Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (52 page)

⁹
Nick Timiras, “Clinton Looks to Greenspan,”
Wall Street Journal
, March 26, 2008.
¹⁰
Keach Hagey, “Greenspan Backtracks on Iraq War Oil Claim,”
CBS News.com,

September 17, 2007. Hagey quotes various reports from newspapers.
¹¹
Edmund L. Andrews and David E. Singer, “Former Fed Chief Attacks Bush on Fiscal
Role,”
New York Times
, September 15, 2007.
¹²
Edmund L. Andrews, “A ‘Disappointed’ Greenspan Lashes Out at Bush’s Economic
Policies,”
New York Times
, September 17, 2007.
¹³
Ibid.

Greenspan’s Grand Tour

Greenspan showed great stamina for a man in his eighties. After selling
The Age of Turbulence
on the domestic press circuit, he headed to Europe. In Paris, Greenspan told
Le Figaro
that Dominique Strauss-Kahn (France’s candidate to head the IMF) should be the next managing director, but the “IMF has to rethink its mission.”
¹⁶
Greenspan was never at a loss to identify others’ faults.

Safely across the border, he told a Bundesbank fiftieth-anniversary gathering that the newly elected president of France, Nicolas Sarkozy, should not be lobbying the European Central Bank to lower rates. After he hemmed, he hawed: Greenspan said that Sarkozy was doing a good job. In London, he told the
Daily Telegraph
that “Britain is more exposed than we are [to mortgage defaults]—in the sense that you have a good deal more adjustable-rate mortgages.”
¹⁷
That would seem to contradict his variable-rate advice in February 2004, when he advised Americans to look overseas, “where adjustable-rate mortgages are far more common.”
¹⁸
His statement to the
Telegraph
was on September 17, in the midst of a bank run on Northern Rock, a British bank. He may not have heightened the hysteria sweeping Britain, but he could have kept his mouth shut.

¹⁴
Interview with Leslie Stahl,
60 Minutes
, September 16, 2007.
¹⁵
Jane Wardell, “Greenspan Defends Subprime,” Associated Press, October 2, 2007.
¹⁶
“World Markets Still Affected by Fear: Greenspan,”
Le Figaro
, September 23, 2007.
¹⁷
“UK More Vulnerable than America to the Credit Crunch, Greenspan says,”
Daily Te l eg raph
(London), September 18, 2007.

After Britain, he was seen in Vienna, where he said, “[T]here is no doubt about the fact that low interest rates for longterm government bonds have caused the real estate bubble in the US” and “[real estate] prices are going to fall much lower yet.”
¹⁹
In Amsterdam, Greenspan fueled a cabinet crisis (about unemployment) when he told the press and ING Bank’s guests that the unemployment numbers are so low in the United States because it’s easy to fire an employee and it’s also easy to find a job.
²⁰

The author grew more defensive. The same day the
New York Times
had upbraided him in September, Greenspan told CNBC: “I’m fully aware of the fact that everyone thinks that the Federal Reserve, back when I was chairman, inflated the economy. Well, we didn’t.”
²¹
“Everyone” went too far, but celebrity economists were about to speak out. Nobel Prize winner Joseph Stiglitz claimed: “Alan Greenspan really made a mess of all this.”
²²
Patrick Artus, economic advisor to the French government and “one of France’s most listened to ‘pundits’” told Bloomberg that “Greenspan was an arsonist and fireman combined. . . . He absolutely failed to see where the malfunctions in the U.S. economy were.”
²³

“I Didn’t Do It!” was the December 12, 2007, headline of a
Salon.com
story that described recent Greenspan excuses.
²⁴
This sort of headline had become a sport: “Not My Fault” was
New York
magazine’s synthesis;
²⁵
The
Sunday Times
(of London): “Don’t Blame Me!”;
²⁶
Palm Beach Post
: “Will Alan Greenspan just shut up and let someone else try to clean up the damage he allowed to happen?”
²⁷

¹⁸
Alan Greenspan, “Understanding Household Debt Obligations,” speech at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C., February 23, 2004.

¹⁹
“House Prices to Drop Much Lower: Greenspan,” Reuters, September 21, 2007.
²⁰
De Telegraaf
, September 29, 2007, translated by Hans Merkelbach.
²¹
Alister Bull, “Critics Charge Greenspan but Maestro Legacy Endures,” Reuters, September 18, 2007.
²²
Reed V. Landberg and Paul George, “Greenspan ‘Mess’ Risks U.S Recession, Stiglitz Says,” Bloomberg, November 16, 2007.
²³
Farah Nayeri, “Greenspan Was ‘Very Bad’ Fed Chairman, Says Artus of Natixis,” Bloomberg, November 30, 2007.
²⁴
Andrew Leonard, “Alan Greenspan on the Mortgage Crisis: ‘I Didn’t Do It!’”
Salon. com
, December 12, 2007.

Greenspan did not agree. The problem was in not explaining himself, the chairman told Steve Inskeep on NPR radio.
²⁸
This was a puzzling self-critique, since he was doing little else. Greenspan rejected criticism that the Fed had fueled the housing bubble by lowering interest rates. That argument “doesn’t coincide with the facts. . . . [W]e’ve had housing bubbles in two dozen or more countries around the world.” Greenspan had grown astonishingly adept at identifying bubbles—at least 24 this time.
²⁹
He did not mention what many critics now argued: there was no one more responsible for the two dozen real estate bubbles than Alan Greenspan. He printed the dollars the rest of the world absorbed. This led to the worldwide asset inflation.

Greenspan addressed derivative problems as if he were a rookie financial reporter recently transferred from the Arts & Leisure section. Greenspan told Reuters the abrupt upheaval in markets as a result of the subprime crisis “was an accident waiting to happen.”
³⁰
He revealed: “It was a failure to properly price these risky assets that set off the tidal wave of risk contamination.”
³¹
On another topic: “Markets from their earliest days have been plagued by bubbles.”
³²

His most obvious claims were quoted as nuggets of wisdom: “The markets for certain complex, structured products, will surely contract.”
³³
A few days later, he “defended the U.S. subprime mortgage market, arguing the repackaging and sale to investors of risky home loans—not the
loans themselves—was to blame for the current global credit crisis.”
³⁴
Any diversion would do.

²⁵
“Not My Fault,”
New York
, September 14, 2007.
²⁶
“Alan Greenspan: Don’t Blame Me; I Couldn’t Alter Asset Prices,”
Sunday Times
(London), January 27, 2008.
²⁷
“The Greenspan Bubble,”
Palm Beach Post
, December 19, 2007.
²⁸
“Greenspan: Recession Odds ‘Clearly Rising,’” NPR, December 14, 2007.
²⁹
Ibid.
³⁰
“Highlights—Speeches from UK’s Brown and Darling; Greenspan,” Reuters, October 1, 2007.
³¹
Ibid.
³²
Ibid.
³³
Ibid.

On January 24, 2008, the itinerant author was in Vancouver, Canada. He told Sherry Cooper at BMO Financial Group that his now-infamous adjustable-rate mortgage speech in February 2004 had been misrepresented. Greenspan, in defending himself, told Cooper that he spoke to the Economic Club of New York seven days later, “where I strongly clarified my remarks,” and “[s]o I plead not guilty.”
³⁵
(Greenspan had blamed several guilty parties over the past few weeks: reporters, Dick Cheney, George Bush I, George Bush II, the cold war, models, history, commercial lenders, mortgage companies, appraisers, and home buyers.) His speech to the Economic Club was about the trade deficit. He discussed the mortgage issue during the question-and-answer session. The Federal Reserve Web site posts only speeches. If Greenspan thought he had been misunderstood, he should have addressed adjustable-rate mortgages in a speech, or several speeches.

Anna Schwartz spoke to the
Daily Telegraph
from her office at the National Bureau of Economic Research, where she had worked since 1941. The coauthor with Milton Freidman of
A Monetary History of the United States
offered a new monetary interpretation. According to the
Te l egraph
: “She is scornful of Greenspan’s campaign to clear his name by blaming the bubble on an Asian savings glut.” In Schwartz’s opinion: “This attempt to exculpate himself is not convincing. . . . It can’t be blamed on global events. . . . It is clear that monetary policy was too accommodative. Rates of one percent were bound to encourage all kinds of risky behavior.”
³⁶

Big Money

Greenspan was hired by John Paulson in January 2008. This was Greenspan’s lucky day: a chance to really make fast money on the crack-up. Paulson saw the future of housing by 2005, when he told one of his colleagues: “We’ve got to take as much advantage of this as we can.”
³⁷
Paulson & Co. took the short side of mortgage security credit default swaps. The strategy paid off handsomely in 2007 when two of Paulson’s hedge funds rose 590 percent and 350 percent.
³⁸
Paulson earned a personal paycheck of $3 to $4 billion.
³⁹

³⁴
Jane Wardell, “Greenspan Defends Subprime, Sees Some Early Signs of Easing in Credit Crisis,” Associated Press, October 2, 2007.
³⁵
Bill Fleckenstein, “Did Greenspan Push Risky Home Loans?”
Contrarian Chronicles
, February 4, 2008; moneycentral.msm.
³⁶
Ambrose Evans-Pritchard, “Anna Schwartz Blames Fed for SubPrime Crisis,”
Daily Telegraph
(London), January 13, 2008.

Greenspan was more responsible than any other person for the bust, which might have caused a moral dilemma before he tackled his new job, but Greenspan had a knack for rationalizations. After the Paulson hiring, the
Wall Street Journal
asked Greenspan: “All three of your clients—Pimco, Deutsche Bank, and now Paulson—were bearish early on housing and mortgages. Is there a connection?” The absent-minded Ph.D responded: “I hadn’t [noticed] until you just raised the issue.”
⁴⁰

Pimco had hired Greenspan as an advisor in May 2007, and Deutsche Bank had done so in August. The
Wall Street Journal
asked Deutsche Bank’s CEO Joseph Ackerman why Greenspan is “uniquely qualified to help his clients.” Ackerman said that he admired Greenspan’s ability to “explain very complicated subjects and situations in simple terms.”
⁴¹

“Don’t Blame the Crisis on Me”

Greenspan defended himself on the editorial pages. “We Will Never Have a Perfect Model of Risk” was both the title and the theme of a March 16, 2008,
Financial Times
op-ed: “[M]athematically elegant economic forecasting models . . . once again have been unable to anticipate a financial crisis or the onset of a recession.”
⁴²
It was unseemly. Richard Russell, the renowned author of the oldest financial newsletter in the country (
Richard Russell’s Dow Theory Letters
), wrote to his clients: “Greenspan with his proclivity to creating bubbles is largely responsible for the subprime mess. But this publicity-seeking ego-maniac continues to act like the great oracle. Is there any way of getting Greenspan off the public scene? The man has absolutely no shame.”
⁴³

³⁷
Gregory Zuckerman, “Trader Made Billions on Subprime,”
Wall Street Journal
, January 15, 2008.
³⁸
Ibid.
³⁹
Ibid.
⁴⁰
“Greenspan: Subprime Sales May Be Near Bottom,”
Wall Street Journal
, January 15, 2008.
⁴¹
Greg Ip, “Fed Ex-Chief Greenspan to Advise Deutsche Bank,”
Wall Street Journal
, August 13, 2007.
⁴²
Alan Greenspan, “We Will Never Have a Perfect Model of Risk,”
Financial Times
, March 16, 2007.

Greenspan was consumed with his own legacy. He did not have the decency to retreat when the Wall Street collapse commenced. On March 16 the Fed announced an “overnight loan facility” that would provide “funding to primary dealers.”
⁴⁴
In a flash, the Fed had increased its mandate to fund brokers and dealers, not just banks. Bernanke’s Fed opened this facility when Bear Stearns could not borrow. Investment banks needed constant government borrowing support just to exist. The Fed arranged a wedding between JP Morgan Chase and Bear Stearns to save the latter. It was now obvious the derivatives that Greenspan still extolled (credit derivative swaps) had concentrated risk in financial institutions rather than spreading risk among parties. His record for wrongheadedness remained intact.

Paul Volcker was distraught. He spoke at the Economic Club of New York on April 8, 2008. Earlier in the year, Volcker told the
New York Times
that “[t]oo many bubbles have been going on for too long. The Fed is not really in control of the situation.”
⁴⁵
This day, he shredded the Bernanke Fed. Volcker was asked if he predicted a dollar crisis in future years. “You don’t have to predict it, we’re in it.”
⁴⁶
The former Federal Reserve chairman explained: “As custodian of the nation’s money, the Federal Reserve has the basic responsibility to protect its value and resist chronic pressures toward inflation.”
⁴⁷
It was apparent that Bernanke’s concerns did not include the dollar. He was busy bailing out participants in the crony capitalism that was making the United States look like a fourth-world country.
⁴⁸

⁴³
Richard Russell,
Dow Theory Letter
, March 17, 2008, pp. 7–8.
⁴⁴
Federal Reserve Bank of New York, “Primary Dealer Credit Facility: Frequently Asked
Questions.” www.ny.frb.org
⁴⁵
Roger Lowenstein, “The Education of Ben Bernanke,”
New York Times Magazine
, January 20, 2008.
⁴⁶
“Volcker’s Demarche,” “Review & Outlook,” online.wsj.com, April 9, 2008.
⁴⁷
Paul Volcker, remarks at a luncheon of the Economic Club of New York, New York, April 8, 2008.