Alan Greenspan’s Genius at the Federal Reserve Was In Hiding How Little He Knew

It’s a bit of unreported on history that will eventually vanish, but back in 2005 Ben Bernanke went on a “listening” and “courting” tour. This thoroughgoing Keynesian who believed deeply that economic growth caused inflation, that government spending boosted growth, and most laughably, that “tight money” from the Fed brought on the 1930s, tried to refashion himself as a “Republican” economic thinker, whatever that means.

Bernanke met with anyone on the Right who would meet with him, and who theoretically had juice. His motives were clear: he was on George W. Bush’s shortlist for Federal Reserve Chairman, at which point he was checking the various Right-wing boxes. He even had lunch with Cato co-founder and President Ed Crane. Crane was clear about his disdain for the Phillips Curve (see above), only for Bernanke to mutter something indecipherable about growth and inflation a la Alan Greenspan’s own inscrutable mutterings as Fed Chair.

As readers know, Bernanke got the job. While Crane wasn’t tricked by Bernanke’s oleaginous ways, it seems enough right-of-center types were. Bernanke became a conservative, free-market type overnight only to revert to the left-leaning, interventionist Keynesian he always was once in the Chairman’s seat. While the Fed’s power is vastly overstated by critics and fans alike, proper history will be clear that the federal government from which the Fed derives its power is powerful. This is important simply because correct history will be clear that the 2008 “financial crisis” was anything but financial, rather it was a crisis of intervention. Financial institutions were failing, their failure was healthy, but the interventionist in Bernanke deemed the bailout of what markets would not save as essential in order to avoid what he imagined would be a decades-long U.S. economic slump. It would be hard to find a viewpoint more ridiculous, but history is clear that Bernanke believed bailouts were the cure. Worse, the man who appointed him in Bush was attracted to bad ideas like moss to a flame, only for a “crisis” to emerge once Bernanke and other interventionists got their way. Markets were fine, but Bush, Bernanke, Paulson and others not so. Again, proper history will correct the falsehood that the “crisis” was “financial.”

But that’s a digression, though a necessary one. It’s a reminder that the Fed is just government, and government is the opposite of markets. Markets comprise all that’s known, which is why they work so well. Governments bring intensely limited knowledge, which is why we’re always worse off (often in “crisis” form) when governments intervene. No matter how smart Bernanke and others might be, their knowledge is a microscopic fraction of what markets know. Bernanke thinks his limited knowledge saved the world, which is a reminder that delusion is incredibly powerful.

The main thing is that upon taking over at the Fed, Bernanke promised to be the opposite of Greenspan. Eager to curry favor with actual market actors, Bernanke promised “forward guidance” in terms of future Fed interventions. While Greenspan reveled in his “inscrutability” and the attention the latter won him, Bernanke would be transparent. In reality, Bernanke was unwittingly revealing how little he understood markets. Think about it.

Bernanke and the Fed’s interventions (think fiddling with short rates of interest) were a vain response to market realities as sleuthed by the mediocre minds at the Fed. In promising “forward guidance,” Bernanke was in truth presuming forward knowledge of economic conditions. Of course, if Bernanke or anyone at the Fed had a faint clue of the economic future they certainly wouldn’t be working at the Fed. They would in fact be doing real work, and earning billions for it. Which was why Bernanke’s laughable promise of “forward guidance” proved rather meaningless.

As Ken Fisher has pointed out, changing economic conditions frequently rendered the guidance provided not very valuable, only for the guidance to reveal itself as a source of instability. Since Bernanke et al couldn’t have possibly known future economic conditions that they were guiding markets ahead of time, the changing nature of subsequent interventions by the central bank were actually the source of greater surprise than Greenspan’s studied “inscrutability.”

Speaking of, isn’t it time we retire the laughable notion that Greenspan’s opaque qualities were those of a wise, intensely skilled mind? In reality, all Greenspan’s alleged mystery revealed was an implicit acknowledgement on his part that he too lacked a clue about the future. And since he didn’t have a clue, better to give off an air of mystery than to speak clearly only for market realities to reveal one’s clarity as wholly detached from reality. Put another way, if there was a genius within Greenspan it was rooted in his knowledge of how little he knew.

To which some who should know better will talk about the “Greenspan put,” and his ability to revive markets that were in decline. Such a view wasn’t serious then, and it’s even less serious now. That’s the case because there was never a “Greenspan put.” We know this because Greenspan began aggressively cutting rates in 2001 only for markets to enter into a long-term dive. In truth, the “put” from Greenspan’s glory years was broadly good economic policy under Presidents Reagan and Clinton, including stable dollar policy from Treasury. When policy turned awful in the 2000s (see Bush, George W.), Greenspan’s “puts” were anything but. If the Fed could engineer bull markets as the simplistic still believe, the U.S. economy (and the markets reflecting its future) would be too wrecked to bother writing about.

Back in 2016 the very excellent Sebastian Mallaby published a book that wasn’t very excellent. About Greenspan, it was titled The Man Who Knew. In reality, Greenspan didn’t know and evidence supporting this claim was his strident avoidance of clarity. That his successors claim to know via “forward guidance” just speaks to how little they know relative to Greenspan. Indeed, they don’t even know what they don’t know to obscure with muttering.