Is Bernanke Worse Than Greenspan?

Alan Greenspan was dubbed history's greatest Federal Reserve chairman upon his retirement in 2006, but the housing bust is prompting renewed criticism of his laissez-faire brand of monetary policy. Hedge fund manager William Fleckenstein is among the loudest critics. Fleckenstein is the author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. He views Greenspan's legacy as a litany of too-low-for-too-long interest rates that created the dot-com and housing bubbles. And he doesn't think current Fed Chair Ben Bernanke is much of an improvement. Fleckenstein spoke with U.S. News. Excerpts:

Do you blame Alan Greenspan for the current housing and credit crisis?
Yes. The madness of crowds plays a role in every bubble. The people aren't blameless. But when you give somebody the power to print an unlimited amount of credit, [you expect] they will be cautious as to catastrophic negative ramifications. In Greenspan's case, his whole legacy is one of attempting to pick the "right" interest rate, which is a fool's errand. When he'd pick a rate that was too wrong, we'd wind up with a misallocation of capital, and he would come back and try to rescue it with more easy money. There's lots of evidence of his willingness to cut rates but reticence to take back those cuts. The consequence was an epic stock bubble. When that burst, it took 13 rate cuts and three tax cuts to get us going again [and produced] a bigger housing bubble that's more dangerous.

So how do you square criticism of Greenspan with unprecedented economic growth during his tenure?
You have to weigh the gains with the fallout. If you're taking steroids and do really well, but three years later you get cancer, was it worth it? That's why in the stock mania, I said it would lead to problems, and people laughed at me before the Nasdaq dropped 70 percent. It's the same in the housing bubble. If we are a year from now mired in the worst recession of the last 30 to 40 years, will it have been worth it? I think people will conclude it wasn't. That's why I wrote the book. When you pursue bad policies, in the short run it seems great, but in the fullness of time it isn't a good idea.

What should the Fed do to improve policy?
They have to stop targeting interest rates. If they set [them] too low, which they tend to do, they have to print gobs of money to force rates below what would be the theoretical natural rate. Then things blow up. Failing that, the Fed has to at least be on its guard for asset bubbles instead of washing their hands and saying, "We'll just clean up the mess." It's not right. It's why the average person has to deal with mortgages that are too big, home prices sinking, and inflation that's eating them alive. The inflation we're seeing is a direct consequence of the Fed and other countries [with currencies that are] linked to the dollar printing too much money. That's why we have this global inflation problem and people are hoarding rice. That's all a function of what the Fed has wrought around the world.

How has Bernanke done so far?
He's done pretty much what Greenspan would have done. He panicked like I always knew he would. He's written enough books on the Depression to have a false reference point. He thinks the Fed caused the Depression by not pushing the right buttons rather than understanding the Fed had a hand in the Depression because of the bubble that burst in '29. They always see a bust as a function of them not doing enough to be stimulative. They don't recognize the bust is a function of the bubble that came before it.

If the situation is so bad, where should you invest?
People have to have some protection against the fact that the Fed is likely to shred the currency. You have to have an insurance policy in the form of gold or silver. The important thing is for people to be liquid and have flexibility to deal with the bear market and economic turmoil that I think we're going to see.