Stephen Roach: Greenspan Guilty as Charged

Morgan Stanley’s Stephen Roach joins the crowd blasting Greenspan for his failure to deflate the housing bubble. Greenspan, says Roach, was politically compromised and allowed his myopic market fundamentalism to cloud his judgement:

Greenspan’s handling of the housing bubble is the smoking gun. The Greenspan mantra is that markets know best—that central bankers should not attempt to override the verdict of millions of market participants by declaring that an asset bubble has formed. After all, there are the costs to economic growth to consider if monetary policy is used to deflate such bubbles. And why should any modern economy have to incur those costs? After all, goes the script, the authorities always have the wherewithal to clean up any post-bubble mess. Maybe not. This time, the mess is almost beyond the realm of comprehension—most likely a good deal larger than any growth that might have been foregone had the U.S. housing bubble been handled more judiciously.

Yet the problem has never really been the bubble in the narrow sense of the word. One of the weakest links in the Greenspan defence is his fixation on whether a serious bubble was forming in America’s housing market. Never mind his earlier arguments that housing markets were local, not national, and that it was highly unlikely that home prices could ever fall nationwide. Whoops.


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