Politics bites Greenspan

I don’t usually read magazines with half-naked babes on the cover, but the latest issue of GQ (thanks to Slate for the pointer) has an interesting piece on Alan Greenspan.

The main thrust of the article is that although the chief of the Federal Reserve isn’t supposed to meddle in politics (and politicians can’t mess with the Fed by law), Mr. Maestro hasn’t resisted the temptation. Allegedly, he struck deals with Bush senior and Clinton to lower interest rates in exchange for tax hikes to curb Ronnie Reagan’s monumental deficits.

This doesn’t make much sense –even though the sources look reliable—since the Fed would probably have reduced rates anyway given the economic conditions of the time. However, these “deals” do seem to indicate that Greenspan prodded these two former presidents to do the right thing in fiscal policy, pointing out that lower deficits would allow rates to fall, thus jump-starting economic growth. The recipe worked just fine for Clinton and the nation, but the benefits didn’t come soon enough to save George H. W. Bush.

One long boom later, Greenspan had to deal with the next Bush and a set of radically different circumstances. The budget was in the black, but an unusual asset-driven recession was looming. The president adamantly wanted tax cuts and got Greenspan to sign on: he firmly and publicly backed them, which everybody interpreted as an endorsement of the chief executive’s plans.

Four years later, the nation faces twin fiscal and external deficits that may lead to a nasty crisis down the road. If this happens, Greenspan’s latest incursion into politics may be the undoing of his place in history as one of the greatest ever central bank chiefs or worse.

To be fair, backing tax cuts when a recession is imminent is not bad policy per se and he probably never envisioned just how irresponsible Bush and the Republicans would be in fiscal matters. Nonetheless, Greenspan must be really, really wishing he could take those words back.

Time to backpedal and promote fiscal sanity with full-force? Seems so. He’s already started to this in some speeches, which haven’t attracted much attention, and he’ll probably give quite a few “can’t quote me on this, but here’s what I really think” interviews. However, his scope for doing this while in office is limited if he doesn’t want to undermine the Fed’s political independence.

It’ll be interesting to see what he does and what he says out of office a year from now. Hopefully, he’ll do his penance and contribute towards the reestablishment of fiscal sanity.