Tuesday, September 18, 2007

The illusion of control

The recent publication of a book by Alan Greenspan has quite naturally gotten quite a bit of publicity, and for those of us who are of Scots heritage like myself, here's an interview where he gets to the crux of the matter; that the Fed really is powerless to do that much to intervene when a bubble, such as the subprime mortgage disasters currently playing out, bursts.

What troubles, or confuses, me is that he stated at least once that he didn't see the subprime bubble bursting until last year.

Really? We have people taking out ARMs with a debt repayment/income ratio of 0.35, and he doesn't see trouble on the horizon? He didn't think it worrisome that large portions of people were so clearly living beyond their means?

He's issued a clarification, but he makes one thing very clear; the idea that the Fed can navigate the economy around every shoal in the economic waters is simply untenable. When the Fed creates a bubble by lowering interest rates, that bubble will eventually burst, and there isn't anything the Fed can do to prevent it from doing so.

1 comment:

Anonymous said...

Let's see....take a dash of the law of unintended consequences, stir in a generous amount of chaos theory, and cook well for two hours on a stove powered by "reaping and sowing are determined on moral and Providential grounds," and guess what? You can control the front end (e.g. stimulate the market by lowering interest rates) but you can't control -- or even reliably predict -- what the long term consequences will be.

Lacking the proper worldview, however, this will be opaque to the monetarist who believes it's all a lever-pulling numbers game.