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New Column: Myths of the Greenspan Era

Posted By Barry Ritholtz On January 31, 2006 @ 11:32 am In Federal Reserve | Comments Disabled

RealMoneyMy new column is posted at TheStreet.com, titled Myths of the Greenspan Era [1]. Its a modest look at some of the economic urban legends that have
sprung up around Easy Al.

Based on yesterday’s Free Lunch [2] discussion, it includes additional charts and data. Its also much less critical than our analysis back in 2004 [3].

Here’s an excerpt: 

"Myth 1: Greenspan Whipped Inflation: This is by far the most pervasive fallacy of the era. It has added to the
Maestro’s legend — undeservedly so, in my opinion. This is probably the myth
that’s easiest to disprove.

Numerous factors have led to low inflation over the past few decades; none of
them have much to do with Greenspan.

To understand where you are, you must consider how you got here. And when it
comes to whipping inflation, it all begins with Chairman Paul Volcker.

As the chart of long-term interest rates reveals, inflation was spiking in
the late 1970s. The oil embargo of the early ’70s started an inflationary spiral
that threatened the entire economy. Growth was anemic, and Japan was a growing
threat to the industrial heartland. A post-Watergate and post-Vietnam malaise
hung over everything. It was not a particularly joyous period in the U.S. When
Volcker was appointed Fed chairman, inflation was in the double digits, and
growth was stagnant. That combination came to be known as "stagflation."

Fed Chair Volcker aggressively changed the way the Fed attacked inflation. He
forced some unpleasant but necessary monetary medicine down the gullet of the
American economy.

No helicopter drops for Volcker: The first thing he did was idle the Treasury
Department’s printing press. By limiting the growth of money supply — and
abandoning interest rate targeting — he made it clear that no matter how
painful in the short term, he was going to get runaway prices under control.
Inflation, which had peaked at 13.5% in 1981, was down to 3.2% by 1983. The U.S.
has been enjoying the fruits of his labor ever since."

Its on the free Street.com site. Go forth and read!.


Myths of the Greenspan Era [1]
RealMoney.com, 1/31/2006 11:08 AM EST

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/01/new-column-myths-of-the-greenspan-era/

URLs in this post:

[1] Myths of the Greenspan Era: http://www.thestreet.com/markets/economics/10265345.html

[2] Free Lunch: http://bigpicture.typepad.com/comments/2006/01/free_lunch_myth.html

[3] analysis back in 2004: http://bigpicture.typepad.com/comments/2004/10/new_column_up_a_1.html

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