[FoRK] Critiquing Alan Greenspan

Jeff Bone jbone at place.org
Sat Mar 26 12:14:53 PST 2005

 From The Cunning Realist:


Wednesday, March 23, 2005

  The Maestro: Living History

  On Tuesday, the Federal Reserve raised interest rates for the seventh 
time since last year. I could write thousands of words about Alan 
Greenspan, who thankfully is retiring from public service soon. 
Something I regret about this is that the full extent of the damage 
this person has caused will not be evident until after he is gone, at 
which point it will be easy for him---or his shills, if they have the 
intellectual honesty to defend him---to blame his successor, the 
Congress, the weather, the Washington Nationals, or a thousand other 

But let's get it straight right now: This man is a Wrong-Way Corrigan 
of epic proportions. He has been utterly, disastrously wrong at 
virtually every important inflection point in his professional career. 
A few---and these are just a few---whoppers:

1. "It is very rare that you can be as unqualifiedly bullish as you can 
be now." This famous statement by Greenspan appeared in The New York 
Times on January 7, 1973, when he was president of the economic 
consulting firm of Townsend Greenspan. It was just two days after the 
1973 stock market peak. Over the next two years inflation and interest 
rates exploded, and the market declined 50 percent in the worst economy 
since the Crash of 1929 and the subsequent Great Depression.

2. Greenspan's background with the Savings and Loan Crisis in the 
1980's is a classic. Bill Fleckenstein, a successful professional money 
manager, comments on it here in an article I recommend reading in its 
entirety. The following three paragraphs are from Fleckenstein:

The last thing that Alan Greenspan did before he left Townsend 
Greenspan to become Fed Chairman, was to opine on the S&L industry, and 
more precisely Charlie Keating's S&L. What follows is a vignette from 
the book "Inside Job," written by Steven Pizzo, about an encounter in 
1984 between Greenspan and Ed Gray, who was the Federal Home Loan Bank 
board chairman.

"Gray received a letter from respected economist Alan Greenspan telling 
him he should stop worrying so much. Greenspan wrote that deregulation 
was working just as planned, and he named 17 thrifts that had reported 
record profits and were prospering under the new rules. Greenspan wrote 
the letter while he was a paid consultant for Lincoln Savings & Loan of 
Irvine, CA, owned by a Charles Keating, Jr., company. Four years after 
Greenspan wrote the letter to Gray, 15 of the 17 thrifts he'd cited 
would be out of business and would cost the FSLIC $3 billion in 

In addition, in 1985, Greenspan pronounced specifically that the 
management of the Keating thrift enterprise was "seasoned and expert" 
with a "record of outstanding success in making sound and profitable 
direct investments."

3. Greenspan played an infamous role in the stock market crash of 1987. 
Having become Fed chairman just a few months earlier, he agreed to an 
interview by Fortune magazine in which he made some shockingly naive 
comments about the dollar. The interview appeared in print late in the 
week, roiling the currency and bond markets, and the stock market 
crashed when the market opened the next week. Greenspan did manage to 
get one thing right from this disaster: He never gave an on-the-record 
interview to any publication again. An excellent account of this by 
Jude Wanniski, which debunks Bob Woodward's absurdly fawning portrayal 
in Maestro of Greenspan's role in the 1987 crash, appears here.

  4. Greenspan's comments in early 1996 about "irrational exuberance" 
are well-known. Not only did he do nothing to act on this, he turned 
into a stock market cheerleader and never looked back. In 1999, he 
injected an epic amount of liquidity into the financial system to 
cushion against a Y2K problem that never happened. We're still 
suffering from the hangover of that malinvestment and overcapacity, and 
will be for many years.

5. As the bubble that inflated on his watch then deflated after 2000, 
never a discouraging word was heard from Greenspan in his speeches or 
Congressional testimony. The economy was always coiled for imminent 
strength, any type of weakness was transient, and the productivity 
miracle was permanent.

6. The minutes of Federal Reserve meetings from 1999 were released 
recently. These offer a fascinating glimpse into what was happening 
behind the scenes at the Fed at the time of the 90's bubble, and what 
they show is incredible. For the past several years, in many speeches 
and in testimony before Congress, Greenspan has denied that he knew 
there was a bubble, and has cast doubt on the ability of the Fed to 
recognize a bubble as it is building. But from the minutes of one 1999 
Fed meeting, we now know this is false. Bill Fleckenstein discusses 
this here under "Truth outed by a Fed transcript" which is a must-read.

7. Partially because he kept interest rates too low---at "emergency" 
levels---for too long, he's now being forced to raise interest rates 
due to rising inflation and demands from our overseas creditors---just 
as the economy is slowing. Noticed the price of a gallon of gas 
recently? Wait until you see it this summer, along with your air 
conditioning bill. You can thank all that easy money of the past few 
years; oil is denominated in dollars, and OPEC is demanding higher 
prices to compensate for the decreasing value of the dollars we give 
them for their oil. And since the majority of wars are fought over 
natural resources, we may not have seen the tragic results of higher 
oil and commodity prices that are due largely to Greenspan's actions. 
I'll write a column on this in the near future.

8. Possibly the most insidious result of all the easy money is the 
destruction of savers and the effect of that on the nation's morality. 
One reason Americans have never saved less is because Greenspan has 
forced them, via absurdly low interest rates, into risky 
investments---such as the stocks that Wall Street sells to the public. 
Yet Greenspan has the gall to opine about how Americans should save 
more. Due in large measure to his actions, the qualities of thrift, 
financial prudence, and "putting something away for a rainy 
day"---integral parts of our nation's history and identity---have been 
destroyed. Instead, we have a national obsession with stocks and real 
estate, and teenagers wander the malls carrying multiple cell phones 
and credit cards.

I could go on and on about Alan Greenspan. The Chairman of the Federal 
Reserve wields extraordinary over the lives of all Americans, and 
arguably most of the rest of the world. He is an unelected 
official---and, as we've seen, virtually unaccountable for his actions. 
One reason the Federal Reserve was created was to separate monetary 
policy from elected officials, who obviously can never be trusted with 
the levers of money creation. But as Senate Minority Leader Harry Reid 
recently observed, Greenspan has acted like a politician who's up for 
re-election every year: "I'm not a big Greenspan fan. ... I voted 
against him two times. I think he's one of the biggest political hacks 
we have in Washington," Reid said.

Longtime Fed Chairman William McChesney Martin once said that it is the 
Fed's job "to take away the punch bowl just when the party is getting 
really good." Alan Greenspan has failed miserably at this. He has never 
met a bubble he did not like, and has acted like a teenager at a party 
who spikes the punch bowl with alcohol. I believe at some point in the 
next several years, public debate about the role of the Federal Reserve 
as an institution will take place. The public may be very surprised at 
what it learns.

Greenspan's defenders are fond of telling the rest of us what a great 
public servant he is, and reminding us of how much more money he could 
have made over his career had he stayed in the private sector. I'm not 
sure his private consulting clients could have taken too much advice 
like his epic 1973 doozy, but the rest of us would have been better 

Make no mistake about it: You should watch and listen to Alan Greenspan 
as much as possible while he's still around. It's rare one gets a 
chance like this. He's living history, for he is our John Law---and 
history will treat him as such.

posted by The Cunning Realist at Wednesday, March 23, 2005   

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