Just a little “froth”: Tracing Greenspan's ideology

Abstract

Although not receiving the attention it deserves, Greenspan's rhetorical rationalization of the extraordinary developments in the housing market contributed significantly to its unsustainable expansion between 2002 and 2006. His rhetorical campaign served to justify his regulatory inaction, much like the language masking the stock market bubble of the 1920s. Informed by this historical pattern, this paper offers a rhetorical analysis of the housing market developments as represented in Alan Greenspan's last speech on the housing market in September 2005, near the peak of the housing market euphoria, as the Fed's outgoing chairman. Although Greenspan explicitly recognized many signs of the bubble, his ideology prevented him from making necessary inferences regarding the true extent and potential ramifications of the bubble burst for the broader economy.

Keywords:

• Greenspan
• Rhetoric
• Economic policy
• Housing bubble

Notes

1 Refer to Blinder, Goodhart, and Hildebrand (2001) for a more detailed analysis for the evolution of Fedspeak as a distinctive genre of speech.

2 He even took pride in his “mumbling with great incoherence.” Greenspan went on to tell the reporters in 1987, “If I seem unduly clear to you, you must have misunderstood what I said.”

3 There is another linguistic study by Abe (2011) examined Greenspan's language use between 1996 and 2005 along several linguistic dimensions. She detected, among others, a more abstract and detached tone, called “psychological distancing,” during transition to the economic recovery following the dot.com bubble. She reasonably interpreted this shift in language as a lack of confidence about the sustainability of the economic recovery.

4 Similar (re-)framing effort is visible, for instance, in the move to rename the “estate tax” the “death tax.” Frank Luntz has been credited for this rhetorical innovation.

5 John Taylor suggested that from 2002 to 2005, the federal funds rate should have climbed to over 5% and stayed there through 2006. Instead, the Federal Funds rate kept falling between 2002 and 2004.

6 Moreover, presenting loan-to-value ratio as a measure of risk is highly questionable in the middle of a bubble as home prices may have easily outgrown mortgage debt for some homeowners.

7 This finding is based on a work-in-progress that we are currently undertaking.

8 There are alternative theoretical explanations in the literature. For instance, in his last testimony to the joint session of Congress in July 2005, as Arestis and Mosler (2006) point out, Greenspan selectively attributes declining interest rates to a saving glut and low intended investment instead of a more essential explanation underlying both: a lack of aggregate demand. However, this debate is beyond the scope of this note.

9 Such a plan would also take away such pretexts as “the break down in our capital markets is the product of many complex and interrelated forces … not fully apparent at the time” (Snow, 2008) for regulatory inaction.

10 “Project Syndicate,” “Economist's View” and similar blog sites should be considered a step in the right direction.

11 The term appeared for the first time in this specific connotation in Bernanke's testimony before Congress in 2012.