Chairman Greenspan: A Fiat Mind for a Fiat Age
[This article is based on a speech delivered at the Ludwig von Mises Institute Conference "Austrian Economics and the Financial Markets."]
Alan Greenspan was the right Federal Reserve chairman for his times. His reputation was a creation of inflation, and this was a century of inflation. His knowledge was superficial when America tended toward superficiality. He was a creation of publicity in an age that craved celebrities. He was inarticulate at a time when minds were growing more confused. He took short cuts to the top when Americans more readily took the easy route.
Money has been degraded over the past century. It takes at least $20 to buy what cost $1 in 1913. Inflation of money was integrated into the 20th-century inflation of words, constant distractions, and media promotion. Thus, the worship of celebrities simply because they are celebrities and the success of one pandering politician and clever opportunist: Alan Greenspan.
The short cuts taken in the 1950s set the course to the present. We bargained for wages and benefits that could not be paid in constant dollars. Americans worked fewer hours. We bought more from abroad than we sold. By the 1960s, the government was spending more than its revenues.
In 1971, we stopped settling our balances in gold. Governments — and this was true around the world — found deficit financing an opium to the masses. Government programs abounded. The masses grew accustomed to inflation and borrowing in currencies that tended toward depreciation. Thus, debtors paid back less real money than they had borrowed. Bankers could lend more after the link to gold was severed, since no final settlement of claims existed.
For this subterfuge, the United States employed celebrity economists who would make up new theories on the fly. This was dishonest. It follows that our dealings in dollars became dishonest. The corruption by the government, and by economists who satisfied their interests, was matched by the corruption of those who trafficked in money. Since honesty was the enemy of our dealings, dishonesty held an advantage. In the end, credit and government policy have gravitated to fewer hands, those willing to participate in a swindle of the public's savings and of its trust.
At the center is an institution, the Federal Reserve System, which has been a willing accomplice. It employs dishonest economists. In 1987, it elected as its chairman a man who was of no merit but who could be counted upon to cut whatever corner was necessary to maintain the façade of national solvency. That imposter was Alan Greenspan.
Alan Greenspan — The 1950s
When Alan Greenspan was 26 years old, he made a far-sighted and characteristic decision. He started smoking a pipe.
This was in 1950.
He had just entered Columbia University, where he was studying for a doctorate in economics. He signed up for a class under Professor Arthur Burns. Burns was a well-known figure. He was coauthor of a well-regarded book: Measuring Business Cycles.
Whatever he learned in Burns's class, Greenspan did the important thing: he took up the pipe. This was Burn's trademark; some will remember when Federal Reserve Chairman Arthur Burns sat before Senate committees and reinvented economics in the 1970s.
For instance, when inflation raged in the 1970s, it was Burns who removed food and energy from the Consumer Price Index.
In 1953, Burns left Columbia to head President Eisenhower's Council of Economic Advisers — the CEA. Greenspan left Columbia at the same time, without receiving his doctorate.
In 1977, Greenspan would receive his doctorate degree in economics, from NYU. It is a collection of articles and some economic journal pieces stapled together. Alan Greenspan made a habit of choosing the easy route.
The media drones on about Greenspan's "ideology." Or sometimes it's his "libertarianism." Or it might be his "free-market beliefs." Whatever the case, these are simple labels, and simple labels are about all we will get from the media.
Alan Greenspan has always cared about one — and only one — thing. Every nerve ending in his body at every moment in his life has been devoted to the promotion of Alan Greenspan.
Greenspan never had an ideology. He probably never understood what Ayn Rand was talking about. Nathaniel Branden, Rand's number one acolyte in the 1950s and also the Randian closest to Greenspan, wrote years later, "Now, looking at [Alan], I wondered to what extent he was aware of Ayn's opinions." Branden continued, "Complimenting Ayn on some [paper she had written and read to the group], Greenspan might say, 'On reading this … one tends to feel … exhilarated.'"
Platitudes and assurances also mesmerized the nation 50 years later. By then, that's about all we could get from any public figure. Of course, as a nation we did not demand more.
Ayn Rand seems to have understood why Alan clung to her apron strings, if she wore an apron. She asked Branden: "Do you think Alan might basically be a social climber?" She hit the nail on the head.
Alan knew what he was doing. Around that time, a young writer asked Gore Vidal if he had any advice. Vidal replied, "Yes, get on TV as often as possible."
At this time, there was a blazing debate in Washington about inflation. Some were for it and some were against it.
In the mid-1950s, academic economists were angling their presence into the media. One was Harvard University Professor Sumner Slichter. Fortune magazine named him the "father of inflation." That might not sound complimentary, but it was publicity.
Slichter told the Senate that the Fed would have to accept inflation to generate sufficient jobs. Slichter argued that costs for materials and labor were rising because "unions [were pushing up] wages and fringe benefits faster than the gains from productivity of labor. The result is a continuation of the slow rise in prices."
Slichter was correct, but ignored the traditional solution to either work harder or reduce benefits. America was not in the mood for either.
Slichter stands at the front of a long list of economists who decided they could abandon common sense on our road to ruin. In my book, I quote Alfred Jay Nock: "It is an economic axiom that goods and services can only be paid for with goods and services."
In the opposite corner from Slichter was William McChesney Martin Jr. He was chairman of the Federal Reserve board from 1951 to 1970.
After Slichter gave the senators the good news, Martin lashed back. This was in early 1957. "I refuse to raise the flag of defeatism in the battle of inflation. If you take [Schlicter's] view, then another bust will surely come."
Refusing to raise the white flag, Martin gave one of the finest speeches ever delivered by a central banker. (He might not have much competition.) It was on August 13, 1957, that he spoke before the US Senate Committee on Finance.
He told the assembled, "There is no validity whatever in the idea that any inflation, once accepted, can be confined to moderate proportions." Martin responded to "some segments of the community" — probably economists — who were arguing for "a gradual rise in prices … perhaps 2 per cent a year," Martin warned that such a prospect would work incalculable hardship. "Losses would be … inflicted upon millions of people."
These included, "pensioners … people who have their assets in savings accounts and long-term bonds."
Chairman Ben Bernanke has stated that the economy should have a minimum inflation rate of 2 percent per year. There is not necessarily a contradiction here. Simple Ben doesn't seem to care if he inflicts hardship upon hundreds of millions, if he knows what he's doing at all.
Martin believed fears of inflation would "cause people to spend more and more of their incomes and save less."
Martin told the politicians that the composition of savings would change. It would "tend towards speculative commitments … and the pattern of investments and other spending — the decisions on what kinds of things to buy — will change in a way that threatens balanced growth."
Martin warned that "a spiral of mounting prices and wages seeks more and more financing" with a "considerable volume of the expenditure … financed at all times out of borrowed funds."
Martin was not an economist. This may be obvious. He had studied Latin at Yale.
"Finally" Martin said, "we should not overlook the way that inflation could damage our social and political structure.… Those who would turn out to have savings in their old age would tend to be the slick and the clever rather than the hard-working and the thrifty. Fundamental faith in the fairness of our institutions and our Government would tend to deteriorate."
We know who won that battle.
Speaking of the slick and the clever, by 1970, Alan Greenspan was a millionaire. By then, he owned an apartment at United Nations Plaza, a new and fashionable address where Walter Cronkite, Truman Capote, and Johnny Carson also lived.
But what had he done — that is, as an economist — to live among such company? It really isn't clear. He was a minor figure. Those who respected him said he was a whiz with numbers. A far larger group remembers that yes, he was full of numbers, but he was always wrong.
In the words of biographer Justin Martin, "The general impression among people who knew Greenspan in those days was that he wasn't exactly marked for real greatness.… His old friends were destined to watch his career unfold — Nixon adviser, Ford adviser, [five]-term Fed chief — in stunned amazement."
Another to witness the curious elevation of Alan Greenspan was Marc Faber, who joined the Wall Street firm of White, Weld & Co. in 1970. Shortly after, they hired Alan Greenspan as a consulting economist.
Part of Faber's job was to attend the monthly economic presentations by Greenspan and interpret his comments for the overseas offices.
Looking back … I … had no idea what Mr. Greenspan was talking about, but I may not have been the exception. When Mr. Greenspan first came on board at White, Weld as a consultant, 30 or 40 people from the firm's various departments would attend the meetings. Within a few months, however, attendance had dropped to just a handful.… By then I had also learned that the easiest way for me to communicate the (to me) incomprehensible remarks … was simply to summarize the previous day's news from the front page of the Wall Street Journal.
Faber noted that one of the best investment decisions White, Weld ever made was to "get rid of Mr. Greenspan in late 1972 and hire instead the economist Gary Shilling."
Martin Mayer, who has written several books about Wall Street, first met Alan Greenspan in the 1960s. The millionaire economist was making a specialty of "statistical espionage" — that was Greenspan's description. Mayer later wrote, "the book on him in that capacity was that you could order the opinion you needed."
Greenspan's girlfriend Barbara Walters wrote in her recent autobiography, "How Alan Greenspan, a man who believed in the philosophy of little government interference and few rules or regulations, could end up becoming chairman of the greatest regulatory agency in the country is beyond me."
This was the road to his success: he would do anything and he would say anything. He worked on his relations with the press much harder than he worked as an economist for his clients. He went one step further than other fast-track economic consultants — he even dated the press, then finally married it.
Even though he was a minor figure during the 1960s, he was getting his name in the New York Times, making market predictions. The funny thing is, he was almost always the voice of doom in those days. That was the sixties, so he was always wrong. In the seventies he was always wrong too, since he was always bullish.
Back to the 1950s
William Martin's insight — that "a spiral of mounting prices and wages seeks more and more financing" and a "considerable volume of the expenditure … financed at all times out of borrowed funds" was a feature of the 1960s. That was the decade of the conglomerate.
Some of those who built mountains from molehills in the 1950s and 1960s were Meshulam Riklis, Carl Lindner, and Saul Steinberg. They used paper instead of cash to buy out companies.
It ended in a baleful scrapheap of waste with such absurdities as Mary Carter Paint [relabeled Resorts International] attempting to swallow Pan American Airways. (It was unsuccessful.)
It is not a coincidence that American living standards probably plateaued around 1970, since capital was so badly mishandled.
By 1974, price inflation was in double digits; "incalculable hardship" was suffered by millions. Capital was again mishandled, one reason being there were so many distractions from running a business. In 1973, Time magazine reported that American "businessmen [could] accomplish much [by] 'speculation.' A U.S. executive … may enclose a check with his order rather than wait until the steel is delivered and the dollar's value may have fallen."
On June 28, 1978, Federal Reserve Board Member Henry C. Wallich addressed the graduating class at Fordham University. "Inflation," he informed the graduates, "is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and aged."
At this moment every graduating member of the Fordham class of '78 ran out of the stadium to the closest Goldman Sachs recruiting booth. Wallich spoke from first-hand experience. He was born in Germany in 1914, so had lived through the Weimer hyperinflation as a child.
Wallich explained that inflation "is technically an economic problem. I mean the breakdown of our standards of measuring economic values, as a consequence of inflation." The strong are smart enough to understand that inflation "introduces an element of deceit into our economic dealings." Contracts are no longer made to "be kept in terms of constant values," but one party understands this better than the other.
Wallich went on to emphasize that "the increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government."
Moving forward to the 1980s, we had the savings-and-loan free-for-all. We also were adding mounds of debt that would have been inconceivable when Martin spoke in 1957.
In 1980, we, the United States, borrowed $1.40 for every $1 we added to GNP. By 1985, we were adding $4.00 for every $1 increment in GNP.
Savings and loans were perfectly designed for clever operators. S&L deposits were insured by the government and they had been deregulated. In the wrong hands, the S&Ls were sponges for questionable investments.
Meshulam Riklis, Carl Lindner, Saul Steinberg used their conglomerate platforms to swap paper.
Barrie Wigmore, then at Goldman Sachs, wrote an excellent book, Securities Markets in the 1980s. Wigmore wrote, of Riklis, Lindner, and Steinberg, "it is tempting to conclude they … represented a cabal.… [They] cooperated and invested with each other extensively and were old hands in the market aspect of "Chinese paper" from the merger wave of the 1960s." Their "activities illustrate the combination of native cunning and access to leverage that made them effective."
Wigmore wrote, "they [Riklis, Lindner, and Steinberg] had a common involvement with Michael Milken's group at Drexel Burnham that probably helped to create enough liquidity for their junk bond securities."
William Seidman, who headed the Resolution Trust Corporation, the body that cleaned up the savings-and-loan mess, wrote later that Michael Milken had "rigged the market by operating a sort of daisy chain among the S&Ls to trade the bonds back and forth across his famous X-shaped trading desk in Los Angeles. By manipulating the market, he maintained the façade that the bonds were trading at genuine market prices.… When … [Milken] was brought down, and his trading operation with him, so were the S&Ls that depended on the value of his bonds to stay afloat."
In 1984, Alan Greenspan was hired by the most notorious criminal in the savings-and-loan racket: Charles Keating. Keating laundered money through Lincoln Savings and Loan. He needed someone to write a letter to his regulator, (the Federal Home Loan Bank of San Francisco) that stated Lincoln Savings and Loan's investments were sound.
In 1985, Greenspan wrote to the Federal Home Bank that Lincoln's management "is seasoned and expert in selecting and making direct investments." By that time, Lincoln was not only loaded up with deals through Milken, it was swapping them at a profit with its holding company, American Continental Corporation. American Continental Corporation — and Charles Keating — had been spun out of Carl Lindner's American Financial Corporation. Keating was known as Lindner's hatchet man. In 1978, Keating had offered no defense when the SEC charged him — in the words of Martin Mayer — with "arranging fraudulent loans to himself … from a bank owned by his friend and employer Carl Lindner."
Greenspan surely knew who he was dealing with. He had been on Wall Street in the 1960s. He trafficked in knowing who he should be schmoozing. In the 1980s, he must have known Lincoln was part of the Riklis-Steinberg-Lindner-Boesky-Milken crowd.
Lindner had been in the news when he extorted greenmail from Combined Communications (1979) and Gannett (1981). "Greenmail" — was a neologism for when a corporate raider acquired shares in a company and the company then bought the shares back at a premium to rid itself of the raider. Steinberg's most publicized success was also his most profitable: he extorted $60 million from Walt Disney in 1984.
Lindner used Keating when greenmail efforts went awry and he wanted to dump shares. An example was Gulf Broadcast — Keating's first big investment, in 1984. Keating paid $132 million to Lindner's American Financial. This was 30 percent above that day's market price. The $132 million was also twice Lincoln's net worth — a violation of California regulations. All of this was before Greenspan's 1985 high praise for Lincoln Savings and Loan's "expert[ise] in selecting and making direct investments."
I should note that Riklis and company had not introduced some fractured ethos of their own. Wall Street was financing greenmail and corporate raiders; investment bankers led raids on their own clients. This conduct was nurtured in the 1970s and bloomed in the 1980s. The rise in debt financing and leverage was one reason.
Greenspan was just the man to inherit the Federal Reserve chairmanship in 1987. Four years before, in 1983, a poll of Wall Street executives found that 31 percent of them had a special confidence in Alan Greenspan, should he be named chairman. He was second in that poll, behind Paul Volcker.
Greenspan's hearing for Federal Reserve chairman was in August, 1987. Senator William Proxmire, a Democrat from Wisconsin, was the chairman. He did not like Greenspan. He had voted against Greenspan's confirmation as chairman of the Council of Economic Advisers in 1974 because he thought Greenspan would pass information back to the companies with whom he had consulted.
I don't know why he thought that, but it is an odd suspicion of a candidate for a senior government post. At least it was in 1974. He may have known about Greenspan's reputation: "the book on him was that you could order the opinion you needed."
Proxmire opened the hearing by chastising Greenspan for his abysmal forecasting record.
More than Greenspan's habit of always being wrong — and by such a wide margin — Proxmire was probably concerned by Greenspan's less-than-honest "full disclosure" statement he had submitted to the White House and the Senate.
Greenspan had not revealed services rendered to Sears and Lincoln Savings & Loan. Greenspan distinguished the two by slipping them in the side pocket of "advocacy projects."
Proxmire was a foe of bank deregulation. He feared big banks would squash smaller banks. He feared Alan Greenspan would be only too happy to squash them. The senator lectured the candidate for the Fed chairmanship:
As chairman of the Federal Reserve you play the key role in approval or disapproval of these massive bank mergers.… I would feel much better about this appointment if there was somewhere in your record an indication of your awareness of the dangers to our economy of excessive financial concentration.
Well, there was no such indication, and oddly for Greenspan, he didn't try to spin some preposterous middle path.
After becoming Federal Reserve chairman, Alan Greenspan could not fulfill Senator Proxmire's fears fast enough. (Proxmire had retired.)
In 1989, the Federal Reserve permitted J.P. Morgan, of which Greenspan had been director before becoming Fed chairman, to underwrite Xerox debt. This was the first such debt issue from a commercial bank since 1933, the year of the Glass-Steagall Act.
In 1990, the Federal Reserve permitted J.P. Morgan to underwrite stock. Time magazine called this "the widest breach of Glass-Steagall yet."
Greenspan was as permissive on money printing as he was on megabanking. He had to be. Americans were impatient and Greenspan did not want to disappoint — he loved to be liked. He would not wait for a proper recovery after the recession of 1990. He reduced the federal-funds rate from more than 9 percent in 1989 to 3 percent in 1992. Banks and hedge funds leveraged up and refloated the economy.
This was the first time a recovery in the United States was driven by finance rather than production. Money and credit was concentrated more and more in the hands of "the slick and the clever" who had nearly unlimited access to "more and more financing." By now, the middle class was getting trounced.
From that point forward, every time the economy coughed, Greenspan cut rates and pumped up a bubble. Loose money attracts characters who should never deal in money.
The economy had become badly unbalanced. Federal Reserve Governor Larry Lindsey warned the Federal Reserve Open Market Committee (FOMC) of the growing income disparity, in every FOMC meeting from 1993 to 1996. The other Fed governors did not understand what he was talking about. For example, Lindsey spoke and Janet Yellen worried that Americans were saving too much, which would reduce the GDP. Not only was the underclass getting crushed, it was borrowing in a desperate attempt to keep up.
In what might be called his farewell address, Lindsey spoke at the September 1996 FOMC meeting:
MR. LINDSEY: Our luck is about to run out in the financial markets because of what I would consider a gambler's curse: We have won this long, let us keep the money on the table.… But the long-term costs of a bubble to the economy and society are potentially great. They include a reduction in the long-term saving rate, a seemingly random redistribution of wealth, and the diversion of scarce financial [and] human capital into the acquisition of wealth.… I think it is far better that we [burst the stock-market bubble] while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights. Whenever we do it, it is going to be painful however.… If the optimists are wrong, then indeed not only our luck but that of the markets and of the economy has run out. Thank you.
CHAIRMAN GREENSPAN: On that note, we all can go for coffee.
Greenspan sat there and drank coffee for the next 10 years. He blew up the stock market, then the mortgage and credit markets, while the sorts of characters who were reaching the top on Wall Street were of a persuasion that you wouldn't allow to fill your gas tank.
Standards Keep Eroding
In 2001, David Tice testified before the House Financial Services Committee, "The most reckless fund managers, the most reckless auditors, the most reckless investment bankers, the most reckless corporate officers made the most money. So you had greater and greater incentives to promote the most reckless guys." Meanwhile "the most reckless CEOs hired the most reckless chief financial officers."
That was in 2001 — a generation of CEOs before those who were promoted and reached the top ran us off the cliff, as such types could be expected to do.
But the worst racketeers in the country have gravitated to the Federal Reserve Board. To prevent the economy from collapsing they rigged more markets than the Politburo.
The 2004 transcripts from the Federal Reserve Open Market committee — the FOMC — have just been released.
At the March 2004 meeting, Federal Reserve Governor Donald Kohn stated the FOMC's mission: "Policy accommodation — and the expectation that it will persist — is distorting asset prices. Most of the distortion is deliberate and a desirable effect of the stance of policy. We have attempted to lower interest rates below long-term equilibrium rates and to boost asset prices."
In other words, Federal Reserve policy was to distort asset prices. Kohn also said this was deliberate and desirable. In other words, distorted asset prices were not an unfortunate consequence of such and such a Fed policy. The Fed's goal was to distort asset prices.
Kohn went on: "It's hard to escape the suspicion that at least around the margin some prices and price relationships have gone beyond an economically justified response to easy policy. House prices fall into this category."
So note — the Fed was deliberately driving up the prices of houses.
I wrote about the 2004 transcripts last week on my blog. Having read all the transcripts from 1994, I can say this latest batch was of a different character. The Fed was now — in 2004 — holding long-term Treasury rates within a narrow band — for the benefit of the carry trade. The FOMC was now managing the size of the carry trade, and Greenspan was now asking whether hedge-fund managers were properly delta hedging the extension of mortgage security duration due to changes in interest rates.
That was in 2004 — and we know how badly this central-planning effort failed. Now in 2010, what in the world is the FOMC trying to manage to prevent an even larger blow up? Those who own stocks, take note.
In retirement, Alan Greenspan claimed that he really didn't get it about subprime housing until late 2005. He can be a particularly incurious fellow.
The center of the subprime universe was Irvine, California. Lincoln Savings and Loan was in Irvine, California. This was not a coincidence. Some of the same characters who had used their "combination of native cunning and access to leverage" in the 1980s were back.
In 2005, New Century ($35 billion), Option One ($29 billion), and Ameriquest ($19 billion) — all of Irvine — sold $83 billion of subprime loans in 2005. That is just subprime. In a single year.
All of America bought $161 billion worth of all types of mortgages in 1992.
And what is Fed policy today? It was stated by Donald Kohn in the fall of 2009:
Recently the improvement, in risk appetites and financial conditions, in part responding to actions by the Federal Reserve and other authorities, has been a critical factor in allowing the economy to begin to move higher after a very deep recession.… Low market interest rates should continue to induce savers to diversify into riskier assets, which would contribute to a further reversal in the flight to liquidity and safety that has characterized the past few years.
So, we have it: one reason for the Fed's zero percent interest-rate policy, in the words of former Federal Reserve Board member Henry C. Wallich: "is [as] a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and aged."
The old cannot live on zero percent, so the Fed has been able to chase them into riskier assets.
Chairman Greenspan was a fiat chairman for a fiat age. His credentials were inflated to serve in a position of responsibility where he would justify that "special confidence" Wall Street executives had vouched for in 1983.
Americans were beguiled by this fixture on television, who gained more credibility simply because he was the central attraction on television. Americans were also taken in by corrupt economists, who were advertised as experts. They propelled a system that needed constant infusions of propaganda, convincing Americans they were getting richer even though they were getting poorer. By 2001, the "slick and the clever" had to be "the most reckless auditors [and] the most reckless investment bankers," since their dealings were divorced from any real economic function. Thus, "fundamental faith in the fairness of our institutions and our Government has deteriorated."