Greenspan - The Guardian of Price Stability?

By: Paul Kasriel | Wed, Nov 16, 2005
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On the eve of Fed chairman nominee Ben Bernanke's Senate confirmation hearing, there is the question whether he will be the same kind of guardian of price stability as his predecessor, Alan Greenspan. Actually, Greenspan is not a tough act to follow. Let's look at what Greenspan is handing off in terms of price stability compared to what he inherited. Upon inspection, the Greenspan myth regarding price stability belies the facts. The data in Chart 1 show that as of September, the yearover-year increase in consumer prices was 3.76% -- only 10 basis points less than it was in August 1987, when Greenspan took the helm from Volcker. That's the best Greenspan could manage when federal spending as a percent of GDP is lower than when he took over (thanks to the disintegration of the "Evil Empire"), when productivity took off due to the implementation of information technology and when the effective global labor supply curve took a quantum leap to the right due to the integration of China, India and Central Europe in the global economy - a measly 10 basis points?

Chart 1

The mainstream tends to be a bit myopic when it comes to price stability. It limits its focus to the prices of goods and services to the exclusion of asset prices. If we expand our view of price stability to include the prices of houses, Greenspan would be viewed as a sleeping guardian of price stability. Chart 2 shows the history of the house price index calculated by the Office of Federal Housing Enterprise Oversight (OFHEO). When Greenspan took over the Fed chairmanship in the third quarter of 1987, the year-over-year change in this price index was 7.7%. The latest reading, the second quarter of 2005, is a 13.4% year-over-year increase in house prices. Some price stability, huh?

Chart 2



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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