The Anti-Greenspan

If we don't audit the Fed, how do we reform it?

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I've recently been thinking out loud: If Greenspan couldn't run the Fed without making critical mistakes, who could? Yesterday at Real Clear Markets, Dani Rodrik of Harvard provided at least some answer. He says the next Fed chairman must not be like Greenspan and believe that "what is good for Wall Street is good for Main Street." Here's an example of the kind of belief he thinks the next chairman must reject:

Financial innovation is a great engine of productivity growth and economic well-being. Again, no. Imagine that we had asked five years ago for examples of really useful kinds of financial innovation. We would have heard about a long list of mortgage-related instruments, which supposedly made financing available to home buyers who would not have been able to purchase homes otherwise. We now know where that led us. The truth lies closer to Paul Volcker's view that for most people the automated teller machine (ATM) has brought bigger benefits than any financially-engineered bond.

This doesn't seem to get to the heart of the problem. These financial "innovations" wouldn't have been nearly so damaging had Greenspan not kept interest rates too low for too long. But he didn't do that just because he was afraid of hurting Wall Street.  He also was afraid of the job losses that would result if the recovery was delayed. In hindsight, that wasn't a good move—better to have a little pain now than a lot of pain later.

But would a "financial skeptic" chairman be willing to pull that trigger and create short-term pain, given the enormous political pressures on him or her? That's what I'm skeptical of.