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Given that human beings are not omniscient -- and historically, central planning committees have been notoriously prone to error -- it's easy to imagine that such a group would be far more likely to pick the wrong interest rate than it would be to choose exactly the right one to run an economy. Yet when these central planners decide they've chosen the wrong rate, for whatever reason, they use the very same process when selecting a new one. It's an impossible job, but they seem happy to do it.
The mission of the Federal Reserve is supposed to be mainly concerned with stability and prudence. The Fed's own Web site lists its three primary responsibilities to the public as follows:
- Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
- Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
- Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
That sounds straightforward enough, even if pursuing stable prices and full employment leads to conflicting agendas at times. The mission is clear, though the execution of it in real life is far more complex and difficult than it may seem at first.
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That said, Greenspan's errors in judgment seemed so obvious they beg the questions: Why did he make them? Did he actually set out to redistribute wealth from the middle class to the rich while the country itself essentially burned the furniture for heat? After all, his bubbles made the sponsors of those bubbles fabulously wealthy, ultimately to the detriment of the average person and the United States as a whole. Or was he simply not up to the task?
Bill Fleckenstein's new book is now available. Click here to buy it.
With the benefit of hindsight, anyone can look infallible or rewrite his own history, as the former chairman has tried to do. However, just as we have a contemporaneous record of what Greenspan really said, I have a record of my own as well. I began writing an online column about the stock market in mid-1996 and continue to do so to this day. As any longtime reader of those columns can attest, I have certainly not been infallible. Far from it. I saw the stock market bubble building and concluded it would end in disaster -- about four years too soon! Then again, I never pretended to know what the right interest rate to run the country was.
Down through financial history, markets have intermittently gone to excess. Prices go to the sky and then fall through the floor. Human beings can't help themselves. But the bubbles in U.S. stocks and real estate didn't just happen. To a degree that the American public has not yet fully realized, these costly distortions were instigated and financed by the Federal Reserve -- Alan Greenspan's Federal Reserve.
This was excerpted from MSN Money columnist Bill Fleckenstein's new book, "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve."
Published Jan. 17, 2008
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