Greenspan and Bernanke: Did they have a choice?

Much has been said about the lack of an evolved regulatory system to keep up with the evolution in financial markets, namely with investment banks and other non-depository lenders.

From my view as a layman, the biggest threat I see to the economy of the future is one in which the central bank has no effective control, a subject I hope to study further here in London. And I fear that while liberalized financial markets have allowed the United States and other countries to finance debt spending at low rates and encourage economic growth with freely flowing capital, central bankers may be losing the ability to predict and stop a collapse. Now, they are effective only when they mobilize in a reactive, not proactive, response.

For example, former Federal Reserve Chairman Alan Greenspan was forced to cut rates precipitously following September 11, 2001 and the concurrent recession. Greenspan was widely lauded as being an economic mastermind for his stewardship of the dot-com economy and the response to 9/11.

But it's now clear that his successor, Ben Bernanke, is dealing with the lagged impact of Greenspan's policies of loose credit in the waning years of Greenspan's term. Historically low interest rates contributed to the housing bubble that, in case you missed it, is blowing up.

To Greenspan's credit, he frequently criticized President Bush's deficit spending, the cause of the expansion of the United States' national debt and widening current account shortfall (and thus reliance on debt to sustain economic growth). But I don't think it is fair to blame Bernanke for the current crisis. He is simply dealing with the lagging effects of his predecessor's policies.

The key is -- did either Greenspan or Bernanke have a choice to make the interest rate decisions they made? Greenspan had no choice but to loosen credit after 9/11, and also to finance a growing debt that was rooted in a reckless fiscal policy. Bernanke has experienced much of the same; he has no choice but to offer this or that bailout, or extend credit to banks or companies, even if their executives still indulge in California resort retreats, to keep the system solvent. And now we have a power-in-waiting in China, which holds half a trillion dollars in American debt. What options do central bankers have? Are they merely guiding a system that is already on auto-pilot and out of their control?