Thank you for the opportunity to host a forum on Dean Baker’s book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy.” As I’m sure that most readers of this blog know, Dean is an economist who has long been affiliated with the Center for Economic and Policy Research in Washington.
There’s a lot a material in Dean’s book that is covered much too briefly. In some ways it is an economic history of the postwar era. For those who aren’t economists and want a left-of-center perspective in a very few pages, this is a good place to start.
Unfortunately, a price is paid for such brevity. Issues on which there is considerable debate even among economists on the left are presented as if our understanding is clear and unambiguous. Also, they are almost always treated as if the connection to particular governmental policies is direct and causal.
But I don’t wish to dwell on my problems with Dean’s book because I would rather talk about what I like about it. The fact is that he got the Big One right; that is the roots of the current economic malaise. Chapters 5 and 6 offer a very clear and accessible discussion of how we got where we are today.
To those of you unfamiliar with Dean’s work, he was a very early and vocal critic of the policies that created the housing bubble. Central among these was the extraordinary power of one man: Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006.
The only person I can think of in American history who comes close to Greenspan is J. Edgar Hoover, director of the FBI from 1924 to 1972. They are alike in that their power was so great that they were routinely reappointed to their positions by presidents of both parties for an amazingly long time.
In my view, the base of their power was that they successfully created the impression that their skills were so profound that they and only they were capable of running institutions that were critically important to the nation. Both Greenspan and Hoover were also masterful at cultivating allies among the media and Congress. Information was their currency—in Hoover’s case, gossip derived from wiretaps and FBI informants; in Greenspan’s, hints about the future direction of Fed policy, upon which fortunes could be made.
I don’t mean that Greenspan ever told anyone exactly what he was going to do. His method was much more subtle—like a seduction, except that those being seduced weren’t members of the opposite sex, but economists, bankers, congressional committee chairmen and even presidents.
Greenspan was a master at giving people the idea that he was interested in their opinions without actually caring about them at all, and appearing to give them insight into monetary policy or the economy without actually saying anything at all. If some bank economist was fortunate enough to get a note from Greenspan congratulating him for some analysis, that economist knew his position was secure; his bosses wouldn’t dare fire him because he had a pipeline to the Great Man. This also guaranteed extreme loyalty to Greenspan from that economist.
As a consequence, virtually all the people with the training, experience and access to data that would have allowed them to see the high-tech bubble or the housing bubble were virtual captives of the man responsible for both. On the one hand, they were fearful that criticism of the Fed might cut off their access; on the other, I think many talked themselves into believing that Greenspan was right and they were wrong (It’s like the punch line to that old joke: “Who are you going to believe? Me or your lying eyes?”) And even if Greenspan was wrong, he was the only one who could fix things. Either way, analysts and investors had no choice but to go along with whatever Greenspan wanted to do.
This really explains how we suffered two massive, back-to-back financial bubbles on Greenspan’s watch. He created them by easing monetary policy too much and then responded too late by tightening too much. All along, he had perfectly plausible reasons for doing whatever he did—reasons that were treated by policymakers and the media with only slightly less reverence than the tablets Moses brought down from Mt. Sinai.
Since all of those in the mainstream effectively were members of the Greenspan cult, it was left to those outside the mainstream like Dean Baker to sound the alarm. Another was Ron Paul, who reached the same conclusions coming from the opposite direction politically and ideologically.
Dean deserves a lot of credit not just for seeing the housing bubble early, but sticking with his analysis even as so many of the leading lights of the investment community proclaimed that it was different this time. I know that I saw many of the same problems Dean did back in 2004 and 2005. I wrote a number of columns warning about collapse of the housing bubble. But then nothing happened throughout 2006 and most of 2007.
After a while, I began to doubt my analysis and moved on to other things. Dean didn’t and stuck to his guns. I hope he was greatly enriched by his insights, selling short stocks in the financial services industry and investing his funds in Treasury securities.
I suspect that he didn’t because being right too soon in the economic forecasting business really has no value. Investors are not interested in knowing what will happen five years from now; they only want to know what will happen tomorrow.
Unfortunately, we are setting the stage for the next bubble at this very minute. I don’t know where it will emerge—perhaps Dean will tell me. I just know that the Federal Reserve can’t inject hundreds of billions of dollars of newly created money into the economy in a very short time without creating a bubble of some kind. You heard it here first.