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Richard Salsman's Confused Review of Greenspan

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03/22/2006

Apparently it was published over a month ago, but I only now discovered that big "O" Objectivist (ARI-affiliated) economist Richard Salsman published a review of Alan Greenspan on Capitalism Magazine's web site. In some ways his review is pretty good, but in other ways it is very confused.

I have previously described how many ARI-affiliated individuals have moved from a Misesian to a Supply-side analysis of the business cycle, with Salsman being one of the most prominent in this regard. The contradictions of supply-side economics who claim to be anti-inflation and pro-gold yet at the same time attack the Fed for pursuing a "too tight" monetary policy is permeating his review.There are some good things about his review. Like me he points out that the consumer price index rose 74% (From 114 to 198) under Greenspan's watch and attacks Greenspan for it. Like me he also points out that Greenspan was once a gold standard advocate who turned on gold and adds the point that Greenspan not only did not advocate gold, but in fact argued against gold in 1981, claiming it was "impractical". He therefore like me concludes that Greenspan in no way replicated gold standard conditions and that gold would be preferable to Greenspan-and Bernanke.

But Salsman also indirectly attacks me as well as The Economist and many others, writing:

"Greenspan's few critics lambasted him for the wrong reason, claiming he improperly "allowed" U.S. stock prices to "rise too much" in the 1990s — or "allowed" house prices to "rise too much" in recent years. In fact, his truly improper behavior entailed enviously smashing such wealth gains with rate hikes and inverted yield curves. His last act on his last day in office last month was to raise rates yet again and invert the yield curve — historically, a leading indicator of recession." 

While he is right to put "allowed" in quotation marks, as the Fed caused the bubbles instead of just allowing them, this criticism flatly contradicts the other things he wrote. Had the Fed not raised rates occasionaly the money supply would have increased further and thus aggravated the loss of purchasing power he later decried in the same article. How could the Fed possibly restrain its money creation with regards to consumer prices and accelerate them with regards to asset prices?

Under a true gold standard, any shift in investor sentiment towards stocks or housing would automatically imply (at least ceteris paribus) higher bond yields, a movement which central banks replicates too late in practice. We see here a perfect example of the previously mentioned contradiction of supply-side economics.

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