We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.

Grim also notes that Greenspan wanted to keep the possible risks of a housing bubble “secret,” and that the Fed keeps its transcripts “secret” for six years. I say this from the viewpoint that Greenspan’s loose monetary policy wreaked unbelievable damage on the U.S. economy. But I agree mostly with Ryan Avent’s take on that particular quote. Here is a fuller version of what Greenspan said:

Let me first follow up on your transparency assessment. I think Cathy Minehan has raised an interesting point. I would say this: We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand. We have a ratchet in here where, if we were to move forward, we can’t go back. So the concept of transparency is a very important concept but one that should be approached with a recognition that we cannot move back and forth on it.

I’m a little concerned here that by raising certain issues we may not be able to backtrack. I hadn’t thought about it when I originally read the draft minutes, but in seeing the concerns that other people had, I think there’s something here that we have to consider. I do not recall so many people raising questions about the minutes before because I think most of us read the minutes passively. That suggests to me that, if there were really a strong focus on them, we’d find a greater degree of disagreement among us about their content. Now, I don’t know whether what I just said is true.

Greenspan is weighing in on a debate about Fed transparency — that is, how much the Fed wants to reveal about its thinking on inflationary pressures and monetary policy at that particular moment. He is not talking about whether to let the public in on whether there might be a housing bubble. (At that point, Fed economists had just started sounding the alarm. In June, the Fed started hiking the interest rate.) Greenspan was worrying that suddenly announcing real concerns about overheating might provoke an adverse response, particularly if things started cooling off by themselves. Avent explains:

Greenspan’s quotes are taken somewhat out of context. His comment is made, specifically, in the context of the phrasing of the Fed’s statement. Several presidents have remarked that the balance of threats to the economy is unpredictable, and the motion has been made that the statement change to reflect a balance of concern between upside (inflation) and downside risks, where before inflation was less of a concern than lingering economic weakness. And Greenspan is saying that with increased transparency, the Fed needs to be more careful about the language it uses lest it give markets whiplash by appearing to veer from one fear to another. Put more simply, if the language were to be changed in the March meeting and subsequent data revealed growth to be more of a worry than inflation (or something else) then the subsequent reversal would not generate a lot of confidence.

So the comment relates to the Fed’s public statements on monetary policy, which are as carefully worded as marriage proposals. Greenspan’s quote in isolation sounds horrible, but makes a bit of sense with more context. (Whether the Fed should be engaging in such elaborate minimalist kabuki in the first place? An entirely different question.) The misunderstanding and misreading of the rent ratio chart — where some of the country’s great economic minds sat around, bickering about what a chart of a basic macroeconomic statistic should look like and missing a bubble right in front of their faces — struck me as the more frightening part of the transcript.

Calculated Risk notes that also on Monday, the markets nosedived, with the Dow alone dropping by 680 points. In a post entitled “Paulson Speaks, Market Crashes,” CR asked, “I wonder if anyone in Treasury notices the correlation.”

It used to be that when former Federal Reserve Chairman Alan Greenspan uttered anything, the markets would react, and usually in positive manner. Cable shows used to run a stock market ticker next to a shot of Greenspan testifying before Congress, so viewers could watch the market’s instant reaction.

These days, I guess the Paulson factor is just the opposite. Maybe he ought to rethink that next news conference, if he wants to keep investors from getting any more nervous than they already are.

Paul Volcker and Barack Obama at the center of a panel in Lake Worth, Fla. that includes, from left to right, Gov. Bill Richardson, Gov. Jennifer Granholm, small business owner Victoria Villalba, Gov. Ted Strickland and Google CEO Eric Schmidt (Flickr: Bridget DeVries)

The announcement that Paul A. Volcker is a key economic adviser to Sen. Barack Obama – cited by the Democratic presidential nominee during the last debate and appearing with him at a campaign event in Florida last week — was met with surprise in some circles.

Volcker, 81, is celebrated as the Federal Reserve chairman who broke the plague of global inflation in the early 1980s. But he did it be engineering a violent crackdown on excess credit — at one point the short-term bank rate jumped to 20 percent — and the 1982 drop in gross domestic product was one of the sharpest in the postwar era.

Illustration by: Matt Mahurin

Volcker is certainly no liberal. He was appointed to the Fed in the last year of President Jimmy Carter’s term — but with a visible lack of enthusiasm. Carter insiders called him the “the candidate of Wall Street.” Double-digit jumps in consumer prices were destroying financial markets, and Volcker was the sheriff whose job was to restore order.

Volcker’s brand of conservatism, however, is far different from the quasi-religious, free-markets ideology espoused by the former Fed Chairman Alan Greenspan and the recent crop of Wall Street barons. Though Volcker had refrained for two decades from criticizing the policies of his successors, he unleashed a blistering, and wide-ranging, criticism in an April speech at the Economics Club of New York.

The most reported section of his speech was the criticism of the forced merger/bailout of Bear Stearns, which Volcker said took the Fed “to the very edge of its lawful and implied powers.” He forecast that it would “surely be interpreted as an implied promise” to do the same for everyone else. And the Fed has duly increased its unorthodox lending by about $800 billion since Volcker spoke.

Volcker’s harshest words, however, were not directed at current Fed policy — he fully acknowledged the gravity of the crisis — but at those of Greenspan, the erstwhile ‘Maestro’ of Wall Street. For it was Greenspan who proudly presided over the Hindenberg-like bubble that officialdom is struggling to cope with. The “bright new financial system,” as Volcker called it, “for all its talented participants, for all its rich rewards – has failed the test of the market place.”

And he went on: “[T]oday’s financial crisis is the culmination, as I count them, of at least five serious breakdowns of systemic significance in the past 25 years — on the average of one every five years. Warning enough that something basic is amiss.”

“It is hard to argue that the new system has brought exceptional benefits to the economy generally. Economic growth and productivity in the last 25 years has been comparable to that of the 1950’s and 60’s, but in the earlier years the prosperity was more widely shared.”

Paul Volcker (barackobama.com)

Volcker lamented the passing of the banks and insurance companies where employees and partners shared pasts and futures, and expected to live with their loans for many years — unlike today, when garden-variety credits are chopped into anonymous pellets, grist for the complex bonds and derivatives that have spread financial havoc throughout the world. Volcker left no doubt that it will take strong leadership, not blind reliance on markets, to restore order.

Volcker’s conservatism fits into the institutionalist tradition of the great Irishman and British parliamentarian, Edmund Burke. It has nothing to do with the Ayn Rand-style of market libertarianism that mesmerized Greenspan.

Burke’s traditionalism is easy to mock — he could not imagine Britain without its royalty and opposed Irish independence. But, remarkably, he was also the leader of parliamentary support for the American Revolution. He came to that position, he said, only because the obstinate mismanagement of the American question by the king and his party had made the “Colonies, who were once not only submissive, but most affectionate to their Mother Country…totally estranged, discontented, disobedient, riotous…and almost rebellious.”

Volcker’s embrace of Obama may be such a Burkean moment. At the conclusion of his April speech, Volcker was asked whether it was true that he had actually endorsed Obama for president. He said it was indeed true and gave his reasons.

“I do have some fairly strong feelings,” Volcker said, “and I don’t like the direction this country has been going in for some time, in many directions. Economics may be part of it, but it is only a small part of the problem….

“People have been taking surveys of American people every year for years. One of these things where they ask the same question. Do you trust your government to do the right thing most of the time? Not a very tough examination…..20 or 30 years ago, the positive response was 70 percent. Now the positive response is 25 to 30 percent. I think that tells you something.”

And it tells you even more that not only would a man like Volcker make this statement, but that he and Obama have developed a clear affinity of views.

Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”

The New York Times took perhaps the strongest line against Greenspan, running the headline “Greenspan Concedes Error on Regulation” and pointing to a “serious flaw in his own philosophy” that free markets can be trusted to regulate themselves.

The Washington Post headline was more neutral — “Greenspan: ‘Crisis Broader Than Anything I Could Have Imagined’” — while the Wall Street Journal headline –“Greenspan Admits Some Mistakes Amid Grilling by House Lawmakers” — implies that he cracked under tough interrogation techniques. The Los Angeles Times avoids placing blame, and does not mention any criticism of Greenspan until six paragraphs into its piece.

Here’s a more complete rundown of the coverage:

Greenspan Concedes Error on Regulation (The New York Times)

Greenspan: ‘Crisis Broader Than Anything I Could Have Imagined’ (Washington Post)

Greenspan Admits Some Mistakes Amid Grilling by House Lawmakers (The Wall Street Journal)

Greenspan admits ‘mistake’ that helped crisis (msnbc.com)

Alan Greenspan warns unemployment will rise further (The Los Angeles Times)