Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (55 page)

Our age of turbulence has shackled Americans to financial markets to a degree that was—literally—unthinkable a generation ago. A large proportion of Americans knew nothing about the stock market or the concept of a bond or the structure of a mutual fund. They were perfectly content to save and watch their dollars accumulate. Such proposals as “stocks for the long run” were directed at a small segment of the population. The Federal Reserve—or, rather, central banking as a whole—is not the sole cause of disturbances, but neither is it what it pretends to be.

Alan Greenspan condemned asset inflation during the 1950s and 1960s; by the 1990s, he claimed that it didn’t exist, and even if it did, there was nothing that the Federal Reserve could do, since it could not recognize a bubble. The oldest generation was not up to running these personal hedge funds; it earned 1 percent on money market funds and ate cat food.

Ben Bernanke has driven short-term interest rates below zero (after subtracting price inflation) to refloat the financial system that the Fed has overindulged and mismanaged at every turn. Now, suffering another asset deflation—following another asset bubble—the Federal Reserve is driving the young and old to cat food.

Only Congress can dissolve the Federal Reserve. It is time to do so.
⁵³
Sidney Homer and Richard Eugene Sylla,
A Profile of Interest Rates
, 4th ed. (Hoboken, N.J.: Wiley, 2005).

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2009—

Alan Greenspan is an old friend. He has devoted unfailing and broadly successful attention to his own career—he’s wonderfully avoided any action that might seem to make him responsible for a slump, but that does not rule out the possibility.
¹

—John Kenneth Galbraith (1999)

Alan Greenspan was the forerunner of a type, a type that has come to dominate public life in the United States. Economists are running national policy, proposing to solve a crisis that was anticipated by some Americans from all walks of life, but apparently not by any of the celebrity bankers and economists. Ben Bernanke is Federal Reserve chairman. Larry Summers (see Chapters 11 and 22) is the director of President Obama’s National Economic Counsel. Timothy Geithner (see Chapter 22) is secretary of the treasury (and not an economist).
People
magazine recently named Geithner to its annual list of the “50 most beautiful people.”
²
These are the most highly regarded minds in an administration that spent over $1 trillion more than it collected during fiscal year 2009.
³
Alexis de Tocqueville foresaw that a democratic

¹
William Keegan, “Sitting Out the Party with Galbraith,”
Guardian Unlimited
, July 4, 1999.
²
“Barack’s Beauties,”
People
, May 11, 2009, p. 89.
³
Martin Crustinger, “Budget Deficit Tops $1 Trillion for First Time,”
SFGate.com
, July 13, 2009.
361

age could elevate a dwarf who appears on top of a huge wave, and gives the impression he is riding and governing it.
⁴

Too much money produced by the Federal Reserve at subsidized interest rates will not solve the problem of too much money produced by the Federal Reserve at subsidized interest rates. Extending more loans to those who could not meet their monthly mortgage payments will not solve the problem of extending too much money to those who could not meet their mortgage payments. Not understanding the problem that has accumulated since they were children, our leaders are compounding the costs that must be paid. The solution must lie in reducing the debt and eliminating the institutions that, through either ignorance or arrogance, ignored their responsibilities.

No matter who holds those positions today, it is doubtful that the decisions made would differ. Other top candidates are products of the same institutions, and, as we could see during the subprime meltdown, they could not see what was happening even after they were run over by a hearse. They are apparatchiks for our time, a decay of aptitude and spirit matched by a parallel decay in Federal Reserve chairmen—from William McChesney Martin to Alan Greenspan.

Another parallel is to capitalism itself. From its earliest days it has developed in conformity to current tendencies of democracies and their governments. What might we expect from here?

Capitalism as practiced in the late nineteenth century was a rigid affair. It was inseparable from the international gold standard. Both were inseparable from personal discipline. When Alan Greenspan wrote his gold-standard diatribe in 1966, he was not referring to the then-current Bretton Woods arrangement.
⁵
He was discussing the pre-1914 international gold standard. Whether one lived in Hungary or California, the national currency could be redeemed for a fixed amount of gold. The people could decide for themselves if they trusted their government. They also had to live with strict limits on credit: it was a world with little sympathy (or, at least, little money) for those who were down on their luck. And it was not a world for mad financial conquest.

⁴
John Lukacs,
A New Republic: A History of the United States in the Twentieth Century
(New Haven, Conn.: Yale University Press, 2004), p. 425.
⁵
There are calls today for a return to a Bretton Woods gold standard. This is posed as an agreement that worked for nearly 30 years (1944–1971). However, it was already failing in the 1950s. It was failing because the United States did not live within the limits imposed on the reserve currency. It was
able
to fail because, as with the CDO trade, there were no market prices. Only governments could redeem currency for gold. This led to subterfuges, which were hidden from the people when it was thought better to do so.

In 1934, Simone Weil, a young French philosopher, expressed how capitalism had changed. She wrote, in
Sketch of Contemporary Social Life
: “[C]apital increase brought about by actual production … counts for less and less as compared with the constant supply of fresh capital.”
⁶
She made this observation without the advantage of having participated in a leveraged buyout. Here, Weil hints at how the word
liquidity
has evolved.

In 1950, an American household’s liquidity was its bank account, not its credit line. The bank’s liquidity was its cash and certain deposits, not its (assumed perpetual) access to credit. The bank’s profits were slow (interest earned minus interest paid) and built up over time. (An analogue exists to the industrial company.) More recently, profits were instant. Because of bank-deposit insurance, a depositor does not consider whether a bank holds gold or confederate dollars in reserve. That being so, banks do not make such distinctions either. Money—inseparable from credit in the mind—will always be as accessible as the air we breathe.

Weil described the more material world of the late nineteenth century: “To increase the size of an undertaking faster than its competitors, and that by means of its own resources—such was, broadly speaking, the aim and object of economic activity. Saving was the rule of economic life; consumption was restricted as much as possible, not only that of the workers, but also that of the capitalists themselves.”
⁷

Partly, the limits on consumption were attached to the monetary standard of the day. Debts were ultimately settled in reference to the fixed price of gold. Today, accounts are settled in dollars, and more dollars are printed every minute. There is no ultimate settling of accounts. When we are not required to settle our accounts, the size and price of houses have no limits.

⁶
Simone Weil,
The Simone Weil Reader
, ed. George A. Panichas (New York: David McKay Company, 1977), p. 34.
⁷
Ibid., p. 33.

Capital is no longer fixed; balance sheets are now flows. This is true for the producer and the consumer. The producer depends upon the consumer’s free-flowing balance sheet. The parties must think alike. If a house were still a home, home-equity withdrawal would not exist. (Quoting again the August 25, 1957, edition of the
New York Times
: “Times have changed. Owning a house is no longer so important as being able to use it while paying for it.”
⁸
) The moorings were loose on each side of the transaction.

Weil described how “saving is replaced by the maddest form of expenditure. The term property has almost ceased to have any meaning; the ambitious man no longer thinks of being owner of a business and running it at a profit, but of causing the widest possible sector of economic activity to pass under his control.”
⁹
Weil concluded that this struggle for economic power was far less about building up than conquering.
¹⁰
In 2009, the consequences of this conquest destruction are the abandoned housing developments that line I-5 from San Diego, through Bakersfield, Stockton, and on to Sacramento.

Capitalists no longer save; profits are not needed to raise capital; the term
property
has lost its former meaning; workers labor for a new owner each year. How will this end? Quoting Weil: “[T]he state tends more and more, and with an extraordinary rapidity, to become the center of economic and social life.”
¹¹
In 2009, Alan Greenspan proposed that the state nationalize U.S. banks.
¹²
In 2009, Jeffrey Immelt, chairman of General Electric, wrote: “The interaction between government and business will change forever. . . . [T]he government will be … an industry policy champion; a financier; and a key partner.”
¹³
Now, General Electric is using government guarantees to sell bonds. This cooperation is not new. General Electric President Gerard Swope helped construct the National Recovery Act at the time Simone Weil wrote
Sketch of Contemporary Social Life
.
¹⁴
She was 25 years old. Weil was a philosophy teacher at the time.

⁸
John Lukacs,
Outgrowing Democracy: A History of the United States in the Twentieth Century
(Garden City, N.Y.: Doubleday, 1984), p. 115.
⁹
Weil,
The Simone Weil Reader
, p. 34.
¹⁰
Ibid.
¹¹
Weil,
The Simone Weil Reader
, p. 34.
¹²
Krishna Guha and Edward Luce, “Greenspan Backs State Control for Banks,”
Financial Times
, February 18, 2009.
¹³
General Electric, 2008 Annual Report, Letter to Shareowners; released early March 2009.

The Greenspan Legacy

Alan Greenspan adapted his talents to a period of flux, flow, and weakness in the moral fiber of the nation. He could say anything because there were no fixed parameters. Greenspan’s creation of endless credit— for any and all, in good times and bad, for the rich and the bankrupt—is building to a culmination.

Alan Greenspan was caretaker during a transient period, a time when democracies could inflate and buy the middle class with uncollateralized credit, not backed by goods and services. During the twentieth century (roughly speaking), impossible promises by governments were accepted by the people, between a period of hard money that ended in 1914 and a future and protracted period of bumbling and experiment. Greenspan was attuned to the illusion that he orchestrated. In 1996, Federal Reserve Governor Larry Lindsey bemoaned a problem related to inflation. Chairman Greenspan told Lindsey that he had a solution: “We just have to make our dollar bills smaller and smaller to reflect the loss of purchasing power. The total amount of paper would be the same.”
¹⁵

Given today’s credit collapse, the virtues of Greenspan’s endowment— monetary inflation and endless credit—must be rethought, but not yet. This is a world with no intentions of paying its bills or paying for its mistakes. Vague and vanishing currencies serve many interests. The inflation of the past century will explode in the new century.

¹⁴
William E. Leuchtenburg,
The Perils of Prosperity, 1914–1932
(Chicago: University of Chicago Press, 1958), pp. 41–42.
¹⁵
FOMC meeting transcript, July 2–3, 1996, p. 55.

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APPENDIX

The Federal Reserve System

The Federal Reserve Act was passed in 1913; the body first met in August 1914. Literalists insist that the Federal Reserve is not a central bank; scholars insist that the Federal Reserve is a federal agency independent of political control. These distinctions blur actual practices.

The Federal Reserve is the only authorized issuer of currency in the United States. The president nominates all Federal Reserve governors. Many tussles between politicians and the Federal Reserve are discussed in this book. Except during the early Volcker years, the politicians won.

The Federal Open Market Committee (FOMC) decides the Federal Reserve’s monetary policy. It consists of seven governors (in Washington) and five regional presidents. There are 12 geographic regions in the Federal Reserve System. The presidents rotate terms on the FOMC. FOMC meetings sent Americans into apoplexy during Greenspan’s tenure: “Is he going to tighten or loosen? How much?” This referred to the federal funds rate, also known as the fed funds rate or the funds rate. What is it? An explanation starts with the banks and runs back to the Fed.

Banks must hold “bank reserves.” This is money that banks draw upon to meet withdrawal requests and that acts as a safety net when bad loans accumulate.

Bank reserves are held with the Federal Reserve. Each day, let us say, all banks look at their reserve position. Some find that they are now holding more reserves than they need, some have fallen below their minimum threshold.

This is where the “Fed funds” market develops. The banks trade reserves among themselves to reach an optimal level. The Federal Reserve coordinates these trades.