December 18th, 2007

Pushmi Pullyu Monetary Policy

Posted in  Economic Growth 
Author: Lawrence A. Hunter || Location: Washington, DC, USA

In his retirement, former Fed chairman Alan Greenspan resembles more the mythological Pushmi Pullyu creature from Dr. Doolittle than the financial master of the universe he liked to portray himself as when he ran the nation’s central bank.  But of course, the master-of-the-universe garb was always just a self-serving costume to keep him on the cover of weekly news magazines and disguise the real Pushmi Pullyu creature underneath who put the world economy through continuous gyrations from his stop-go monetary policy.

On “This Week with George Stephanopoulos” Sunday, Greenspan assumed the role of elder statesman, holding forth on a variety of issues but not once did he acknowledge any responsibility for the current economic problems confronting the United States or the sorry state of the U.S. financial system.  Last week in this space (“Old bureaucratic functionaries never die; they just keep prattling on”) I laid the problems right at Greenspan’s doorstep:

The source of the current economic mess originates in the stop-go, discretionary monetary policy engineered by the Fed during Greenspan’s tenure as Chairman — first the deflationary monetary policy that caused the Asian financial meltdown in the late 1990s followed in panic after the turn of the millennium by inflationary monetary policy in the Fed’s ill-conceived effort to compensate for and repair the deflationary damage.

Moreover, Greenspan remained consistent Sunday in offering up contradictory prescriptions for dealing with monetary policy and the financial crisis.  The one head of the Greenspan Pushmi Pullyu brayed the outrageously inflationary idea of having the federal government simply throw money at the mortgage banking crisis by depositing cash directly into the bank accounts of homeowners facing foreclosure on their homes:

GREENSPAN:  “. . .There are a very large number of people who are in very major stress and having great difficulty in paying off their mortgages and even when they’ve tried exceptionally hard.  But when you think of how you come to grips with this, it’s important to help those people outside — without affecting the mortgage rates and without affecting the structure of markets.  Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this…”

STEPHANOPOULOS:  “Cash from the government?”

GREENSPAN:  “Cash from the government, yes.  In other words, if you’re going to do that, it’s far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates.  If you do that, it’ll drag this process out indefinitely.”

In the very next breath, the head at the other end of the Greenspan Pushmi Pullyu uttered the dread words “stagflation” (which I warned about here last week in “Old bureaucratic functionaries never die; they just keep prattling on”) in his usual roundabout manner —“We are beginning to get not stagflation, but the early symptoms of it.”  Greenspan went on to emphasize the need to allow the Fed to reign in inflation, presumably with higher interest rates:  

“Inflation must be suppressed.  And it’s ultimately the Federal Reserve in this country which is the key architect of doing that, and it’s critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging. . .”

At the same time, he rapped the Bush tax cuts for increasing the deficit because they were not accompanied by offsetting spending reductions or tax increases, implying that he wouldn’t support their extension unless it were accompanied by future tax hikes or spending reductions.  Given liberal control of the Congress, and probably liberal control of both ends of Pennsylvania Ave. after November of next year, spending reductions don’t seem likely, which Greenspan surely must know, so one can only assume Greenspan is positioning himself to support something like the Rangel tax increase to “pay for” extending past tax cuts with future tax increases.  

Talk about stagflation:  Greenspan may only detect the glimmer of stagflation right now but his hodgepodge of ill-conceived policies is a guarantee that stagflation will come roaring back with a vengeance.  Somebody get a rope around one of the heads of that Pushmi Pullyu creature and drag it off stage before it makes another big mess.