As we noted this morning, this whole genre of attacking economists for believing that humans are always perfectly rational is getting a bit tiresome.
This weekend in the NYT it was Robert Frank. Last weekend it was Paul Krugman.
Both heaped a ton of scorn on Alan Greenspan who, they say, believed that markets were always perfect and therefore didn’t require any regulation.
Alex Tabarrok begs to differ:
Hardly anyone wants to recall today, for example, that it was Alan Greenspan who popularised the term “irrational exuberance,” in a speech in December of 1996. At the time, Greenspan’s remarks were covered around the world and they created a sell off in stocks. In a NYTimes article titled Irrational Exuberance, Louis Uchitelle wrote:
That sort of optimism cannot last; stocks that are too highly priced will inevitably fall, perhaps over a long period, as they did in the mid-1970’s. Mr. Greenspan, who is 71, lived through that painful downturn as a top economic adviser in the Ford Administration.
This time, a falling stock market might have a broader impact. Many more Americans own stocks today than in the past, and a downturn could cut deeply into their sense of well-being. The result could be a severe cutback in spending, hurting the economy. For that reason, the stock market has become increasingly important in the deliberations of the Federal Reserve over interest rates — whether to raise them to slow the economy or lower them to encourage spending and growth.
Greenspan in Uchitelle’s piece is the one raising questions about market prices. Furthermore, no economist in Uchitelle’s piece says that prices are always correct or that markets are perfectly efficient or that bubbles are impossible–the mainstream view according to Krugman. Robert Shiller is quoted not Eugene Fama. And, of course, it was Robert Shiller who would later author two bestsellers warning of bubbles, another discomforting fact for those who argue that dissenting economists were marginalized.
So basically Greenspan was wrong in 1996 about stocks being overpriced. And he was wrong in 2004 to not realise that we were on the precipice of a gigantic bubble collapse. He was wrong, but not ideologically blind. If his ideology blinded him to the possibilities of bubbles or irrationality, then he would never have made his warning back in 1996 about stocks.
Of course, you can still slam Greenspan for inflating a bubble, and for missing subprime, and all that. But to think that it was merely the result of his beliefs — rather than just being wrong — and to think that the natural antidote to irrational exuberance is more rational regulators just doesn’t fly.