It has been famously said that a Central Banker's role is to "take away the punch bowl when the party gets going
", i.e. to slow down the economy when it starts getting too frothy, mainly by increasing interest rates in order to slow down investment and/or spending, to avoid inflation and other macro-economic imbalances. (the original quote is from Fed Chairman William McChesney Martin in the 50s
Greenspan has done nothing but refill the bowl at every occasion:
- 1987: he flooded the world economy with liquidity after Black Monday, thus fuelling an unsustainable boom which crashed nastily in 1990/91.
- 1995-2000: his benign interest rate policy let the dot com bubble grow and grow, until it massively crashed on its own after having become a lot bigger than it should have (see the graph above);
- 2001: just at the time when the US economy was finally trying to swallow the excesses of the recent years, 9/11 gave him a great pretext to slash rates again and to flood again the US and the world with cheap liquidity, fuelling a real estate (and bond) boom (see the graph above);
The last one is the worst - the previous bubbles were the tail end of real value- and wealth-creating economic cycles, fuelled by industrial innovation, immigration and productivity growth. A good central banker would have slowed the "irrational exuberance" and let the boom play itself out in a more sustainable fashion. Today's bubble creates no wealth, as is demonstrated by the low overall employment rate: as shown in this great diary by Stirling Newberry
Today's growth is just debt-fuelled consumption. It generates imports, not value-creating activity, and the hangover will be the mother of all hangovers.
Mr Gerashenko, in Russia, printed money because otherwise salaries would go unpaid. Depreciating money (because of inflation) is less horrible than no money at all - which was the real plight of Russians back then. Mr Greenspan does not have this excuse.
Of course, he is popular - a barman handing out free drinks again, again, and again is never going to be unpopular - until the next morning. He has kept the party going for a long time (and ironically, 9/11 has probably prolonged it by a few years), but history will not be kind to him.
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