Politics & Policy

The “Maestro” Problem

Greenspan's tag has been his undoing.

When F. A. Hayek wrote The Road To Serfdom in 1944, socialism was not the exception, it was the rule. Hayek lamented that it was “no longer fashionable to emphasize that ‘we are all socialists now,’ this is so merely because the fact is too obvious.”

Moving ahead sixty years, the debate couldn’t be more different. Japan’s prime minister, Junichiro Koizumi, is expected to win reelection on a platform that includes privatization of the Japanese postal system — presumably the political equivalent of dismantling Social Security here. In Germany, both candidates for chancellor decry the welfare and wage systems that keep the German economy stagnant, and the one in favor of greater change (Angela Merkel) is in the lead. In England, Laborite Gordon Brown is a proponent of Adam Smith.

The U.S. story is even better. Although the top tax rate is still too high, at 35 percent it is just ten percentage points above the 20th century low of 25 percent achieved under Calvin Coolidge. In the past eleven years, presidents from both parties have signed bills that cut the capital-gains rate as well as market-opening trade agreements. Even though both parties regularly pass bills that are anti-market, neither would embrace the socialist ideology.

That free-market advocates have won the battle of ideas with central planners is not in doubt. That this is true makes the discussion of money and the Federal Reserve all the more confusing. Over at the Fed, the debate has seemingly regressed. Nowadays most media members and politicians, and a good number of economists, would agree that the Fed should cut interest rates when the economy is weak, and raise them to stave off inflationary pressures when the economy is strong. While central planning has been totally discredited, the Fed chairman’s role as manager of the U.S. economy is seemingly welcomed.

The latest example of this comes from the Fed’s annual retreat in Jackson Hole, Wyoming. The Wall Street Journal’s Greg Ip betrayed no cynicism in quoting Princeton economists Ricardo Reis and Alan Blinder saying that Alan Greenspan “has a legitimate claim to being the greatest central banker who ever lived.” Bank of England governor Mervyn King thanked Greenspan “for raising the respect that others give to our discipline of economics and our profession of central banking.”

The bouquets thrown Greenspan’s way in Jackson Hole speak to a major problem of perception. It seems that the consensus today calls for the Fed chairman to pull the various economic levers to insure impressive, but not too impressive, economic growth, and low, but not too low, unemployment. Alan Greenspan increasingly adheres to this consensus, and instead of letting market indicators guide him, he speaks about the right level of employment, “exuberance” about equities that he once considered “irrational,” “frothy” sectors of the real estate market, and just last week that investors in U.S. assets are too tolerant of risk that he apparently deems excessive relative to future returns.

These are big statements. Leaving aside the Fed chairman’s major role in a housing boom that he apparently now laments, not to mention whether or not a public employee should comment at all about private investments, Greenspan’s commentary should be a cause for concern simply because the Hayeks of the world made it clear over sixty years ago that markets should rule precisely because no man and no government can ever possibly understand the infinite factors, inputs, and decisions that are the marketplace. It’s not a question of whether Greenspan should or should not use his powerful position to talk asset prices up or down, but that no government official should ever do such a thing because no one person has the ability to do so knowledgeably.

While stock-market performance since 1987 speaks to mostly good monetary policy, arguably the most dangerous aspect of Greenspan’s tenure has been his unwillingness to shed the “Maestro” label. As most readers now know, in 1994 he listed gold, the yield curve, and the dollar’s value versus other currencies as the market indicators that guided monetary policy. But a maestro wouldn’t use such simple indicators — meaning the Maestro label has in a way been Greenspan’s undoing: It has ascribed to him knowledge and abilities that no human or collection of humans could ever possibly possess.

Indeed, since Bob Woodward’s biography of Alan Greenspan was released on November 14, 2000, the S&P 500 is down 13 percent. While everyone would no doubt prefer it higher, this will hopefully in the end prove to be something good. It will be good because unless we bring expectations about the role of central bankers back down to earth, future Fed chairmen will be expected to “fix” things, and these expectations have the potential to bring the economy major harm.

Returning to markets versus central planning, free markets are once again winning, yet not in the area of monetary policy. Arguably, monetary policy has been our weak link for several years now. But the fix is simple: It involves limiting the responsibilities of future Fed chairmen to maintaining dollar stability. Let free markets take care of the rest, only because they will.

John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.

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