A Friday Stroll Down Memory Lane

I've been hunting around through some newspaper archives for stories about the end of the last housing boom and the subsequent credit crunch of 1990-91, and I've found lots of good stories to read -- some alarming, some prescient, some naive, and some just plain funny.

Many of them are too good to keep to myself, so I've decided to start a regular Friday feature of excerpting an old newspaper or magazine story about the state of the economy at some time in the past. Since I happen to think that today's economy has some important resemblances to the US economy in 1990, I'll initially be focusing on that period. But I'm sure I'll be branching out soon enough.

This isn't just intended as a way to get in cheap shots at people who pontificated about the economy in the past, by the way; by itself, that is an easy but pretty unfulfilling exercise. After all, it's not a revelation that it's hard to predict the future, or that hindsight is 20-20.

But I do think that it can be very instructive to look back when it helps us to correct misperceptions that people have today about what happened in the past; when it contains lessons applicable to today; and when it just generally reminds us how hard it is to guess correctly at what is going to happen, since the street that we're on is, for the most part, so very dark.

I think that today's excerpt does all three of those things. It's from the Boston Globe, July 19, 1990:

Greenspan: Interest rates may ease; Fears credit crunch may fuel recession

Despite a strong surge in inflation, Federal Reserve Board chairman Alan Greenspan said yesterday that the central bank is worried a credit crunch could nudge the nation's economy into recession and is ready to lower interest rates to offset the damage.

Greenspan also said the Fed is ready to lower rates to minimize damaging side effects of any agreement to reduce the federal budget deficit. While such an agreement would slice government overspending, it could hurt the economy by siphoning off money through taxes and reducing government demand through spending cuts.

Greenspan's comments, in testimony before the Senate Banking Committee, were the second time in less than a week that the Fed chairman has said the central bank is prepared to reduce borrowing costs and they signaled the murky state of an economy that, while still growing, is doing so in a patchwork fashion.

They follow by five days the Fed's first major policy change since December: a modest reduction in the federal funds rate - the rate that banks charge on loans to each other - from 8.25 percent to 8 percent.

Both the rate reduction and Greenspan's remarks left analysts baffled. Coming on top of an unexpected surge in inflation during June and Greenspan's previous skepticism about the existence of a credit crunch, the moves left many unsure of where the central bank thinks the economy is headed, and some questioning whether the reserve chairman is bowing to Bush administration demands for lower interest rates.

"I find the timing puzzling and I find the reason puzzling," said Lyle E. Gramley, a former Fed governor who is now chief economist for the Mortgage Bankers Association in Washington.

Greenspan labeled as "low" chances that the economy will slip into recession soon. But he devoted much of his testimony to concerns about the economic damage that a credit crunch could cause.