Greenspan: Put a sock in it!

There is an unwritten rule for former Presidents of the United States that even if they disagree with a successor’s policies, they will not criticize him/her openly. For the most part, most have followed that unwritten rule (with the exception, perhaps, of Jimmy Carter, who recently has taken to being an outspoken critic of the current administration’s war strategy.)

When they have gone abroad to give speeches, they are mainly on mundane topics like “living the American Dream” or such things. That is a given.

But what do you do with a former Federal Reserve Chairman who was in office for 19 years and only just left the post? Other former Reserver Chairman, like Paul Volker, have been giving speeches for years. Heck, Volker has been writing op-ed pieces in the Wall Street Journal for seemingly forever.

But he didn’t just leave the position. He left it in the early 1980s- ancient history.

Because when Greenspan talks, people still listen. A few weeks ago, he told a Japanese audience, via videoconference, that the United States would likely be in a recession by the end of 2007. The stock markets tanked. Last week he said that subprime mortgage problem probably wouldn’t spread, but then changed his mind and said that it would. The markets, again, didn’t like it.

Should Greenspan not be speaking on the economy right now? Does it take away authority from the current chairman, Ben Bernanke when he does? What DO you do with a retired Chairman?

Wall Street seems particularly irritated that he is seemingly giving manifestos about various parts of the economy nearly every week. From the UK’s Fin 24:

“I’m kind of disappointed with Greenspan,” said Andrew Brenner, a market analyst at MAN Financial. “I find it unusual that he’s been talking so much.”

Making matters worse, he seems to be contradicting some of what he said only a few years ago as Fed Chairman.

This is what he had to say back in 2005 about the subprime mortgage market, where rising default rates have now sparked concern about a broader economic crisis: “Lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately,” he argued at the height of the housing boom.

With many of those very same lenders now declaring bankruptcy, their efficiency in measuring risk now seems a lot less sturdy - making Greenspan’s assessment seem off target.

It’s not just housing that has suddenly yanked the former central bank chief off the pedestal where he once stood. For some, the biggest beef comes from his prediction that a US recession was possible this year.

Coming at a difficult juncture for financial markets, his comments contributed to the biggest plunge in US stocks since September 11 2001, and revived an aversion to risk from which global investors had yet to recover.

Again, this is a departure from statements near the end of his term at the Fed, when he endorsed the theory that growth was likely to slow moderately to a more sustainable pace.

One Wall Streeter actually suggested that Greenspan simply misses the limelight after two decades in it. From Reuters:

In part, Greenspan may be making a comeback because he simply missed the attention.

“This last speech suggested he kind of liked the limelight,” said Mike Englund, chief economist at Action Economics.

But to the extent that Greenspan’s words affect the markets, potentially making it tougher for the central bank to keep the economy humming along, his loose lips could be detrimental to the country.

Or as Brenner at MAN Financial, put it: “He’s setting a very bad precedent.”

Could Greenspan be naive enough to believe that his “closed door” speeches via videoconference aren’t some way going to be leaked to the larger world? Or does he really believe that his outspokenness isn’t harming the current Fed Chairman’s grip on the economy?

Either way, it’s strange indeed.

Greenspan’s upcoming memoirs are to be called “The Age of Turbulance.”

Ah, the irony.