There are few sights quite so grimly fascinating as watching a once-stellar reputation come hurtling back down to earth. By the time he finally stepped down as chairman of the Federal Reserve, Alan Greenspan was hailed as an economic mastermind. He was paid millions for a book and even more for speaking engagements. The markets continued to hang on every word uttered by ‘the maestro’.
Yet last week, Greenspan was beaten up in Congress and castigated for his role in creating what now looks like one of the greatest bubbles of all time. Far from being a genius, Greenspan is rapidly being recast as the man who allowed a slow-motion train crash to play out on his watch and did nothing to prevent it.
From a British perspective, what’s interesting is not just how the Greenspan story is being rewritten, but how lightly his equivalents on this side of the Atlantic have so far escaped. Shouldn’t Mervyn King and the Bank of England itself come under the same sort of forensic examination? They certainly should. After all, if we aren’t willing to learn from the mistakes of the past decade then we are condemned to repeat them.
In America, there has been a lot more soul-searching over the central bank’s role in the build-up to the crash. Greenspan still clings to his mantra that he was largely blameless. You can’t spot bubbles in advance, he insists. Even if you could, you couldn’t do much about them. And, anyway, as he pointed out to Congress at last week’s hearing, there was a lot of pressure from politicians and others to grow lending, not shrink it. It’s not fair to blame him.
Maybe he’ll get away with that line. When the history books come to be written on the Great Crash of 2008, no doubt many different culprits will be fingered. But it’s unlikely that Greenspan, with his policy of pumping up the economy with ultra-low interest rates during every minor downturn will escape a hefty share of the blame.
Yet so far, in Britain, we have pointed the finger everywhere other than the Bank’s Threadneedle Street headquarters. We have blamed the Americans, the bankers, the Financial Services Authority (FSA) and, of course, Gordon Brown. The Bank itself has skilfully sidestepped any real criticism. That’s pretty odd. After all, the UK has suffered as badly as any country from the credit crunch. The bank bail-outs have been massive, saddling a whole generation with huge debts. Our economy has slumped into a longer recession than any other major economy.
It didn’t have to be like that. Other so-called ‘Anglo-Saxon’ economies haven’t suffered anywhere near as much. Australia is still booming – so much so that the central bank is raising rates again. Canada didn’t see any significant banking crisis. In truth, the UK suffered so badly because of specific, home-grown policy mistakes.
It’s certainly fair to blame Gordon Brown. He over-regulated and over-taxed the economy, and ran up too much debt. And the FSA made a terrible mess of regulation: it focused on micro-managing who could open an account, while failing to notice that whole banks were going bust. Yet the Bank, surely, is guilty on two counts. It ran a loose monetary policy, allowing, if not actively encouraging, a runaway housing boom. And it did nothing to prevent the build up of personal, corporate and government debt.
House prices have rocketed since the Bank was made independent in 1997. According to Nationwide, in the 13 years since, the price of an average house in the UK has risen by 173%. True, King was one of the very few senior officials willing to warn publicly that the housing market looked overheated. The Bank fretted about the housing bubble, and the impact it might be having on the economy. But it stopped well short of raising interest rates to choke it off.
Likewise, the UK built up extraordinary debts. According to McKinsey research, when you add together government, corporate and personal debt, the UK is now by far the most indebted of all the developed economies. Total debts are a staggering 450% of GDP. Most of that was built up in the last decade: total debt as a percentage of GDP roughly doubled since the Bank won its independence in 1997. Again, there are other culprits for that. The government borrowed a lot more than it should have. Tax policy favoured debt over equity, stoking the boom in leveraged buy-outs. But you can’t exclude monetary policy. The interest rate is the price of debt. If people were taking out too much of the stuff – and in retrospect it’s clear they were – then surely it was priced too cheaply?
Both the housing boom and the debt bubble were fuelled by monetary policy that was too easy for too long. In the City, an independent Bank of England is viewed as a ‘good thing’, without any real debate. The fact remains that it has presided over a catastrophic collapse in the financial system. In the US, they have started to rumble that the central bank might have had something to do with that. Here in Britain, we should at least be questioning whether ours did as well.