Maestro? Nah...

GREENSPAN'S GOLDEN ERROR

Here's a curious exchange in Alan Greenspan's interview with the Wall Street Journal, in which he tries to defend himself against critics who say his policy mistakes enabled the housing boom and credit bubble:

WSJ: What was your attitude about the initial phase of low interest rates in 2001-2003?

Mr. Greenspan: I'm an old 19th-century liberal who is uncomfortable with low interest rates. My inner soul didn't feel comfortable. I said to my colleagues, we've got to restore interest rate neutrality as quickly as we are able to. But we were confronted with a continuous decline in the rate of inflation. The presumption that we could provoke corrosive deflation with a flat currency seemed inconceivable to me. But that was what was happening in Japan. I couldn't deny that my old predispositions, which come from the gold standard, were being violated by evidence in front of my eyes.

Surely there is a typographical error here -- "flat currency" should have been "fiat currency." But what is truly strange about this is that Greenspan's interest in the gold standard would have provided perfect guidance for policy here -- if he had only seen what gold was telling him. What other "evidence" was he looking at? Backward-looking statistical measures of inflation? Gold's fall from $400 to $250 could have warned Greenspan about deflation long before he started focusing on it in 2002. By then, gold was already well on its way back to $400, which it nearly had attained again by 2003 (and did attain in 2004). But then Greenspan (and Bernanke) were still ignoring gold entirely, still worrying about deflation, and still holding interest rates at rock bottom for a "considerable period." So it's not Greenspan's traditional orientation around a gold standard that failed him. What failed him was his own abandonment of the gold standard, precisely when it was giving him just the guidance he needed.