Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (7 page)

²⁶
Brooks,
Go-Go Years
, p. 177.
²⁷
Chapter 12 is devoted to the topic of government calculations. The figures above are from the U.S. Census Bureau, Table H-3. March 7, 2009.

Fiscal Incontinence and Money Mayhem in 1966–1967

Alan Greenspan’s participation in politics could not have begun under more interesting circumstances. Fiscal incontinence was matched by money mayhem. Federal Reserve policy added to the flood of dollars. Bank credit more than doubled from a 7.2 percent annual rate of increase in December 1965 to a 15 percent rate in April 1966.
³¹

The United States was the market maker for the international monetary system. As a crisis loomed, Bundesbank President Karl Blessing stated simply and angrily: “ ‘[I]f the deficit in the U.S. balance of payments remains large, the group’s discussions [on strengthening the gold pool] might as well be brought to an end, because they would be futile.’”
³²
Blessing was correct, and the United States had no intention of dealing with deficits, credit, and money printing. The American people were not in a mood to tighten their belts, and the politicians ignored the worrywarts.

²⁸
One member, Roy Wilkins, did not sign the report but wrote a letter supporting the commission’s decision.
²⁹
Martin,
Greenspan
, p. 79
³⁰
Ibid., p. 78. Greenspan’s change of heart may have been more calculated. A RAND Report on the commission cited evidence that “the substantial powers of persuasion of economists Milton Friedman and Alan Greenspan [drove] the commission to rec
ommend the end of conscription”; http: //www.rand.org/pubs/monographs/MG263/
chapter4_sec2.html.
³¹
Robert P. Bremner,
Chairman of the Fed: William McChesney Martin, Jr., and the Creation of the Modern American Financial System
(New Haven, Conn.: Yale University Press, 2004), p. 215.

The charade went on for another three years before President Nixon officially closed the gold window on August 15, 1971, after which foreign governments could no longer receive gold payments for unwanted dollars.

Peer Reviews

Some of the best investment minds of the next generation did not think highly of Greenspan. Michael Steinhardt, hedgefund manager extraordinaire for the next three decades, looked back: “Around this time [circa 1967], I first met Alan Greenspan. Then a consultant to Donaldson, Lufkin, Jenrette, he visited our offices every quarter with our DLJ salesman. I recall being disappointed … that what he said was mostly an extrapolation of the obvious.… There were certainly no clear signs back then that he would one day rule world financial markets.”
³³

Marc Faber, Hong Kong–based investor and author of the monthly
Gloom, Boom & Doom Report
, could see far enough ahead to move to Asia in the 1970s. He remembers his meetings with Alan Greenspan (when Faber still worked in New York):

I was put in charge of research liaison for White, Weld’s overseas offices.… My job entailed … attending the monthly economic presentations [by Alan Greenspan].… 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 of White, Weld employees. By then I had also learned that the easiest way for me to communicate the (to me) incomprehensible remarks of [Greenspan] to our overseas offices was simply to summarize the previous day’s news from the front page of the
Wall Street Journal.
³⁴

³²
Ibid., p. 240.
³³
Michael Steinhardt,
No Bull: My Life In and Out of the Markets
(New York: Wiley, 2001), p. 98.

Skyrocketing Inflation and “Statisticalitis”

Inflation, as measured by the Consumer Price Index, rose from 3.3 percent in 1966 to 4.7 percent in 1968 to 5.5 percent in 1970.
³⁵
For a country that thought of inflation as something that only happened “down there” (in South America), these numbers were traumatizing. Longterm government yields, which, in the not-too-distant past donned a “2” as the first digit, rose from 4.5 percent in 1966 to 6.0 percent in 1968 to 6.9 percent in 1969.
³⁶

The various government outposts were at a loss. Arthur Okun, President Johnson’s Council of Economic Advisers chairman, found rising rates to be “disastrous and shocking.”
³⁷
Former CEA Chairman Walter Heller, in fear that “the theoretical basis for the ‘new economics’ would be jeopardized,” wanted to increase taxes.
³⁸
Heller argued that Lyndon Johnson needed to employ “the full use of the weapons of modern economics.”
³⁹
Economists are not reluctant to test their failing theories on entire populations.

Meanwhile, the Federal Reserve fought a pitched battle between the traditionalists and the econometricians. The latter wanted the Fed to act on predictions that were mathematically modeled by the new generation of Ph.D.s. But Fed Chairman Martin was dead set against predicting the money supply, consumption, tax revenue, and other such Keynesian aggregates, dismissing it as “statisticalitis.”
⁴⁰

However, new Fed board member Sherman Maisel made history twice. First, he was the first academic economist to be appointed to the board since 1914.
⁴¹
Second, he pushed for (and received) board approval for model-driven decisions.

³⁴
Marc Faber,
Gloom, Boom & Doom Report
, June 23, 2003.
³⁵
Ibbotson Associates,
Stocks, Bonds, Bills and Inflation, 2000 Yearbook, Market Results for 1926–1999
, 2000, p. 226, Table A-15.
³⁶
Ibid., p. 214, Table A-9.
³⁷
Bremner,
Chairman of the Fed
, p. 247.
³⁸
Ibid., pp. 221–222. This was mid-1966.

Martin lost this battle to modernism. Statisticalitis was coming to dominate every field, from political science to baseball. The Federal Reserve Open Market Committee (FOMC) would soon provide a shuttle service for academics testing their latest chalkboard theories. In 1968, the academics’ machines predicted that tighter fiscal policy would slow consumer spending. Instead, consumers spent more, and economic growth shot north of 10 percent.

Yet despite such on-the-pavement evidence, the econometricians decided that the people were wrong and their machines were right. The staff warned: “It is imperative to distinguish temporary aberrations from developments of longer lasting significance.”
⁴²
With a genuflection to the machines, the Fed watched inflation skyrocket into the close of William McChesney Martin’s term of office as Fed chairman. A lame duck after Nixon’s election, he warned the new chief executive: “Mr. President, I have been fooled too many times by statistics. The momentum of inflation was stopped in mid-summer, but the psychology of inflation has accelerated again.
⁴³
In 1969, wage settlements called for 30 to 35 percent increases over a three-year contract period.
⁴⁴

William McChesney Martin’s Parting Self-Evaluation: “I’ve Failed”

On February 1, 1970, Arthur Burns was sworn in as the new Federal Reserve chairman. At William McChesney Martin’s final Federal Open Market Committee meeting, the departing chairman offered a selfassessment: “I’ve failed.”
⁴⁵
But Martin had been fighting a battle that no human being could win. In any case, he should be complimented for his persistent warnings and understanding of inflation throughout his term.

⁴¹
Ibid., p. 200.
⁴²
Ibid., p. 254.
⁴³
Ibid., p. 272.

Martin told his farewell dinner gathering at the White House: “I wish I could turn the bank over to Arthur Burns as I would have liked. But we are in very deep trouble. We are in the wildest inflation since the Civil War.”
⁴⁶
After that climactic finale, a troop of singers and dancers burst into the room to stage the evening’s entertainment: “The Decline and Fall of the Entire World as Seen through the Eyes of Cole Porter.”
⁴⁷

On August 15, 1971, President Nixon announced the United States’s unilateral decision to no longer pay gold to foreign governments for dollars. He blamed speculators.
⁴⁸
He did not give blame where it was due: to the American people and, perhaps foremost, to the decision makers in the Oval Office, who had done a bang-up job of destroying the Bretton Woods agreement. At no time did Nixon acknowledge that the United States had committed the shameful act of default. Nixon also used this opportunity to place wage and price controls on practically every American. The land of the free and the brave was looking anything but. Most Americans were in favor of this initiative by the government—the same government that had shown neither the knowledge nor the backbone to avoid the financial chaos that now engulfed the free world.

From $35 an ounce (when redeemable with the U.S. government), gold rose to more than $800 an ounce within a decade, and holding paper assets was an easy way to lose a life’s savings. Commodities, rare stamps, and Rembrandts were the assets to hold during the 1970s. Americans abroad found that Italian and Belgian hotels would not accept dollars. The annual inflation rate of goods (the CPI: Consumer Price Index) rose to 18 percent, short-term Treasury bills traded at 17 percent; and the 30-year bond yielded 15.6 percent.

⁴⁶
Ibid., p. 276.
⁴⁷
Ibid., p. 277.
⁴⁸
William Greider,
Secrets of the Temple: How the Federal Reserve Runs the Country
(New York: Simon and Schuster, 1987), p. 337.

Greenspan Expands His Rolodex

The American public was at sea. It didn’t know what was coming next, so it turned to economists for answers. One who soon acquired national attention was Alan Greenspan.

Time
magazine organized an illustrious Board of Economists that met four times a year. Alan Greenspan joined in 1971. He now had the opportunity to develop kinships with other members, including Otto Eckstein [formerly a member of President Johnson’s Council of Economic Advisers (CEA)], Walter Heller (former chairman of the CEA), Arthur Okun (former chairman of the CEA), Beryl Sprinkel (future CEA chairman during the Reagan administration), and Robert Triffin (early forecaster of the Bretton Woods disaster). Greenspan would remain on the board until his turn as chairman of the Federal Reserve began in 1987, with the exception of his CEA years. These administration officials would come in handy during the Reagan presidency.

By 1973, Greenspan was regularly appearing in public, at least where it mattered: in the pages of the
New York Times
. He was photographed with “10 leading business and academic economists” in the January 2, 1973, issue. The group included Murray Weidenbaum, a professor of economics at Washington University who would become Nixon’s assistant secretary of the treasury for economic policy and later President Reagan’s first chairman of the CEA, and Albert Rees, chairman of Princeton University’s department of economics. Rees had served as assistant professor of economics with Milton Friedman at the University of Chicago, where he wrote an important monograph with George Shultz when Shultz was dean of Chicago’s Graduate School of Business. After serving as secretary of labor from 1969 to 1970, Schultz directed the Office of Management and Budget from 1970 to 1972, moved to head the Treasury Department from 1972 to 1974, and later was Reagan’s secretary of state from 1982 to 1989. Shultz’s launching pad had been his apprenticeship as senior staff economist to Arthur Burns at the CEA.
⁴⁹
Clearly, the pattern of familiar faces rising up the economic stepladder was well established. Also, the tendency to hand national policy to economists was more pronounced. This vetting of candidates for senior posts successfully relieved the pool of eccentric dispositions.

⁴⁹
Bremner,
Chairman of the Fed
, p. 267.

January 1973: “It’s Very Rare That You Can Be as Unqualifiedly Bullish as You Can Now”

On January 7, 1973, Greenspan’s picture again appeared in the
Times
among a group of market forecasters, where he was described as “highly optimistic.” He announced: “It’s very rare that you can be as unqualifiedly bullish as you can now.” The Dow Jones Industrial Average peaked at 1,051 four days later and bottomed at 571 on December 12, 1974—a loss of 46 percent during a period when the dollar lost 21 percent of its value against consumer prices.

Greenspan’s inaccuracy was not important. The other economists quoted also missed the bust (although Greenspan’s enthusiasm was singularly inept). His portrait was where it belonged. It is curious, though, that the man who could be counted on to give the
Times
a bearish, or at least highly qualified, stock market forecast in the 1960s was now a cheerleader when the market was highly speculative, as was the economy.

Doubts about the stock market were not hard to come by. Shortly after Greenspan’s unqualifiedly bullish call,
Time
magazine discussed a chaotic series of “devaluations, revaluations and [currency] floats [that had] been coming with dizzying rapidity.”
⁵⁰
Living costs rose 8.8 percent in the first quarter of 1973.
⁵¹
This report prompted AFL-CIO chief George Meany to announce: “In his Inaugural Address in January, the President [Nixon] advised Americans to help themselves. It is obvious that this is what unions are going to be forced to do at the bargaining table.”
⁵²
One suspects that this was not the spirit in which the president’s advice was intended, but it is difficult to fault Meany, even though successful negotiations by steelworkers, autoworkers, and airline mechanics were to reduce these industries to minor-league status. As Meany (and Greenspan) undoubtedly knew—and
Time
reported: “[M]anufacturers decided long ago to serve foreign markets by building plants overseas rather than by exporting. The multinational corporations will profit from devaluation.”
⁵³
Federal Reserve Chairman Martin warned of “extravagance, incompetency and inefficiency” in the 1950s.
⁵⁴
Ever since, the costs of production had been pricing heavy industry out of the domestic market.