Greenspan’s Massacre Masterpiece

What most Economists “learned” from the Great Inflation was how important psychological factors had become. You would think that such a huge monetary disconnect would teach especially monetary officials the importance of monetary competence. However, as Upton Sinclair once wrote, paraphrasing, it’s difficult to get a central banker to understand money when his paycheck can be saved by blaming you (inflation expectations) for his mistakes.

The economic boom of the eighties, alighted by further and even more massive monetary evolution, offered Economists the chance to re-align monetary policy with their new approach. They couldn’t any longer define money so monetary policy as it stood was useless (targeting bank reserves or a broad money supply definition, those that had already been rendered obsolete two decades before).

J. Alfred Broaddus Jr. was President of the Richmond branch of the Federal Reserve and therefore rotated to become a voting member of the FOMC for the first time in the crucial year of 1994. The US economy had fallen into recession in 1990-91, and then somewhat sluggish recovery following from it (a pattern that has grown worse). President Bush (41) was defeated by “it’s the economy, stupid” even though the prior contraction had ended, technically, in March 1991 – nineteen months before the election held in November of 1992.

Stubborn economic weakness had meant the FOMC kept pushing the federal funds target, their relatively new policy approach, lower and lower. More than a year after the recession finished, FFT would finally come to rest at a low of 3% just months before the Presidential vote.

Then, everything changed in 1993; recovery ignited as if from out of the blue. Greenspan, of course, took it a sign of his and the new policy approach’s proficiency. But that left these same people to wonder and worry about thereafter. Problematic inflation was still fresh in their memories. Even in the late eighties, the CPI had become uncomfortably high again – it would peak at greater than 6% in 1990 during the contraction.

If monetary expectations policy was as powerful as authorities began to believe, then they had to act quickly. After all, a 3% federal funds rate was the lowest in decades. The dangers of an inflationary breakout dominated conventional thinking as 1994 approached and the economy kept improving.

It sounds very strange to us in 2019. Policy hawks in this day and age are central bankers who maybe, sort of act every once and a while. A quarter-century ago, Greenspan went full throttle on the hikes.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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Gary Anderson 11 months ago Contributor's comment

There is money, but it is not where it should be, and a little more would help the overall economy. But asset inflation while wages hardly grow is simply not cutting it. But the Fed likes it this way.