Reflections on Central Banking
Following are some comments made by Greenspan at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming August 26, 2005. The subject matter of Greenspan's speech was "Reflections on Central Banking". Here are some of the highlights:
"History has not dealt kindly with the aftermath of protracted periods of low risk premiums"
"Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices"
"Given our inevitably incomplete knowledge about key structural aspects of an ever-changing economy and the sometimes asymmetric costs or benefits of particular outcomes, the paradigm on which we have settled has come to involve, at its core, crucial elements of risk management. In this approach, a central bank needs to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path. The decision makers then need to reach a judgment about the probabilities, costs, and benefits of various possible outcomes under alternative choices for policy."
"The structure of our economy will doubtless change in the years ahead. In particular, our analysis of economic developments almost surely will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period."
Mish has some questions for Mr. Greenspan and the FED.
- The FED was created in 1913 supposedly to steer the economy in the right direction. It did not do a very good job in the late 20's and early 30's did it?
- Given your admission that the "economy will doubtless change" in the years ahead, why do you foolishly think you can guide the economy down the correct path, when you have blown the two largest bubbles in history?
- Given your admission of "inevitably incomplete knowledge about key structural aspects of an ever-changing economy" just why the hell do you think the FED can steer the economy better than the market can?
- Given your obviously bad track record, why shouldn't you abolish yourselves?
By the way, here is the complete text of Greenspan's speech. Given that the complete text is lengthy and generally boring save a few key quotes for everyone to ponder, I am pleased to offer this fine translation by Ramsey Su on Silicon Investor.
For 18 years, the Feds led be me, the supreme highness of the universe, did not have a clue what we were doing. So we think the economy is zigging so we zigged faster. As it turned out, the economy is really zagging so we zagged. In the end, we just decided to roll up all those zig-zag reports and had one hell of a smoke. Now that the party is over, it is time for me to get the hell out of here and let someone else clean up my mess.
There you have it. That is what Greenspan really meant to say.