirely...
