Tuesday, February 21, 2012

Greenspan vs Trichet, a tie?

If Greenspan was the head of the G30, would one then wonder if it is a proper institution to impulse change in banking legislation and monetary policy, at a time when we're grappling with the legacy of the financial crisis? Probably, one would wonder, but, in reality, no wonder, because Trichet is chair of the G30. But then, did Trichet do such a better job than Greenspan? Economic historians are the final authority on this sort of legacy, but, until they render their judgment, it's open for discussion.

The jury is out

In an op-ed, Dean Baker, a recipient of the Revere Award for correctly predicting the crisis, said that that Trichet's legacy is "no party for Europe". An "impeccable disaster", wrote Paul Krugman in a blog post, in reference to Trichet's self attributed "impeccable record". Arguably, the crisis started in the US, and he was spared the sort of public outcry that a congressional hearing broadcast on TV can sometimes generate. That explains, perhaps, the difference between the perception of Greenspan's tenure and that of Trichet. This said, the Frenchman has an ally among economists of the same league as those mentioned, Nouriel Roubini.  In the relevant interview, however, he doesn't really justify his positive opinion, except for acting on the crisis "ahead of the curve", in August 2007!


Jean Claude Trichet attended the same conferences as Greenspan (Jackson hole). So, just like him, he must have not heeded the BIS' repeated warnings of a mortgage crisis in the US1,2. Due to the interconnectedness of world markets, it should have been expected that the shock wave would spread to Europe, as the turn of events painfully demonstrates. Besides, there was housing bubble brewing in Spain and Ireland, under his watch and jurisdiction. This scenario was foreseen by one of the foremost experts on European monetary policy in 1998, as related in op-ed in the FT3.

In a 2004 speech, Trichet credited the Stability and Growth Pact (SGP) for Ireland's economic success (deceptive, it turns out), explicitly dismissing those who recommended a federal budget (subtext: to offset asymmetric responses throughout the Euro zone in the event of a major economic/financial shock, that's standard OCA theory). Retrospective research has shown that the majority of  US economists advised against the creation of the Euro. In a 2007 speech, Trichet reiterated that Ireland was a "role model in many respects for the euro area". Asked specifically about risk in the property market he said "it seems to me that we have been going in the right direction". In March of that year, he is reported as "downplay[ing] Greenspan's comments about a U.S. recession".

New beginning

Trichet doesn't seem to have recognized that there was a problem with the Euro, until it translated into a nightmare, what he calls "the gravest crisis since WWII". But did he identify the problem? In a dramatic turnaround, he is now the loudest proponent of a European ministry of finance (Zero Hedge). But his idea of a big MOF, to simplify, is to achieve a substantial reinforcement of the existing framework, the SGP. The rules aren't the problem. Rather, it's an enforcement problem, and he's lending his weight to fix it, relying on the G30 as a public platform.

If our interpretation correct, the moral argument goes like this : if everyone deserves a second chance, it stands to reason that elite bureaucrats deserve an n-th chance, with n specified by the interested party, in perpetuity. And, therefore, in the case of Trichet, the purpose of the G30 is to keep the wheel of fortune rolling. 
  1. In earnest, we say 'BIS warnings' as a simplification. The BIS, as an organization, heeded the warning of its top economist. As of June 2006, their forecast was  "The best bet for next year is that strong, non-inflationary growth will continue". 
  2. In a December 2006  document  whose purpose is to play a role in preventing financial crise the ECB forecast for 2007 was that the financial system would remain in "healthy condition and the economic outlook favorable". In the detail, the document correctly analyzed "Potential housing market correction in the US" (Box 2), but it was not singled out as a major source of risk.  
  3. In 2002 he was candidate for the Vice-Presidency of the ECB, according to an FT report, but he did not succeed. Explanation: he's an academic, not a central banker.


  1. On fiscal union:

    VoxEu - Feb 26, 2013 - Mutualisation and constitutionalization - By Harold James and Hans-Werner Sinn

    Draws from US history to deduce that a European federal union would be messy unless fiscal discipline enshrined in law. Sounds familiar?