http://www.observer.co.uk/economy/story/0,1598,787908,00.html
How the Greenspan bubble burst William KeeganSunday September 8,
2002The Observer
There was a period
during the chancellorship of Nigel Lawson when some Treasury officials favoured
the 'spritzer' as a drink. This is neither white wine nor water, but an uneasy
combination of the two.
The mystery of why officials should have been opting for this strange potion
was solved when one learnt that leadership in this matter was coming from none
other than the Chancellor himself.
This summer, before going on holiday, I noticed that a number of Treasury
officials were talking of the crime novels of Raymond Chandler. I don't know
whether this was at the suggestion of the Chancellor, but it intrigued me; as I
hadn't read Chandler since I was at school, I thought a return to the scene of
the crime might make good holiday reading.
And so it did - ideal for the necessarily brief bursts of reading that child
duty by the pool allows. But for meatier stuff I took Anthony Beevor's Berlin:
the Downfall, 1945 and Piers Brendon's account of the Thirties, The Dark Valley.
Anything to do with the Second World War puts current problems in perspective,
and reminds one why, for all its irritations, the European Union is a good thing
and must be built on.
But the relentless slaughter of 1944-45 described by Beevor made pretty
depressing holiday reading, although it did not quite drive me to try the drink
favoured in Chandler's The Long Goodbye: the 'gimlet', 'half gin and half Rose's
lime juice, and nothing else'. I do not know whether this will catch on at the
Treasury. Perhaps it could be mixed with a spritzer.
To explain the Thirties, Brendon naturally spends a good deal of time on the
Twenties. And, without wishing to push the analogies too far, one is reminded
how closely the boom of the Nineties and turn of the millennium resembled the
lead- up to the 1929 Crash and Depression.
Brendon's section on this is replete with quotations and rationalisations
that could have come straight from the Nineties. The basic belief was that it
was a 'new era', and you could forget the old assumptions, rules and
regulations: the stock market knew better...
Which brings us to the recent apologia by the economic policymaker who was
worshipped throughout the Nineties and acquired the status of financial
witchdoctor, Alan Greenspan, chairman of the US Federal Reserve. Greenspan
recently claimed 'it was very difficult to definitively [sic] identify a bubble
until after the fact' and that, in any case, it was impossible to do anything
about a bubble, even if it could be identified.
This seemed to me to be a revisionist view, because I recalled friends of
Greenspan telling me years ago that he was very concerned about the stock market
bubble, and indeed used that term. But he would then point out that the very
metaphor itself implied you could do nothing about it. You could not 'deflate' a
real bubble. Real bubbles could only burst.
Can it be that the boom got out of hand, and that appropriate cautionary
policies were not adopted simply because policymakers were obsessed with one
metaphor that told them they could do nothing?
Well, not exactly: the American economist Paul Krugman has tracked down a
passage in the published minutes of the Federal Open Market Committee for
September 1996, at which the Fed chairman said: 'I recognise that there is a
stock market bubble problem at this point.' The solution was 'the possibility of
... increasing margin requirements. I guarantee that if you want to get rid of
the bubble, whatever it is, that will do it.'
The timing of this statement was interesting. It was several months before
Greenspan made his famous comment about 'irrational exuberance', and that
comment itself was made in December 1996, when the US stock market boom of the
Nineties was only in its infancy.
Now anyone who has read JK Galbraith's The Great Crash will recall the
central role 'margin requirements', or rather the lack of them, played in the
boom of the Twenties. Bluntly, much of the feverish buying in the Twenties and
the Nineties was done on easy credit, and tougher regulation of the financing of
stock market activity could have done a lot to limit the damage.
This is not of just historical or 'academic' importance. As British economist
Christopher Dow made clear in his last work, Major Recessions , history teaches
us that 'the bigger the boom, the bigger the bust'. This is a lesson that, to
judge from the number of times he has referred to 'the economics of boom and
bust', Gordon Brown has fully appreciated.
It is abundantly clear from the gloominess of the economic news in the US
that the 'bust' phase is far from over. And, given that the rest of the world
relied for so long on the US role as 'importer of last resort', there is a limit
to which European schadenfreude can offer consolation. For years
