Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (10 page)

After Ford lost the 1976 presidential race to Jimmy Carter, Greenspan wasted no time getting out of Washington. He caught the noon shuttle back to New York the day of President Carter’s inauguration.

⁴⁰
Martin,
Greenspan
, p. 127.
⁴¹
Ibid.

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1976–1980

Alan Greenspan, the economist, has asserted that the translation of homeownership equity into cash available for consumer spending is perhaps the most significant reason why the economy in 1975-1978 was consistently stronger than expected.
¹

—New York Times, February 17, 1980

As Jimmy Carter delivered his inauguration address in 1977, Greenspan resumed his publicity campaign. He also received his Ph.D. in economics from New York University in 1977. He did so under the tutelage of his former classmate, Bob Kavesh, who was now a professor at NYU. Greenspan’s dissertation was peculiar. According to Jeff Madrick, writing in the
New York Review of Books
: “[H]e did not complete a conventional dissertation. Instead, he submitted published articles and other writings, some of them for publications such as
Business Economics
, which would not have met the scholarly standards for most economic

¹
John H. Allan, “Thrift Adrift: Why Nobody Saves,”
New York Times
, February 17, 1980, p. 4.

59

departments.”
²
Traditionally, scholarship is available to the public; however, NYU has not released Greenspan’s work.
³

The Ph.D. might or might not have aided his consulting business, but Greenspan knew it would be an asset if he were to be considered for a senior government position—such as Federal Reserve chairman. His personal relations with the press and with members of the Ford administration gave him an insider’s edge, and he understood the value of constant publicity. Thus, he hired the Harry Walker Agency to line up speaking engagements. Greenspan spoke roughly once a week, for compensation ranging from $10,000 to $40,000.
⁴
This is an impressive fee, even today. Greenspan received glowing tributes from the press. One reason for this was his courtship: an editor of
BusinessWeek
complimented the overworked economist by saying, “No matter what he was doing, you could get him instantly.”
⁵

On August 16, 1977, a momentous event occurred that attested to the farsightedness of Greenspan’s non-academic route to the top of his profession. Elvis Presley died. His passing caused a national ruckus. Many believed it was a hoax; some still do. “Elvis sightings” were reported by the thousands. Long before he died, Elvis ceased to exist as a person and was reincarnated into a transcendent symbol. “Elvis imitators” stumbled through their acts across America to susceptible and lachrymose audiences. They couldn’t sing like Elvis but that didn’t matter. This new industry embodied the image of Elvis. Likewise, the capabilities of Alan Greenspan as an economist were now transcendent; they were above examination by the press or public. He now played the role of Alan Greenspan, celebrity economist. He would never relinquish that perch.

Greenspan reassumed his position inside the womb of the press as a member of
Time
magazine’s Board of Economists. The group included familiar names: Otto Eckstein, Beryl Sprinkel, Murray Weidenbaum, Walter Heller, and Arthur Okun.
⁶
This was not a roll call of enlightenment. Since the solution to overindulgence was politically unpalatable, economists ignored the explosion in the fireplace and instead swatted the flies on the mantelpiece.

²
Jeff Madrick, “Mr. Fixit,”
New York Review of Books
, 48, no. 12, July 19, 2001.
³
Justin Martin,
Greenspan: The Man behind Money
(Cambridge, Mass.: Perseus, 2000), p. 138. See also: Jeff Madrick, “Mr. Fixit.”
⁴
Ibid., pp. 139, 276.
⁵
Ibid.

Charles Schultze was President Carter’s chairman of the Counsel of Economic Advisers. Schultze had been director of the Bureau of the Budget during the Johnson administration. He was now on furlough from the Brookings Institution.
Time
reckoned that Schultze should steer away from the mistakes that Herbert Stein had made during his tenure at the CEA. (Stein had preceded Greenspan as chairman.) Stein “arouse[d] suspicion that politics was warping his professional judgment.” The magazine offered Schultze a role model: “Alan Greenspan restored the CEA’s professional respectability largely by staying out of the public eye and talking primarily to President Ford.”
⁷
Greenspan’s self-effacement proved so counterintuitive that his brand of personal publicity was continually mistaken for an absence of it.

An interview with the
New York Times
in April 1977 served to integrate the returning consultant to his hometown. Leonard Silk asked if, after “the intimate and influential relationship” he enjoyed with President Ford, Greenspan suffered “decompression pains on his return to New York.” The former public servant responded, “Surprisingly few.… I haven’t fundamentally changed what I am doing.” This was true—the reader may not have appreciated how true.

Greenspan went on to contrast himself with former Ford aides who might find themselves adrift: “Of course, if power interests you, you would miss the change.… [M]y professional work interests me more.”
⁸
He went on to tell Silk his initial belief that for the CEA chairman, avoiding public exposure was an error: “It is essential not to go completely underground.… I ought to join regular White House briefings, for sheer technical reasons.”
⁹
Silk apparently did not ask for what technical reasons Greenspan found that “even swearing-in affairs at the White House were useful because they provided one a chance to be close to the President.”
¹⁰

⁶
“Prescriptions for a Drastic Program,”
Time
, February 21, 1977. Others were Paul McCracken, chairman of the Counsel of Economic Advisers under Nixon; Robert Nathan; and Joseph Pechman.

⁷
“A Starring Role for the CEA?”
Time
, February 7, 1977.
⁸
Leonard Silk, “Greenspan, White House Days Behind, Picks Up as Before”
New York Times
, April 28, 1977.

The Carter Years: An Economy in Decline

The Carter presidency may have done more to further Alan Greenspan’s rise than all his weekly speeches and exposure in
Time
. Carter was encumbered by policies that the best minds had instituted earlier in the decade. The break from the gold standard unleashed economic theories that had scrimmaged on college blackboards for decades. With currencies no longer fixed to the price of gold, economic theory claimed that the United States needed to devalue the dollar to compete with overseas producers. The consequent cheaper dollar—in theory—would make U.S. products less expensive abroad.

The dreary result may be summed up by reviewing the relative fortunes of domestic and foreign car producers across the decade: the Carter administration bailed Chrysler out of a looming bankruptcy. By 1980, 25 percent of auto sales in the United States were imports.
¹¹
In 1950, only 500,000 automobiles were produced outside of the country and 4,000,000 in the United States.
¹²

The central problem that Carter faced was inflation. The Carter administration aggravated the situation with larger spending deficits and a determination to shield Americans from the consequences of higher prices—when the only solution was to expose Americans to the reckoning for past misdeeds. Government spending and bank credit continued to expand, delaying the insolvencies of unviable businesses. The budget deficit reached $59 billion in 1977.
¹³

⁹
Ibid.
¹⁰
Joseph Kraft, “Right, for Ford,”
New York Times Magazine
, April 25, 1976.
¹¹
The Eighties Club, Chapter 5 “Car Wars”; http://eightiesclub.tripod.com/id291.htm.
¹²
John Lukacs,
Outgrowing Democracy: A History of the United States in the Twentieth

Century
(Garden City, N.Y.: Doubleday, 1984), p. 110.
¹³
White House Office of Management and Budget, Fiscal Year Budget Data, October 15,
2008.

Americans had learned that to stay ahead, or at least keep up, one borrowed to buy and paid later. Inflation passed 16 percent in 1979. The house-swapping frenzy of the 1970s was a precursor to the postmillennium escapade. Despite mortgage rates more than double anything in the past, residential real estate boomed. By 1979, the housing market was a national obsession. House prices had risen 8 percent or more every year since 1970. Prices were up 17.7 percent in the first nine months of 1979—from $50,200 to $57,200.
¹⁴
In 1972, membership in the National Association of Realtors first passed 100,000, and it surpassed 435,000 in 1975 (which included a merger with independent salespeople); by 1979, 761,000 Americans were selling houses.
¹⁵

And what did Alan Greenspan make of all this? In the
New York Times
, Greenspan worried that “[p]eople no longer think a mortgage is just something to take out to buy a home. It can be a means of cashing in on your gains.”
¹⁶
Between 1975 and 1978, home mortgage debt rose from $479 billion to $737 billion—a 53 percent rise. Consumer borrowing rose by 60 percent during the same period.
¹⁷

The American middle class showed signs of fatigue and instability: the higher incidences of drug use, divorce, and single-parent homes were emblematic. A 1979 reading test showed that the reading ability of American college students at the better universities was beneath those of 1928.
¹⁸
Teachers and students were remiss. Jacques Barzun wrote “Occupational Disease: Verbal Inflation” in 1978: “How did the public school get to such a pass? The answer is: inflation—not monetary inflation, but intellectual, emotional, social, egotistical inflation. For the last fifty years American Education … has lived by continual exaggeration of what it is for and what it can do … Read the top-heavy curriculum plans, the twelve objectives, the twenty-three guidelines, and bring to mind the fraudulent slogans with which the profession has gargled during the last two generations.”
¹⁹
Exaggeration, abstractions, and empty vocabulary whirred through the markets: three decades later, investment managers and trading desks monitored screens while their computers exchanged securities, programmed to trade when certain words and phrases were spoken (or, more likely, shouted) on CNBC, the television network that turned investing into a football game. Alan Greenspan was the prime beneficiary of a time in which empty vocabulary was considered brilliant.

¹⁴
Karen W. Arenson, “Rise in Home Prices Apparently Slows,”
New York Times
, November 13, 1979.
¹⁵
Frederik Heller National Association of Realtors, “The Power of One Million,”
Realtor
, May 1, 2004.
¹⁶
Mario A. Milletti, “Inflation’s Impact on Homeowners,”
New York Times
, January 1, 1978.
¹⁷
Joseph Nocera, “America’s Inflation Anxiety,”
Worth
, July/August 1994, p. 98.
¹⁸
Lukacs,
Outgrowing Democracy
, p. 190.

Greenspan Waxes Nostalgic for the 1950s and 1960s

Meanwhile, across America, not only were households unable to plan for the future, but the same was true of companies. In 1979, Greenspan wrote a column in the
New York Times
. He waxed nostalgic about the “halcyon days of the 1950’s and 1960’s” when “business investment decisions seemed appropriately focused on longer-term payoffs.” But now, “it is not surprising that in recent years, business capital investments have become increasingly concentrated in assets with quick cash payoffs.”

Greenspan calculated that the “[e]xpansion of manufacturing capacity has fallen short of the pattern in earlier business cycles.” He thought “more ominous” the “shift in research and development budgets towards quick-payoff ‘development’ projects.”
²⁰

U.S. News and World Report
sounded the alarm in 1978: “The mountain of debt has grown so high in this country that many economists fear the United States is unusually vulnerable if a recession occurs.… The question now being raised is whether a day of reckoning is at hand.”
²¹

A time of turbulence was ahead, but not a day of reckoning. That would be postponed. In the decades ahead, price inflation would fall, but never disappear. The habits and financial consciousness of the 1970s were here to stay, a consciousness that handcuffed the American imagination to a mosaic of unnecessary and unreasonable desires.

¹⁹
Jacques Barzun,
A Jacques Barzun Reader
(New York: HarperCollins, 2002), pp. 392–393. Originally published in
Begin Here: The Forgotten Conditions of Teaching and Learning
, (Chicago: University of Chicago Press, 199), pp. 101–113.

²⁰
Alan Greenspan, “Economic Scene,”
New York Times
, August 8, 1979.
²¹
James Grant,
Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken
(New York: Farrar Straus Giroux, 1992), pp. 313–314, quoting from
U.S. News & World Report
, November 20, 1978.

Americans would never again save as they had. Corporations would never revert to longterm capital commitments at home. The borrowing that looked so ominous to
U.S. News
in 1978 would rise to a new, permanent high plateau established in the 1980s—after which it was impossible to contract, barring a grave crisis.