Jewish World Review Feb. 7, 2006 / 9 Shevat, 5766

Greenspan advising Britain? It's housing bubbles, deficits and potential meltdowns all over again

By Niall Ferguson

http://www.JewishWorldReview.com | They really are the odd couple of economic policy. on one side of the atlantic is alan greenspan, who last week stepped down as chairman of the federal reserve after nearly two decades of mastering the financial universe. On the other is Gordon Brown, Britain's chancellor of the Exchequer, who last week was still chancellor of the Exchequer after nearly one decade of wishing he were prime minister.

Greenspan is revered today but, before he went to the Fed, he was regarded as something of a right-wing maverick. He was a disciple of Ayn Rand, whose theory of objectivism might best be summed up as the veneration of unfettered capitalism.

Brown had a rather different mentor in his formative years. He wrote his doctoral dissertation about that Red Clyde firebrand, James Maxton, who dedicated his life to the denigration of unfettered capitalism.

So there was something distinctly bizarre about the report last week that Greenspan is to become an unpaid "honorary" advisor to Britain's treasury.

One can only hope that when Greenspan arrives at No. 11 Downing St. he will not — as has been his wont for the last 19 years — mince his words.

AG: "Gordon, I have to level with you. The British economy is in a mess. And it's your fault. You inherited an economy that had been saved from ruin by Margaret Thatcher. You did one thing right, which was to make the Bank of England independent. But to call the rest of your time as chancellor a success would be — to coin a phrase — irrational exuberance.

"Nearly a third of the new jobs created in Britain since 1997 have been in the public sector. You've thrown billions at an inefficient, state-run health service. Meanwhile, British productivity lags behind not just the U.S. but even Italy."

GB: "Thanks, Alan old boy, but actually those aren't the things I wanted you to advise me about. There's another set of problems that are worrying me more. First, I'm a little nervous about the growth of public-sector borrowing. Second, there's been a housing bubble here, and I'm worried that as it deflates we're going to slide into recession. Our pension system seems to be heading for a meltdown, and our current account deficit refuses to go away. Sound familiar to you?"

AG: "OK, OK, so I'm not quite as big a genius as everyone was saying last Tuesday. Sure, I got the big things right. Inflation is lower and growth steadier than it was when I took over the Fed in 1987. I've got the American economy through not one, but two stock market crashes, to say nothing of a direct terrorist hit on downtown Manhattan.

"But my real legacy to my successor is a conundrum. I've spent the better part of the last two years raising interest rates but — I have to admit it — no one seems to have noticed. The dollar has weakened only a little, and long-term rates haven't budged at all. So our housing bubble is still going strong. And Americans aren't saving a cent. In fact, they just keep borrowing more and more against their homes, and then heading off to the shopping malls to spend it.

"I just don't get it. If quadrupling the cost of borrowing can't cool things down in the U.S., I don't know what can. Are long-term rates being artificially depressed by Asian central banks' purchases, or is everybody out there just dreaming that inflation is no longer something they need to worry about because of globalization?

"One thing's for sure, I breathed a sigh of relief when I walked out of my office for the last time. Come to think of it, I guess that's the way you'll feel when you finally get to move next door into No. 10."