Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (53 page)

While Volcker worried about the country, Greenspan had more parochial concerns. He was back in the
Financial Times
on April 7. The newspaper seemed to be using Greenspan more than the other way around. In the weekend edition (April 5–6, 2008), there was a large advertisement for his Monday column. A solid, black background housed the topic in pink letters: “Greenspan: Don’t Blame the Crisis on Me.”
⁴⁹
His immaculate record had become a joke.

The title of Greenspan’s article said more than enough: “The Fed Is Blameless on the Property Bubble.”
⁵⁰
More model problems. The press was less subservient than before. Some headlines on April 8:
New York Post
: “Greenspan Blames Investors for Crisis”
⁵¹
; Reuters (Singapore): “Greenspan Says Unfairly Blamed, Has No Regrets”;
Sydney Morning Herald
, Australia: “Greenspan Rejects Interest Rates Criticism”;
Gulf Times
(Qatar): “Investors to Blame for Crisis, not Fed, Says Greenspan”
⁵²
;
Los Angeles Times
: “Memo to Greenspan: Enough Already.” (The first sentence from L.A. Land, the newspaper’s blog: “The unseemly, globetrotting, money-grabbing, legacy-spinning, responsibility-denying tour of Alan Greenspan continues, as relentless as a bad toothache.”
⁵³
)

On the same day, April 8, the
Wall Street Journal
published a long self-defense in an interview with Greenspan. The bull market icon who used to be God told the
Journal
that he didn’t regret a single decision.
⁵⁴
Greenspan was particularly upset with criticisms “by friends and former colleagues, many of them respected economists who backed his policies at the time but now say, in hindsight, that the calls were wrong.”
⁵⁵
This was a fair point. It does seem that professional economists waited until the housing meltdown before tossing the former chairman overboard. Among possible explanations, those who now spoke may have believed what they now said all along, but there was no one in the media interested in quoting them; they may have waited until it was safe to talk; they may have been as inept as Greenspan at looking ahead; they may have grown sick and tired of his whining or they may have, in concert, derided Greenspan, using him as a sacrificial offering, since the fallacy of economics as taught over the past half century was unraveling.

⁴⁸
Bernanke was just warming up. Within a few months, all the investment banks had either failed, been absorbed, or been allowed to hide under a commercial banking umbrella. The big five had been Bear Stearns, Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Brothers. Aside from the various Federal Reserve windows (soon there were more than in the cathedral at Chartres), the government (through the Treasury Department) was pouring billions of dollars into Citicorp, Fannie Mae, Freddie Mac, and Bank of America (the government had absorbed Mozilo’s Countrywide Credit), and the Fed was running the biggest insurance company in the world: AIG.

⁴⁹
Financial Times
, April 5–6, 2008, p. 9.
⁵⁰
Alan Greenspan, “The Fed Is Blameless on the Property Bubble,”
Financial Times
, April 7, 2008.
⁵¹
The headline was in the
New York Post
; the accompanying article is from Reuters.
⁵²
The headline was in
Gulf Times
(Qatar); the accompanying article is from Reuters.
⁵³
Peter Viles, “Memo to Greenspan: Enough Already,”
Los Angeles Times
, blog called “L.A. Land,” April 8, 2008.

After reading the
Journal
article, Senator Jim Bunning commented, “He protests too loudly of the criticism that is justly due him. I’ve never seen someone who doesn’t think he needs defending himself so much.”
⁵⁶

Comparisons the next day were inevitable. Caroline Baum wrote: “Volcker is a man of few words; Greenspan won’t shut up.” Baum quoted another apostate to the Greenspan legend, former Federal Reserve Governor Alice Rivlin: “[T]he culprit was not imperfect models. It was a failure to ask common sense questions, such as, ‘will housing prices keep going up forever?’”
⁵⁷
The title of Baum’s article captured a general mood: “Volcker Stands Tall, Greenspan Keeps Shrinking.”
⁵⁸

⁵⁴
Greg Ip, “His Legacy Tarnished, Greenspan Goes on Defensive,”
Wall Street Journal
, April 8, 2008, p. 1.
⁵⁵
Ibid
.
⁵⁶
“Greenspan’s Senate Antagonist Attacks His Defense,” Blogs.wsj.com, April 9, 2008.
⁵⁷
Caroline Baum, “Volcker Stands Tall, Greenspan Keeps Shrinking,” Bloomberg, April 9, 2008.
⁵⁸
Ibid.

2008

[O]ver-confidence finds exuberant expression in a bull stock market.… Once stock prices reach the point at which it is hard to value them by any logical methodology, [Greenspan] warns, stocks will be bought, as they were in the late-1920’s—not for investment but to be unloaded at a still higher price. The ensuing break could be disastrous. Panic psychology, Greenspan believes, cannot be summarily altered or reversed by easy money policies or any built in stabilizers.
¹

—Fortune
magazine, March 1959

What Alan Greenspan really believed is beyond the scope of this book. We know what he said in public. Quoting him again, from earlier chapters, offers a synopsis of where we have traveled during his lifetime.

There are two categories in which his statements on investment can be channeled. The first is bubbles. The second is the need for longterm investment in a sustainable economy.

Of the first, bubbles, he stated what everyone at the local Rotary Club luncheon knows: “I think the downside risks are basically coming from the possibility of significant increases in stock and bond prices.… Ironically, the real danger is that things may get too good. When things get too good, human beings behave awfully.”
²
At a different time:

¹
Gilbert Burck,
Fortune
, “A New Kind of Stock Market,” March 1959, p. 201.
²
FOMC Meeting transcript, March 28, 1995, p. 42.

349

“Mr. Greenspan declared that a rising stock market tended to put strong upward pressure on stockholder inclination to spend. If market values rise, and do not quickly fade again, he said, the gain gets built into the individual stockholder’s permanent assets and his standard of living ideas change, with consumption rising accordingly.”
³

At the intersection of bubbles and investment, Greenspan explained “that a break in stock market trends was not just a harbinger of boom or recession, as is commonly held, but a crucial factor in causing a boom or a recession.”
⁴
The larger the boom the larger the bust: these are not the words of Alan Greenspan, but at the time the New Economics (circa 1960) toyed with the idea that it had discovered how to cure the business cycle (there would be no more recessions), Greenspan “questioned the theory that the enlargement of the Government’s role in the national economy had brought a ‘new era’ in which an old-fashioned financial contraction was impossible.”
⁵

This merges with the second category of Greenspan’s statements on investment, more important than the first. The first—bubbles—come about because the second operates poorly. Greenspan explained that longterm investment “is needed each year just to replace this depreciated capital stock, and more investment yet is needed to increase the nation’s net capital stock.” He stated the consequence of only investing for the short-term: “What happens if you have inadequate capital investment, is you wind up with lower standards of living than you otherwise would.”
⁶

That is, lower standards of living for the majority. An earlier Federal Reserve chairman, William McChesney Martin, had explained to the Senate in 1957 the importance of asset inflation—monitoring the inflation of goods and services was not enough. He told the legislators that “if further inflation is expected, speculative commitments are encouraged and the pattern of investment and other spending—the decisions on what kinds of things to buy—will change in a way that threatens balanced growth.”
⁷
Alan Greenspan expanded on this explanation in 1959 when he spoke to
Fortune
reporter Gilbert Bruck. In Bruck’s words, Greenspan explained that before the Federal Reserve was established “prices could not get too far out of line with real values because the supply of credit was automatically constricted by a limited money supply.” Since 1914, “[w]ith one eye necessarily cocked on politics, the Fed has always maintained a more than adequate money supply even when speculative booms threaten.”
⁸
(This was really what Martin was telling the senators in 1957: stop putting pressure on the Fed to inflate.)

³
New York Times
, “Economists Sift Jobs and Stocks,” December 28, 1959, p. 39.
⁴
Ibid.
⁵
Ibid.
⁶
Steven Greenhouse,
New York Times
, “Pitfalls in the Capital Spending Boom,” June 3, 1984.
⁷
William McChesney Martin, Statement before the Committee on Finance, U.S. Senate, August 13, 1957, p. 14.

It was about that time when James Joseph Ling was forming his conglomerate (see Chapter 3). His was a speculative venture of spectacular proportions. Federal Reserve or no Federal Reserve, there always were and always will be speculative manias. But it was the size of the conglomerate craze in the 1960s (when Saul Steinberg’s Leasco stock appreciated 5,410 percent) that acted as a destructive force on the economy.
⁹
Such destruction was allied to excessive money printing by the Fed. This was also true when LBOs battered companies in the late 1980s and of private equity most recently.

In the same 1957 speech to the Senate, Martin worried that the heaviest burden would be borne by those who could not protect the value of their income or savings.
¹⁰
That is the “little man.” Martin predicted those with “savings in their old age would tend to be the slick and clever rather than the hardworking and thrifty.”
¹¹

The lower standards of living for the majority today are partly attributable to the lack of longterm investment, the need for which Alan Greenspan explained above. Instead, we have tended more and more to the opposite: short-term investment by financiers with (what seems) limitless access to borrowed money that is loaded onto company balance sheets. (Alan Greenspan worried about this in the 1980s: “We are increasing debt at levels which should make us all uncomfortable. It certainly makes me uncomfortable.”
¹²

⁸
Gilbert Burck,
Fortune
, “A New kind of Stock Market,” March 1959, p. 201. Greenspan continued, again, in the words of Gilbert Burck: “The Fed, furthermore, has recently been boxed in by a huge and partially monetized federal debt, which tends to produce an addition to the money supply, whose size is unrelated to the needs of private business.”

⁹
John Brooks,
The Go-Go Years
(New York: Weybright and Talley, 1973), p 238.
¹⁰
Martin, Statement Before the Committee on Finance, p. 15-16.
¹¹
Ibid, p. 23.

Wealth has risen to the top as most Americans work under the weight of unsound business structures: downsizing and all the rest of the burdens borne by those who are toiling in a haze of uncertainty.

greenspan’s history lesson

In his 1966 essay “Gold and Economic Freedom,” Greenspan dramatized (maybe overdramatized) an earlier period when the Federal Reserve paid little attention to asset prices: “When business in the United States underwent a mild contraction in 1927, the Federal Reserve created [excessive] paper reserves.… The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom.… As a result, the American economy collapsed.… The world economies plunged into the Great Depression of the 1930’s.”

Money pouring into speculation in the 1920s went not only into the stock market, it also went into an asset class that probably received more speculative funds than the stock market: real estate. Speculative real estate lending then bore a sickening resemblance to the present. But by the late 1920s, New York banks lent to commercial builders long after they should have stopped. The city’s office space rose 92 percent in the last half of the 1920s and by another 56 percent after the stock market crash.
¹³

One notable growth story was the Bank of United States. Its asset base grew from $46 million in 1923 to $315 million in 1929.
¹⁴
It failed in 1930. Among other problems, it had caught the skyscraper bug. It financed two monuments designed by the esteemed architect Emory Roth: the San Remo and Beresford apartment houses. The builders were soon in bankruptcy. The San Remo and Beresford became instantly fashionable, yet they sold at a deep discount in 1940.
¹⁵
To this day, they are two of the most distinguished silhouettes on Central Park West. Vikram Pandit, the current CEO of Citigroup, paid $18 million for a 10-room apartment in the Beresford.
¹⁶
The San Remo is home to Steven Spielberg, Steve Martin, and Bono.
¹⁷

¹²
Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, pp. 36–37.
¹³
Robert A. Stern, Gregory Gilmartin, and Thomas Mellins,
New York 1930: Architecture and Urbanism between the Two World Wars
(New York: Rizzoli, 1994).
¹⁴
James Grant,
Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken
(New York: Farrar Straus Giroux, 1992), p. 203.

A critique of the 1932 skyline published in the
New Republic
indicates the destructive capacity of an unstable banking system: “[W]inter evenings were cruelly revealing, for when the sun set before the close of daily business it was all too apparent how many of these towers stood ‘black and untenanted against the stars.… With some few exceptions, the newest New York may be described as a sixty-story city unoccupied above the twentieth floor.’”
¹⁸