Wall Street Bubbles

Alan Greenspan


Stephen Roach

Heinrich BrĂ¼ning

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Greenspan's most vehement critics are convinced he has made a fundamental error as a monetary economist.
The hairshirt economists vs. the cheerleaders for growth-is-good
Business Week 28/6 2005

The hairshirts believe that for the health of the economy to be restored, the inevitable bust that follows a boom must be at least as great as the boom.

Growth proponents - and there's none greater than Greenspan - believe that it's better to limit the fallout of a bust and get the economy growing again as quickly as possible.

A problem with the anti-Greenspan mindset is that hairshirt economics was largely discredited during the Great Depression.

The most infamous proponent of this point of view was Andrew Mellon, President Herbert Hoover's Treasury Secretary. He called for letting the Depression run its course without government interference: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate," he remarked.

Doing so would "purge the rottenness out of the system."

Mellon was far from alone in valuing severe downturns as purgatives. The depression-is-desirable crowd included such legendary economists as Joseph Schumpeter, Friedrich Hayek, and Lionel Robbins, according to University of California at Berkeley economist J. Brad DeLong in his essay "'Liquidation' Cycles and the Great Depression."

Mainstream economists of all schools, from Keynesianism to monetarism, turned away from hairshirt economics after the Great Depression. They realized that the government could play a positive role in counteracting contractionary forces in the economy.

Perhaps there is a bubble in the housing market. Certainly, home prices have strayed far from fundamental values on both coasts. The popularity of interest-only mortgages and other speculative financing techniques is worrisome [see BW Online, 6/16/05, "The Mortgage Trap"].

But a record 70% of American households now own their own homes.

Remember, not all price increases are bubbles, booms are better than busts, and growth is not only good -- it's vital.

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