Greenspan Protesteth Too Much
Cross and guest post by Raymond L. Richman ofTrade and Taxes
Greenspan Protesteth Too Much
Raymond L. Richman
Alan Greenspan in his op-ed in the Wall Street Journal 3-11-09 entitled “The Fed Didn’t Cause the Housing Bubble” denies that the “easy money” policies of the Federal Reserve produced the U.S. housing bubble “that is at the core of today’s financial mess.” Instead, he argues, “The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria.” but the presumptive cause was the world wide decline in long-term interest rates, “the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition . . a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment … which propelled global long-term interest rates progressively lower between early 2000 and 2005.” There you are, the real estate bubble was the result of the play of free market forces and the U.S. Federal Reserve System was an innocent bystander. If you believe that, we have a bridge for you!
If the reader has read our book, Trading Away Our Future, he knows that Japan pursued an export-based strategy of developing herself at the expense of the American worker since the early 1950s under the aegis of its Ministry of Trade which used every dirty trick to limit imports and subsidize exports. Lee Iacocca describes his visit to Japan in the 1980s in which he protested the existing tariff on American automobiles. Japanese cars are better which is why the Japanese don’t buy American autos, he was told. If so, why did Japan need a tariff?
China modeled her development strategy after Japan. To our everlasting shame, we permitted both China and Japan, and other countries, to pursue this development strategy which should be called by its right name dollar mercantilism. When trade is in balance, the workers of all trading partners benefit. Balanced trade is like barter; each partner gives up a bundle of goods it can produce more cheaply for a bundle of goods more costly to produce. When countries maintain by artificial means a favorable balance of trade, they cause the loss of jobs in their trading partners. The chronic trade deficits have cost the jobs of over 7 million American industrial workers. (That is how many workers, more or less, that it would take to produce $700 billion worth of goods and bring trade into balance.)
Mr. Greenspan is enthusiastic about international trade. “Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being.” He does not mention the trade deficits even once. The flow of savings to the U.S. “was a measure of our financial systems precrisis success.” Indeed, many called the flow of funds to the U.S. an example of the confidence foreigners had in our economy (or, perhaps, in their ability to take jobs from American workers with impunity).
Mr. Greenspan speaks in Keynesianese, using phrases made famous by Keynesians like “intended savings” and “intended investment”. China (and Japan) never intended to spend their savings on real capital from the U.S., trucks, tractors, factory and road-building equipment, etc. They deliberately invested their trade surpluses in financial assets like U.S. government bonds and later private securities which kept interest rates low and encouraged American consumers to keep importing. And, yes, to buy houses and finance the housing bubble!
What was the responsibility of the Federal Reserve System and why does Mr. Greenspan escape into technical jargon? The Fed is responsible for the money supply – not too hot, not too cold, just right. With foreign savings flooding the U.S. because our trade was seriously unbalanced, it had at least two options. First, it could restrict the inflow of foreign savings, or, second, urge Congress and Administration to ensure balanced trade. Warren Buffet proposed restricting imports to the amount we imported. Or, quick and simple, impose protective tariffs on all imports emanating from countries with which we are experiencing sizable chronic trade deficits.
Mr. Greenspan, indicates why he chose to do nothing about the damage the trade deficits were causing the American economy and the American worker. He makes no apology for being a free trader just as nearly all economists make no apology for being free traders. Is free trade an economic concept? Not really. It is an ideal toward which economists believe we should all subscribe. It is an ideology.
Do the Japanese and China, and OPEC believe in free trade? Maybe they, too, believe it as an ideal, but nothing in their trade practices shows that they believe it at all. Why should free trade be treated as though it actually exists? There is not a single example in any international trade textbook that shows the benefits of unilateral free trade. In every example that shows both parties benefiting from trade, trade is in balance at equilibrium.
Under the rules of the World Trade Organization, every country was admitted leaving in place all kinds of barriers to imports and subsidies to exports. There was no pretense at free trade, only an encouragement to reduce trade barriers.
Moreover, we have had experiences with the negative aspects of international flows of funds. In the late 90s, the flow of funds to the Asian Tigers bankrupted all of them. Now they all have barriers to financial flows. Perhaps Mr. Greenspan thought it could not happen to us; after all their debt was payable in dollars and the Fed can print as much as it wants.
Now we do not want to give the impression that our trading partners caused the severity of our current crisis. The defaulting subprime mortgages created a world-wide financial crisis and those were made right here in the United States. Indeed, numerous economists studied them and reported they posed no greater risk than “normal” loans. Indeed, they did not until they defaulted en masse and it is not over yet. Perhaps economists never learn (except us!). Elizabeth Duke, a member of the Board of Governors of the Fed, is still enthusiastic about the Community Reinvestment Act that started the no-prime fad. And Larry Summers, Pres. Obama’s chief economist, has never mentioned the trade deficits. They are likewise no problem to most economists, just to workers.