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Home Truths from Big Mac

In one week from now Alan Greenspan will retire as chairman of the US Federal Reserve. He will be 80 on March 6 and was appointed chairman on 11 August 1987, 2 months before the 1987 sharemarket crash. As the Economist notes this week, the rock star status given to this central banker and accolades for a long period of economic growth, have a "strong whiff of irrational exuberance". If full credit was to be taken for this then what about Enron, the housing and stockmarket bubble and the collapse of LTCM which nearly ended the US banking system?

Our own Big Mac, Mr Ian Macfarlane, Governor of the Reserve Bank of Australia, brings a touch of humility to the subject in his address to the Australian Business Economists published in this month's RBA Bulletin. Macfarlane will turn 60 on June 22 and was appointed governor in September 1996. In his closing remarks he gives some humble views of what makes the economy tick. They minimise his own importance in relation to economic success, and read as follows: 'I want to conclude now by briefly revisiting the subject of why economies, including our own, have exhibited more stability than in earlier periods. Is it because policy-makers have become better forecasters and more adept at timely adjustment to the levers of economic policy? It would be tempting to answer yes to this, but I suspect it is only a small part of the answer. A more plausible explanation is that our economy has become more resilient. That is, we have systematically modified our institutional framework so that it is more flexible and more able to adjust to economic shocks than formerly.'

Posted Friday, 20 January 2006

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