Reflections on Greenspan ’s “Irrational Exuberance” Speech after 25 Years

ConclusionMuch can be learned by reflecting on Greenspan ’s 1996 speech, especially given the global financial crisis of 2007–2009 and the current pandemic—both of which have increased the Fed’s power and weakened its independence. There is still no monetary rule to guide monetary policy, even as inflation has reared its head once more. What jumps out from Greenspan’s speech is how he posed a problem that the Fed never solved, and then made things worse.The New Year will test the Fed ’s resolve to taper QE, “normalize” interest rates, and slow inflation. With unprecedented fiscal deficits and debt, at least in peacetime, there is a strong need to redelineate the distinction between fiscal and monetary policy—and to recognize the limits of monetary policy. Asking the Fed to do “too much” risks further politicizing the central bank, with the consequent loss of credibility.Although Greenspan never formally adopted a monetary rule, he certainly understood the knowledge problem facing central bankers. Perhaps he might be more open to a rules-based monetary policy today, if he were to reflect on KarlBrunner ’s insights regarding rules versus discretion:Our life moves in a grey zone of partial knowledge and partial ignorance. More particularly, the products emerging from our professional work reveal a wide range of diffuse uncertainty about the detailed response structure of the economy. . . . A nonactivist [rules-based] regime emerges under the circumstances...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs